**United
        States**
 **Securities
        and Exchange Commission**
 **Washington,
        D. C. 20549**
  **FORM
        10-KSB**
  **x
        ANNUAL REPORT UNDER
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**
 **ACT
        OF 1934**
  For
        the
        fiscal year ended December 31, 2004
  **o
        TRANSITION REPORT UNDER
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**
 **ACT
        OF 1934**
  For
        the
        transition period from ______________ to ______________
  0-26695
 *Commission
        File No.*
  **MICHELEX
                  CORPORATION**
                (Name
                  of Small Business Issuer in its Charter)**UTAH**
                (State
                  or Other Jurisdiction
                of
                  incorporation or organization)
              **87-0636107**
                (I.R.S.
                  Employer
                Identification
                  No.)Outer
                  Willow Street
                Massena,
                  New York 13662
                (Address
                  of Principal Executive Offices)Issuer’s
                  Telephone Number: (315) 769-6616Securities
                  registered under Section 12(b) of the Exchange Act: None
                Name
                  of each exchange on which registered: NoneSecurities
                  Registered under Section 12(g) of the Exchange Act:$0.001
                  Par Value Common Voting Stock(Title
                  of class)
  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
o
        No x
  Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B is not contained in this form, and no disclosure will be
        contained, to the best of Company’s knowledge, in definitive proxy or
        information statements incorporated by reference in Part III of this Form
        10-KSB
        or any amendment to this Form 10-KSB. o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes
o
        No x
  Issuer’s
        revenues for the fiscal year ended December 31, 2004 were $14,815,294 .
  
  There
        are
        approximately 58,470,240 shares of common voting stock of the Company held
        by
        non-affiliates. These shares have been valued at $.042 per share, which was
        the
        closing bid price of the Company’s common stock on September 30, 2006. Because
        there has been no “public market” for the Company’s common stock during the past
        five (5) years, the Company has arbitrarily valued these shares at par value
        of
        $0.001 per share.
  As
        of
        October 23, 2006, 105,871,037 shares of common voting stock, par value $0.001
        per share were outstanding.
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
  Certain
        information required by Item 13 of Form 10-KSB is incorporated by reference
        into
        Part III of this report.
  **Transitional
        Small Business Issuer Format Yes o No x**
  2
  **Michelex
        Corporation**
 TABLE
        OF
        CONTENTS
 PART
                  IITEM
                  1
              Description
                  of Business
              4ITEM
                  2
              Property
              7ITEM
                  3
              Legal
                  Proceedings
              9ITEM
                  4
              Submission
                  of Matters to a Vote of Shareholders
              9PART
                  IIITEM
                  5
              Market
                  for Common Equity and Related Shareholder Matters
              9ITEM
                  6
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              12ITEM
                  7
              Consolidated
                  Financial Statements
              F-1ITEM
                  8
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              17PART
                  IIIITEM
                  9
              Directors,
                  Executive Officers and Control Persons; Compliance with Section
                  16(a) of
                  the Exchange Act
              17ITEM
                  10
              Executive
                  Compensation
              18ITEM
                  11
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Shareholder Matters
              19ITEM
                  12
              Certain
                  Relationships and Related Transactions
              20ITEM
                  13
              Exhibits
              20ITEM
                  14
              Controls
                  and Procedures
              21ITEM
                  15
              Principal
                  Accountant Fees and Services
              21SIGNATURES
              22
  3
  **Forward-Looking
        Statements.**
  Statements
        made in this Form 10-KSB which are not purely historical are forward-looking
        statements with respect to our goals, plan objectives, intentions, expectations,
        financial condition, results of operations, future performance and business
        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 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 reports on file with the
        Securities and Exchange Commission (“SEC”): (i) general economic or industry
        conditions, nationally and/or in the communities in which we 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 we compete; (v) the development of products
        or services that may be superior to products or services offered or developed
        by
        us; (vi) competition; (vii) changes in the quality or composition of products
        or
        services developed by us; (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; and (xiii) other economic, competitive,
        governmental, regulatory and technical factors affecting our 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.
        We do not undertake, and specifically disclaim, any obligation to update
        any
        forward-looking statements to reflect events or circumstances occurring after
        the date of such statement.
  In
        this
        report, “Michelex,” “we,” “us,” “our,” and the “Company” refer to Michelex
        Corporation and its subsidiaries unless the context otherwise
        requires.
  **PART
        I**
  **Item
        1. Description of Business.**
  **Overview.**
  Michelex
        Corporation (“Michelex” or the “Company”) was formed on September 29, 2003 as a
        Utah corporation pursuant to an Amendment to the Articles of Incorporation
        of
        our predecessor Highway One-OWEB, Inc. (“Highway One”). We are the designers and
        manufacturers of high quality customized and standard plastic components.
        Highway One was originally organized in 1999 to develop and market internet
        web
        page design and maintenance, for companies that had not previously used the
        internet for marketing purposes. That venture however did not achieve the
        expected results. In an effort to establish a more successful operation for
        stockholders, Highway One changed its business strategy and company control.
        A
        privately-held, operating company had been identified by Benjamin Hansel
        and in
        order to make Highway One a more attractive merger candidate, in addition
        to
        certain representations made by Mr. Hansel, Highway One president, secretary
        and
        sole director Peter Chandler resigned and appointed Mr. Hansel as Highway
        One’s
        new president, secretary and director pursuant to a February 2003 Purchase
        Agreement and accompanying resolutions. As consideration for remaining with
        Highway One and for payment of all costs and expenses associated with the
        transaction, Mr. Hansel was issued 20 million shares of Highway One’s restricted
        common stock, par value $0.001 per share representing an 89% ownership interest.
        As an officer Mr. Chandler’s beneficial ownership of 2,000,000 shares of Highway
        One’s common had constituted approximately 85.2%
  In
        May
        2003, Highway One created Michele Audio, Inc., a Delaware corporation, as
        a
        wholly-owned subsidiary for the sole purpose of merging with and into an
        existing operating company (“Michele Delaware”). On July 7, 2003 Highway One
        acquired Michele Audio Corporation of America, a New Jersey corporation and
        fully integrated audio replication and multimedia fulfillment company ("Michele
        Audio") pursuant to an Agreement and Plan of Merger (the “Merger Plan”). As the
        surviving entity of the merger, Michele Audio became Highway One’s subsidiary
        and sole business operation. The merger became effective on July 23, 2003
        upon
        the filing of a Certificate of Merger with the New Jersey Secretary of State.
  4
  We
        are
        providers of precision products manufactured with state-of-the-art equipment
        using only the finest materials which must meet or exceeding our rigorous
        evaluative standards. To date our Company consists of two (2) primary business:
  ·
            MICHELEX
                DIVISION-
                began operations in September 1983 (“Michelex Division”). Our primary
                business is manufacturing, importing and distributing Optical Media
                Packaging products. We also produce, import, and distribute a complete
                line of plastic injection molded multimedia packaging products; and   ·
            MICHELE
                AUDIO DIVISION-
                began operations in April 1972 as a New Jersey corporation and became
                our
                wholly owned subsidiary in 2003. Our primary business is replication
                services for the spoken words industry. We also own a large catalogue
                of
                music which we intend to market.  We
        previously owned Hindsight Records, Inc. (“Hindsight”) which was acquired
        through an Agreement and Plan of Merger on December 30, 2004, by and among
        the
        Company, Hindsight, Stradaveri, Inc. and an employee of the Company who was
        also
        the mother of one of the officer/director’s children (“Purchaser”). The Company
        purchased the outstanding shares of Hindsight and Stradaveri for $800,000
        and
        issued 100,000 shares of our common stock. We also assumed all of Hindsight’s
        obligations under $1,000,000 5% secured convertible debentures due December
        29,
        2006. In December 2005 however the Purchaser reacquired the shares of Hindsight,
        previously sold to the Company in December 2004, in exchange for canceling
        the
        $800,000 promissory note payable by the Company to the Purchaser.
  **The
        Business** **.**
  We
        are
        the designers and manufacturers of high quality customized and standard plastic
        components providing precision products manufactured with state-of-the-art
        equipment using only the finest materials. We believe that our businesses
        along
        with superior customer satisfaction have positioned us to be at the forefront
        of
        the media and replication industry.
  MICHELEX
        DIVISION .
  Michelex
        Division sells and distributes a broad range of paper, vinyl, tyvek, and
        board
        mailer based multimedia packaging products. We also manufacture and import
        a
        wide range of plastic components used by the multimedia Optical Disc Industry.
        Our products are sold and primarily distributed through our own Company sales
        representatives. We service our customers from our facilities in Massena,
        New
        York and Salt Lake City, Utah, as well as from several public warehouses
        located
        throughout the United States.
  ·
            Our
                principal product is the CD Jewel box. Our primary market is in the
                United
                States. Recently, two (2) of our major competitors went out of business.
                Our product is sold directly by our in house sales team, which we
                plan to
                expand in the near future. We have just completed our own retail
                website
                www.michelexmedia.com.  ·
            We
                are expecting to commence production of our “5.2 jewel case ultra slim” in
                the last quarter of this year.  ·
            We
                believe that low electrical power and reasonable labor costs allow
                us to
                compete favorably with many of our competitors. We also believe that
                going
                forward the secret to our success will be bringing our facilities
                up to
                eighty percent (80%) operational level. We are expecting to achieve
                this
                goal once we complete our financing which we expect will provide
                us with
                sufficient working capital.****Our
                goal in 2007, is to regain the market share that we believe was lost
                in
                2005 and 2006, due to a conflict with Wells Fargo Business Credit,
                Inc.,
                our senior lender (“Wells Fargo”).  5
  ·
            Our
                primary raw material for our plastic products is polypropylene and
                polystyrene. The cost of these materials is directly related to the
                cost
                of a barrel of oil. We are subject to price fluctuations that are
                beyond
                our control.  ·
            We
                had approximately four hundred (400) accounts throughout the United
                States
                and Canada two (2) years ago. We are aggressively trying to recapture
                these accounts. Our “Made in the USA” products have a very good following
                and we hope to use this to our advantage.  Governmental
        Regulations .
  The
        primary governmental regulations affecting Michelex Division are related
        to
        tariffs levied on products that Michelex Division domestically produces for
        competition in its various market segments. In addition, Michelex Division
        is
        subject to federal state and local laws governing such matters as wages,
        working
        conditions, citizenship and health and sanitation requirements. We believe
        that
        we are in substantial compliance with all of such laws.
  As
        the
        cost of compliance with environmental laws has not been significant, Michelex
        Division does not maintain detailed records of these expenses.
  Employees.
  As
        of
        December 31, 2004 Michelex Division had a total of 15 employees; of this
        amount,
        15 were employed full-time.
  MICHELE
        AUDIO .
  Michele
        Audio provides state of the art duplication, packaging, and fulfillment services
        for Cassette, CD, and DVD based products. Michele Audio also operates both
        a
        recording and mastering studio through which it provides audio restoration,
        editing, and mastering services. Additionally, Michele Audio libraries and
        controls our catalog of music and spoken word recordings which we license
        to
        other companies.
  ·
            Our
                principal market is the spoken word industry. We provide cassettes
                and CD
                replication for various book publishers, primarily in the
                northeast.  ·
            Our
                distribution for replication services is directly to the customers.
                Our
                music division distributes its products through regional distributors.
                We
                are currently working on a direct retail website to expose our music
                catalogue directly to the consumer. The Company will also explore
                granting
                download rights to internet sites that specialize in that service.  ·
            We
                intend to place a greater emphasis on our music division because
                the
                replication of cassettes has diminished greatly. Cassettes were Michele
                Audio’s main business. The music business offers us a greater margin and
                higher revenues per unit. We believe that our catalogue has great
                potential that has not yet been realized.  Michele
        Audio is a party to numerous royalty and licensing agreements of various
        dates
        and durations.
  Governmental
        Regulations.
  The
        primary governmental regulations affecting Michele Audio are related to tariffs
        on products that Michele Audio imports or those levied on products which
        Michele
        Audio domestically produces for competition in various market segments. An
        increase in the tariffs on products produced offshore would enhance Michele’s
        Audio domestically produced products ability to compete more effectively
        on
        price; however it would also increase the cost of Michele Audio import products.
        Conversely, a decrease in tariffs on products produced offshore would have
        the
        opposite effect. Any change would require Michele Audio to evaluate and possibly
        adjust its product mix. In addition Michele Audio is subject to federal state
        and local laws govern such matters as wages, working conditions, citizenship
        and
        health and sanitation requirements. We believe that we are in substantial
        compliance with all of such laws.
  6
  As
        the
        cost of compliance with environmental laws has not been significant, Michele
        Audio does not maintain detailed records of these expenses.
  Employees.
  As
        of
        December 31, 2004 Michele Audio had a total of 14 employees; of this amount,
        13
        were employed full-time.
  HINDSIGHT
        RECORDS . ****
  The
        thrilling discovery that there was a vast repertoire of Big Band music which
        had
        never been released to the public, led to the formation of Hindsight Records.
        When Wally Heider, a producer for the Company, learned that broadcasts of
        certain Big Band recordings had never been commercially released he decided
        to
        secure the licensing rights and transfer these one-of-a-kind originals to
        records and cassette tapes of the highest quality using state of the art
        equipment.
  ·
            Hindsight’s
                principal products were CDs and cassettes tapes of Big Band recordings.
                It
                also expanded into well-known jazz artists and singers of the great
                standard songs such as Doris Day, Rosemary Clooney and Mel
                Torme.  ·
            Our
                products were sold primarily to independent records
                distributors.  ·
            Our
                main supplier was Michele Audio.  ·
            We
                previously owned Hindsight Record’s numerous copyrighted songs and
                recordings.  In
        December 2005, Hindsight was re-acquired by the Purchaser in exchange for
        canceling the $800,000 promissory note owed payable by the Company to the
        Purchaser as part of the original purchase price.
  **Governmental
        Regulations.**
  Hindsight
        Records was subject to federal state and local laws govern such matters as
        wages, working conditions, citizenship and health and sanitation requirements.
        We believe that we were in substantial compliance with all of such laws.
  Employees.
  In
        December 2004 Hindsight had a total of two (2) employees; both were employed
        full-time.
  **Item
        2. Description of Property.**
  MICHELEX
        DIVISION .
  Through
        Michelex Division, we own the following properties:
  ·
            a
                8,750 sq. ft. metal building on one (1) acre. The building, located
                in
                Massena, has two (2) loading dock doors with 1,500 square feet in
                office
                space. This property has been pledged as security for a $7,000,000
                asset
                backed revolving line of credit with Wells Fargo (the “Line of Credit”).
                This lot also contains a 1,200 sq. ft. metal building, which is pledged
                as
                security for a $1,200,000 mortgage note with Madison Realty Capital,
                LP
                (“Madison Capital Mortgage”);  7
  ·
            a
                9,800 sq. ft. metal building on one (1) acre with two (2) loading
                dock
                doors and 1,800 square feet of office space. This property is also
                located
                in Massena and is pledged as security for the Madison Capital
                Mortgage;  ·
            a
                20,000 sq. ft. metal building on one acre of land with four (4) loading
                dock doors and 1,300 square feet of office space. This property is
                also
                located in Massena and is being used as security for the Line of
                Credit
                with Wells Fargo. There is also a 1,200 sq. ft. metal building on
                this
                lot, which has been pledged as security for the Madison Capital Mortgage;  ·
            a
                25,500 sq. ft. block and metal building with six (6) loading dock
                doors
                located on two (2) acres of land in Massena. Approximately 15,500
                square
                feet is leased to two (2) entities, for an annual lease income of
                $86,875.
                We currently owe approximately****$770,000****on
                the mortgage of this property; and  ·
            a
                four (4) acre vacant lot in Massena.  We
        previously owned:
  ·
            a
                83,864 sq. ft. cement building located in Salt Lake City, Utah. The
                building had three (3) dock doors and 25,000 square feet of office
                space.
                Michelex used the un-rented space for office, warehouse and manufacturing
                facilities. This parcel had a first mortgage with Equitable Life
&
                Casualty and a second mortgage for $800,000 from First Interstate
                Financial LLC, which was subordinate to the first mortgage. The second
                mortgage carried an interest rate of 9%, with a term of 18 months.
                Our
                President Thomas Gramuglia, held a mortgage on this property in the
                amount
                of $350,000 that was subordinate to the other two (2) mortgages.
                Prior to
                its sale in 2006, we owed approximately $1,992,000 on the parcel.
                We
                previously leased a total of 26,693 square feet to four (4) entities
                for a
                total of $132,048 in annual rents; and  ·
            a
                16,000 sq. ft. building in Salt Lake City with approximately 4,000
                square
                feet of office space. We generated $36,000 in annual lease income.
                Prior
                to its sale in 2005 we owed approximately $647,000 on a mortgage
                on this
                property.  MICHELE
        AUDIO .
  Through
        Michele Audio, we own the following properties:
  ·
            7.5
                acres with a two (2) car garage and a mobile home in Massena. This
                property is part of the security for a $770,000 mortgage held by
                Pittsford
                Capital, LLC (the “Pittsford Mortgage”);  ·
            14
                acres of land with 1,850 feet of frontage on Route 37 in Massena.
                The land
                connects to the mobile home and garage property discussed above.
                This
                property is also part of the security for the Pittsford
                Mortgage;  ·
            a
                5,000 sq. ft. metal building on three (3) acres of land, also located
                in
                Massena. This property connects to the mobile home and garage property
                identified above, and is also part of the security for the Pittsford
                Mortgage; and  ·
            85.39
                acres of farm land on Route 56 in Massena. This parcel is also part
                of the
                security for the Pittsford Mortgage; and  8
  We
        previously owned:
  ·
            the
                Massena Theater, an 8,000 sq. ft. building with a 400-seat movie
                theater
                and two (2) retail stores. Prior to its sale in 2005, annual rents
                were
                generated in the amount of $10,800; and  ·
            a
                5,000 sq. ft. block building in an industrial park in Massena. Prior
                to
                its sale in 2006, we owed approximately $57,000 on the
                mortgage.  Properties
        Previously Owned Through Hindsight Records .
  Prior
        to
        the re-acquisition of Hindsight by the Purchaser, we previously owned a 35,000
        sq. ft. building in Massena, which had been pledged as security for the Madison
        Capital Mortgage. The building was sold on December 31, 2006.
  **Item
        3. 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
        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.
  **PART
        II**
 
 **Item
        5. Market for Common Equity and Related Stockholder
        Matters.**
  **Market
        Information.**
  Our
        common stock is currently quoted on the Pink Sheets, LLC under the symbol
        “MLXO.PK” Historically, our stock has been quoted on the Over the Counter
        Bulletin Board of the National Association of Securities Dealers, Inc.
        (“OTCBB”), however on July 5, 2005we announced our temporary voluntarily removal
        from the OTCBB. Due to previous financial constraints on the Company we were
        unable to remain current with our reporting obligations under the Securities
        Exchange Act of 1934 (the “’34 Act”) We are in the process of becoming current
        with our filings, which will enable us to file a 15(c)(2)(11) for quotation
        of
        our common stock on the OTCBB; however there can be no assurances as to when
        the
        15 (c)(2)(11) will be approved or whether it will be approved at all.
 
 9
  Below
        is
        a table indicating the range of high and low transaction price for the common
        stock for each quarterly period within the most recent three (3) fiscal years.
        The information reflects prices between dealers, and does not include retail
        markup, markdown, or commission, and may not represent actual transactions.
        However, the market for shares of our common stock is extremely limited and
        only
        commenced in the third quarter of 2000. No assurance can be given that any
        established trading market for our common stock will develop or be maintained.
        If such a market develops in the future, resales of “unregistered” and
“restricted” shares of common stock by members of management or others may have
        a substantial adverse impact on any such public market. See the heading “Recent
        Sales of Unregistered Securities,” and the caption “Security Ownership of
        Certain Beneficial Owners and Management” of this Report.
  The
        high
        and low bid prices for the Company’s common stock for the past three (3) years
        are as follows:
  BidQuarter
                  ending
              
              High
              
              LowJanuary
                  2, 2003, through March 31, 2003
              
              $
              0.03
              
              $
              0.01April
                  1, 2003, through June 30, 2003
              
              $
              0.01
              
              $
              0.01July
                  1, 2003, through September 30, 2003
              
              $
              1.01
              
              $
              0.01October
                  1, 2003 through December 31, 2003
              
              $
              0.25
              
              $
              0.15January
                  1, 2004 through March 31, 2004
              
              $
              1.9
              
              $
              0.25April
                  1, 2004 through June 30, 2004
              
              $
              1.45
              
              $
              0.25July
                  1, 2004 through September 30, 2004
              
              $
              0.65
              
              $
              0.08October
                  1, 2004 through December 31, 2004
              
              $
              1.58
              
              $
              0.2
  These
        bid
        prices were obtained from Pink Sheets LLC and do not necessarily reflect
        actual
        transactions, retail markups, mark downs or commissions. These quotations
        reflect inter-dealer prices without retail markup, markdown, or commissions,
        and
        may not represent actual transactions.
  10




**Holders
      of Record of Common Equity.**




The
      number of record holders of the Company’s securities as September 30, 2006 is
      approximately 779. This figure does not include an indeterminate number of
      stockholders who may hold their shares in “street name.”




**Dividends.**




The
      Company has not declared any cash dividends with respect to its common stock
      and
      does not intend to declare dividends in the foreseeable future. There are no
      material restrictions limiting, or that are likely to limit, the Company’s
      ability to pay dividends on its common stock.




**Recent
      Sales of Unregistered Securities.**




The
      following table reflects all sales of “unregistered” and “restricted” securities
      of the Company during the three most recently completed fiscal
      years:





Name
            
            Date
                Acquired
            
            Number
                of Shares
            
            Aggregate
                ConsiderationBenjamin
                Hansel
            
            
            2/7/03
            
            
            20,000,000
                (1
            )
            
            Payment
                of all costs and expenses incurred in connection with the
                Plan.Ginette
                Gramuglia
            
            
            7/28/03
            
            
            5,196,000
            
            
            (3
            )Thomas
                Gramuglia
            
            
            7/28/03
            
            
            5,040,120
            
            
            (3
            )Michele
                Stone
            
            
            7/28/03
            
            
            51,960
            
            
            (3
            )Patrick
                Gramuglia
            
            
            7/28/03
            
            
            51,960
            
            
            (3
            )




(1) All
      but
      250,000 of these shares were canceled under the Plan.




(2)   
      527,000 shares were sold in 2004.




(3) These
      shares were issued to these former stockholders of Michele Audio under the
      Plan.




11




The
      offer
      and sale of these securities are believed to have been exempt from the
      registration requirements of Section 5 of the Securities Act of 1933, as
      amended, pursuant to Sections 3(b) and/or 4(2) thereof, and from similar
      applicable states’ securities laws, rules and regulations exempting the offer
      and sale of these securities by available state exemptions from
      registration.




**Item
      6. 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.




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.




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.




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.




14


I n
      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 that will be incurred in
      2006.




15




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 $15,000 (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
      $60,000 (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 472,500 shares of common stock to
      employees.




16


**Item
        7. Financial Statements.**
  **MICHELEX
        CORPORATION**
 AND
        SUBSIDIARIES
 
 Index
        to
        Consolidated Financial Statements
 for
        the
        Period Ended December 31, 2004
 
 Report
                  of the Independent Registered Public Accounting Firm
              
              
              F
                  -
                  2Consolidated
                  Balance Sheet
              
              
              F
                  -
                  3Consolidated
                  Statements of Operations
              
              
              F
                  -
                  5Consolidated
                  Statements of Changes in Shareholders’ Deficit
              
              
              F
                  -
                  7Consolidated
                  Statements of Cash Flows
              
              
              F
                  -
                  8Notes
                  to Consolidated Financial Statements
              
              
              F
                  -
                  10
 
 F-1
 REPORT
        OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        The
        Board of Directors and Shareholders
 Michelex
        Corporation
 
 We
        have
        audited the accompanying consolidated balance sheet of Michelex Corporation
        and
        subsidiaries as of December 31, 2004 and the related consolidated statements
        of
        operations, changes in shareholders' deficit and cash flows for the period
        March
        1, 2003 to December 31, 2003 and the year ended December 31, 2004. 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 audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. 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
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Michelex
        Corporation and subsidiaries as of December 31, 2004 and the results of their
        consolidated operations and cash flows for period March 1, 2003 to December
        31,
        2003 and the year ended December 31, 2004 in conformity with accounting
        principles generally accepted in the United States of America.
  The
        accompanying financial statements have been prepared assuming the Company
        will
        continue as a going concern. As discussed in Note 12 to the financial
        statements, the Company has incurred significant recurring losses. The
        realization of a major portion of its assets is dependent upon its ability
        to
        meet its future financing needs, and the success of its future operations.
        These
        factors raise substantial doubt about the Company’s ability to continue as a
        going concern. The financial statements do not include any adjustments that
        might result from this uncertainty.
  Seligson
        & Giannattasio, LLP
 
 White
        Plains, New York
 December
        28, 2005, except for
 Note
        14,
        which date is October 2, 2006
 
 F-2
 
 MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEET
 
 December
        31, 2004
 
 ASSETSCurrent
                  assets:Cash
              
              $
              20,976Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $148,734
              
              
              2,649,451Accounts
                  receivable - related party
              
              
              547,152Inventory,
                  net
              
              
              1,650,246Restricted
                  cash
              
              
              91,587Prepaid
                  expenses and income taxes
              
              
              733,483Current
                  assets held for sale
              
              
              310,039Total
                  current assets
              
              
              6,002,934Fixed
                  assets - net of accumulated depreciationand
                  amortization of $21,054,656
              
              
              7,667,685Fixed
                  assets held for sale
              
              
              441,859Other
                  assets:Land
                  and building held for investment
              
              
              148,429Loans
                  receivable - related party
              
              
              90,413Goodwill
              
              
              99,007Other
                  assets
              
              
              62,446Other
                  assets held for sale
              
              
              129,006Total
                  assets
              
              $
              14,641,779
 
 See
        notes
        to consolidated financial statements
  F-3
 
 MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEET
 
 December
        31, 2004
  LIABILITIES
                  AND SHAREHOLDERS' DEFICITCurrent
                  liabilities:Note
                  payable to bank
              
              $
              2,441,319Current
                  portion of long-term debt
              
              
              1,624,892Current
                  portion of capital leases
              
              
              287,532Note
                  payable - related parties
              
              
              16,400Convertible
                  debentures, net of discount of $43,832
              
              
              609,418Accounts
                  payable
              
              
              2,961,076Accrued
                  expenses
              
              
              501,469Payroll
                  taxes payable
              
              
              569,251Current
                  liabilities held for sale
              
              
              424,091Total
                  current liabilities
              
              
              9,435,448Other
                  liabilities:Long-term
                  debt less current maturities
              
              
              4,684,041Note
                  payable - officers
              
              
              586,900Capital
                  leases less current maturities
              
              
              43,881Other
                  liabilities held for sale
              
              
              697,913Total
                  liabilities
              
              
              15,448,183Commitments
                  and contingenciesShareholders'
                  deficitCommon
                  stock - no par value stock,100,000,000
                  shares authorized,57,204,814
                  shares issued and outstanding
              
              $
              57,205Additional
                  paid-in-capital
              
              
              1,476,363Retained
                  deficit
              
              
              (2,339,972
              )Total
                  shareholders' deficit
              
              
              (806,404
              )Total
                  liabilities and shareholders' deficit
              
              $
              14,641,779
 
 See
        notes
        to consolidated financial statements
 
 F-4
 
 MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF OPERATIONS
 
 Year
                  Ended
                December
                  31,
                2004
              
              March
                  1, 2003
                to
                December
                  31,
                2003Net
                  sales - unrelated parties
              
              $
              14,815,294
              
              $
              17,300,668Net
                  sales - related parties
              
              
              69,204
              
              
              411,569Net
                  sales
              
              
              14,884,498
              
              
              17,712,237Cost
                  of goods sold
              
              
              10,331,594
              
              
              11,109,140Gross
                  profit
              
              
              4,552,904
              
              
              6,603,097Operating
                  expenses:Selling
                  and shipping
              
              
              579,613
              
              
              501,808General
                  and administrative
              
              
              5,756,461
              
              
              5,929,784Depreciation
              
              
              1,180,737
              
              
              1,126,004Total
                  operating expenses
              
              
              7,516,811
              
              
              7,557,596Loss
                  before other income (expense) and income taxes
              
              
              (2,963,907
              )
              
              (954,499
              )Other
                  income (expense):Other
                  income
              
              
              155,808
              
              
              127,866Interest
                  expense, net
              
              
              (1,278,957
              )
              
              (619,409
              )(Loss)
                  gain on sale of assets
              
              
              (24,039
              )
              
              34,352Net
                  income (loss) from rental properties
              
              
              3,243
              
              
              (13,181
              )Other
                  income (expenses)
              
              
              (1,143,945
              )
              
              (470,372
              )Loss
                  before income taxes
              
              
              (4,107,852
              )
              
              (1,424,871
              )Income
                  tax (benefit)
              
              
              623,534
              
              
              (510,454
              )Net
                  loss from continuing operations
              
              
              (4,731,386
              )
              
              (914,417
              )Net
                  loss from discontinued operations, net of taxof
                  $0 and $0
              
              
              (213,612
              )
              
              —Net
                  loss
              
              $
              (4,944,998
              )
              $
              (914,417
              )
 
 See
        notes
        to consolidated financial statements
  F-5
 
 MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 
 Year
                  Ended
                December
                  31,2004
              
              March
                  1,
                to
                December
                  31, 2003Weighted
                  shares outstanding:Primary
                  and diluted
              
              
              46,971,687
              
              
              38,970,000Loss
                  per share primary and dilutedLoss
                  per share from continuing operations
              
              $
              (.10
              )
              $
              (.02
              )Loss
                  per share from discontinued operations
              
              
              (.01
              )
              
              —Net
                  loss per share
              
              $
              (.11
              )
              $
              (.02
              )
 
 See
        notes
        to consolidated financial statements
   F-6
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARY
 
 CONSOLIDATED
        STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
 
 **PERIOD
        MARCH 1, 2003 TO DECEMBER 31, 2003**
 **AND
        THE YEAR ENDED DECEMBER 31, 2004**
 
 Common
                  stock
              
              Additional
                Paid-in
              
              RetainedShares
              
              Amount
              
              Capital
              
              Deficit
              
              TotalBalance
                  - March 1, 2003
              
              
              12,990,000
              
              $
              12,990
              
              $
              4,850
              
              $
              3,519,443
              
              $
              3,537,283Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (914,417
              )
              
              (914,417
              )Balance
                  - December 31, 2003
              
              
              12,990,000
              
              
              12,990
              
              
              4,850
              
              
              2,605,026
              
              
              2,622,866Correction
                  of shares issued in acquisition
              
              
              (51,960
              )
              
              (52
              )
              
              52
              
              
              —
              
              
              —Shares
                  issued for legal services
              
              
              1,462,308
              
              
              1,462
              
              
              312,765
              
              
              —
              
              
              314,227Conversion
                  of convertible debenture
              
              
              1,600,000
              
              
              1,600
              
              
              298,400
              
              
              —
              
              
              300,000Beneficial
                  conversion feature ofconvertible
                  debentures
              
              
              —
              
              
              —
              
              
              420,981
              
              
              —
              
              
              420,981Exercise
                  of options
              
              
              866,666
              
              
              867
              
              
              216,653
              
              
              —
              
              
              217,520Shares
                  issued for financialconsulting
                  services
              
              
              400,000
              
              
              400
              
              
              99,600
              
              
              —
              
              
              100,000Sale
                  of securities
              
              
              500,000
              
              
              500
              
              
              159,500
              
              
              —
              
              
              160,000Shares
                  held in escrow forfinancial
                  consulting services
              
              
              1,267,924
              
              
              1,268
              
              
              (1,268
              )
              
              —
              
              
              —Effect
                  of 3 for 1 stock split
              
              
              38,069,876
              
              
              38,070
              
              
              (38,070
              )
              
              —
              
              
              —Issuance
                  of shares in acquisitionof
                  Hindsight Records, Inc.
              
              
              100,000
              
              
              100
              
              
              2,900
              
              
              —
              
              
              3,000Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,944,998
              )
              
              (4,944,998
              )Balance
                  - December 31, 2004
              
              
              57,204,814
              
              $
              57,205
              
              $
              1,476,363
              
              $
              (2,339,972
              )
              $
              (806,404
              )
 
 See
        notes
        to consolidated financial statements.
 
 F-7
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 Year
                  ended
                December
                  31,
                2004
              
              March
                  1, 2003
                to
                December
                  31,
                2003CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  loss**
              
              **$**
              **(4,944,998**
              **)**
              **$**
              **(914,417**
              **)**Adjustments
                  to reconcile net loss to net cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              1,180,737
              
              
              1,126,004Loss
                  (gain) on sale of assets
              
              
              24,039
              
              
              (34,352
              )Impairment
                  of goodwill
              
              
              213,612
              
              
              —Deferred
                  taxes
              
              
              622,509
              
              
              (511,479
              )CHANGES
                  IN OPERATING ASSETS AND LIABILITIES:Accounts
                  receivable
              
              
              1,139,640
              
              
              143,874Inventory
              
              
              796,387
              
              
              186,732Prepaid
                  expenses and taxes
              
              
              (225,909
              )
              
              114,190Other
                  assets
              
              
              106,953
              
              
              (239,509
              )Accounts
                  payable
              
              
              (759,074
              )
              
              353,020Accrued
                  expenses and taxes
              
              
              306,879
              
              
              103,223NET
                  CASH FLOWS FROM OPERATING ACTIVITIES
              
              
              (1,539,225
              )
              
              327,286CASH
                  FLOWS FROM INVESTING ACTIVITIES:Proceeds
                  from sale of fixed assets
              
              
              315,000
              
              
              —Acquisition
                  of fixed assets
              
              
              (265,650
              )
              
              (854,231
              )NET
                  CASH FLOWS FROM INVESTING ACTIVITIES
              
              
              49,350
              
              
              (854,231
              )
 
 See
        notes
        to consolidated financial statements
 
 F-8
 
 
 MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
  CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 (Continued)
 
 Year
                  ended
                December
                  31,
                2004
              
              March
                  1, 2003
                to
                December
                  31,
                2003CASH
                  FLOWS FROM FINANCING ACTIVITIES:Repayment
                  of long-term debt
              
              $
              (445,045
              )
              $
              (902,504
              )Proceeds
                  from long-term debt
              
              
              1,593,250
              
              
              950,000Proceeds
                  from the exercise of options
              
              
              217,520
              
              
              —Proceeds
                  from the issuance of common stock
              
              
              160,000
              
              
              —Net
                  borrowings from loan payable
              
              
              (282,972
              )
              
              250,559Net
                  borrowings from loans to related parties
              
              
              47,324
              
              
              189,159NET
                  CASH FLOWS BY FINANCING ACTIVITIES
              
              
              1,290,077
              
              
              487,214NET
                  CHANGE IN CASH
              
              
              (199,798
              )
              
              (39,731
              )CASH
                  AT BEGINNING OF YEAR
              
              
              225,825
              
              
              265,556CASH
                  AT END OF YEAR
              
              $
              26,027
              
              $
              225,825SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Income
                  taxes paid
              
              $
              1,025
              
              $
              1,025Interest
                  paid
              
              $
              791,566
              
              $
              622,153
 
 See
        notes
        to consolidated financial statements.
  F-9
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
  NOTE
        1
        - SIGNIFICANT ACCOUNTING POLICIES
  Business
        Activity
  Michele
        Audio Corporation of America began business in March 1972. As a result of
        a
        merger discussed in Note 5, Michele Audio Corporation of America became a
        wholly
        owned subsidiary of Highway One-Oweb, Inc. Subsequent to the merger Highway
        One-Oweb, Inc. changed its name to Michelex Corporation. Michelex is a fully
        integrated audio replication and multimedia fulfillment company that provides
        quality products and professional grade services to customers throughout
        North
        America. Through its Plastics division the Company provides a broad range
        of
        plastic injection molded multimedia packaging products and fulfillment services.
        The product offerings include Jewel Boxes, Trays, DVD Boxes, and C-Shells
        for CD
        and DVD based products, Norelco Boxes and C-0’s for cassette based products and
        Video Boxes and Poly Boxes for VHS based products. Through its audio division
        the Company provides replication services for cassette, CD and DVD based
        products. Additionally, the audio division owns exclusive rights to an extensive
        library of music and spoken word program material it licenses to customers
        and
        also operates both a recording and mastering studio which provides audio
        restoration, editing and mastering services to its customers. Through its
        newest
        division the Company offers a broad range of paper, vinyl, tyvek, and board
        mailer based multimedia packaging products. In addition to servicing customers
        from its headquarters and manufacturing facilities in Massena, NY, in 1999
        the
        Company opened a manufacturing and distribution facility in Salt Lake City,
        UT
        to better serve customers in the western half of the United States.
  Principles
        of Consolidation
  The
        consolidated financial statements include the accounts of Michelex Corporation
        and Michele Audio Corporation of America and Hindsight Records, Inc., its
        wholly
        owned subsidiaries. All intercompany balances and transactions have been
        eliminated in consolidation.
 
 Cash
        Equivalents
 
 The
        Company considers all highly liquid debt instruments with a maturity of three
        months or less to be cash equivalents.
  Accounts
        Receivable
  The
        Company estimates an allowance for bad debts based on a periodic review of
        its
        accounts which are charged to operations at the time they are deemed to be
        uncollectible.
 
 F-10
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2004
 
 NOTE
        1
        - SIGNIFICANT ACCOUNTING POLICIES (Continued)
  Inventory
 
 Inventory
        is valued at the lower of cost (first-in first-out method) or market.
        Merchandise shipped from overseas is inventoried, and the corresponding
        liability recorded, upon the Company’s taking title to the
        inventory. **** Components
        of inventories at December 31, 2004 are as follows:
 
 Raw
                  materials
              
              $
              417,121Work
                  in process
              
              
              142,238Finished
                  goods
              
              
              1,090,887$
              1,650,246
 
 Revenue
        recognition
 
 Revenues
        are recognized when product is shipped from the Company’s
        facilities.
  Concentration
        of Credit Risks
 
 The
        Company’s financial instruments that are exposed to concentrations of credit
        risk consist primarily of temporary cash investments and trade accounts
        receivable.
 
 The
        Company maintains its cash in bank deposit accounts at high credit quality
        financial institutions. The balances are insured by the Federal Deposit
        Insurance Corporation up to $100,000. At December 31, 2004, the Company had
        no
        uninsured cash. The Company may exceed the insurance limits at times during
        the
        year.
 
 Most
        of
        the Company’s business activity is with customers located in the United States.
        Consequently, the Company’s ability to collect the amounts due from customers is
        affected by economic fluctuations in the country.
  Fixed
        Assets
 
 The
        value
        of fixed assets is at historical cost as required by generally accepted
        accounting principles. Depreciation is calculated on a straight-line over
        the
        expected useful life of the asset as follows:
 
 Building
                  and improvements
              
              10
                  to 31 yearsEquipment
              
              5
                  to 7 yearsVehicles
              
              5
                  yearsMasters
              
              3
                  years
 
 
 F-11
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
        31, 2004
  NOTE
        1
        - SIGNIFICANT ACCOUNTING POLICIES (Continued)
  Land
        and Building Held for Investment
 
 Property
        held for investments consists of land not used in the business in Massena,
        NY,
        as well as property for which the Company plans to renovate and
        rent.
  Use
        of
        Estimates
 
 The
        preparation of 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 financial statements and the reported amounts of revenues and expenses
        during the reporting period. Accordingly, actual results could differ from
        those
        estimates.
  Income
        Taxes
 
 The
        Company reports income taxes based upon Statement of Financial Accounting
        Standards No. 109 (FAS 109) “Accounting for Income Taxes”, which requires the
        recognition of deferred tax liabilities and assets for the expected future
        tax
        consequences of temporary differences between the carrying amounts and the
        tax
        bases of other assets and liabilities.
  Advertising:
 
 The
        Company expenses advertising costs as they are incurred. Advertising costs
        were
        not material during the years ended December 31, 2004 and 2003.
  Earnings
        (Loss) Per Share:
 
 The
        Company calculates earnings (loss) per share in accordance with SFAS No.
        128,
“Earnings Per Share”. Basic earnings (loss) per share was computed by dividing
        net income (loss) by the weighted average number of common shares outstanding.
        Diluted earnings per share is computed by dividing net income by the weighted
        average number of common shares outstanding and is adjusted for the dilutive
        effect of shares issuable upon the exercise of options and warrants. The
        Company
        had a net loss for the period March 1, 2003 to December 31, 2003 and the
        year
        ended December 31, 2004, and accordingly, potential common share equivalents
        are
        excluded from this computation, as the effect would be anti-dilutive.
 
 F-12
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
        31, 2004
 
 NOTE
        2
        - FIXED ASSETS
 
 Fixed
        assets consist of the following at December 31, 2004:
 
 Land
              
              $
              749,500Building
              
              
              5,125,971Equipment
              
              
              21,589,500Vehicles
              
              
              377,858Masters
              
              
              879,51228,722,341Less:
                  accumulated depreciation
              
              
              21,054,656$
              7,667,685
 
 Included
        in fixed assets are $1,712,645 in equipment and $310,920 in land and buildings
        under capital leases.
  NOTE
        3
        - RELATED PARTIES
 
 Note
        Payable - Key Bank/Officers
 
 In
        August
        2002, the officers of the corporation borrowed $50,000 personally from Key
        Bank.
        Proceeds were then lent to the corporation which is making scheduled monthly
        payments of $5,000 principal plus interest at the Bank’s Prime Rate plus 2%.
        This loan was repaid in 2003.
 
 In
        addition, officers of the Company have made interest free advances totaling
        $586,900 at December 31, 2004.
 
 Loans
        Receivable- Media Books LLC, Michelex Plastics Corp. and Michelex
        Trimark
  The
        Company has made interest free advances to these companies, which are owned
        principally by certain shareholders of the Company.
 
 In
        addition, there have been sales to related parties during the last several
        years, primarily to Media Books LLC, which have resulted in accounts receivable
        totaling $547,152.
  F-13
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
        31, 2004
  NOTE
        4
        - CREDIT LINES
 
 Wells
        Fargo Business Credit, Inc.
 
 In
        March
        2002, the Company entered into a $7,000,000 revolving note agreement with
        Wells
        Fargo Business Credit, Inc. for working capital and issuance of letters of
        credit. Interest is payable monthly at the Bank’s base rate plus 3%. The note is
        payable on demand. Borrowings under the credit facility at December 31, 2004
        totaled $1,666,319. The Company was in default of the credit facility. In
        April
        2004, the agreement was amended. The amendment changed certain of the provisions
        of the agreement including the formula used to calculate the funds available
        to
        be borrowed. In addition, certain default charges were settled. In April
        2005,
        the Company and Wells Fargo entered into a letter agreement whereby the balances
        due under the line of credit agreement were accelerated and the Company was
        required to seek alternative financing to repay the borrowings. In 2006,
        The
        Company and Wells Fargo entered into an agreement to settle the debt owed
        to
        Wells Fargo. Pursuant to the agreement, the Company was to make payments
        of
        $1,025,000 in June 2006, $1,150,000 in August 2006 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.
  Pittsford
        Capital Mortgage Partners
 
 In
        September 2003, the Company 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
        June
        2005, The Company 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 the Company’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 the
        Company.
 
 Ringsport,
        Ltd.
 
 In
        January 2005, the Company entered into a revolving line of credit agreement
        with
        Ringsport, Ltd., a British Virgin Islands corporation. Pursuant to the
        agreement, the Company may borrow up to one million dollars ($1,000,000)
        for a
        term of one 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
        the Company. In 2005, the Company borrowed $50,000 under the line.
 
 F-14
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        5
        - ACQUISITIONS
 
 Merger
        with Highway One-OWeb, Inc.
 
 In
        July
        2003, Michele Audio merged with Highway One-OWeb, Inc. (“Highway”). In exchange
        for the shares of Michele Audio outstanding common stock on the date of the
        merger, the shareholders received 10,392,000 shares of Highway stock. In
        addition, 19,750,000 Highway shares previously issued were cancelled.
        Immediately after the merger, the shareholders of Michele Audio controlled
        80%
        of the voting stock of the consolidated entity. As a result, the merger has
        been
        reflected as a reverse acquisition, and as such, the historical information
        presented reflects those of the operating Company, Michele Audio. The effect
        of
        this recapitalization has been reflected retroactively.
 
 Acquisition
        of Hindsight Records, Inc.
 
 On
        December 30, 2004, the Company entered into an Agreement and Plan of Merger
        to
        acquire Hindsight Records, Inc. and Stradaveri, Inc. from an employee of
        the
        Company and mother of one of the officer/director’s children. Approximately one
        week previous, the employee purchased the shares of Hindsight and Stradaveri
        from the officer/director of the Company for $800,000. Pursuant to the merger
        agreement, the Company purchased the outstanding shares of Hindsight and
        Stradaveri for $800,000 and the issuance of 100,000 shares of the Company’s
        common stock. In addition, the Company assumed all of Hindsight's obligations
        under Hindsight's 5% secured convertible debentures due December 29, 2006
        having
        an aggregate principal balance of $1,000,000.
 
 In
        December 2005, the Company entered into a sale agreement with an officer
        and
        director of the Company to sell Hindsight back to him. Pursuant to the
        agreement, the officer reacquired the shares of Hindsight sold to the Company
        in
        December 2004 in exchange for the canceling of the promissory note for $800,000
        owed to the officer. The assets, liabilities and profit and loss are therefore
        reflected as a discontinued operation. Proforma income statement information
        has
        not been presented as there would be no change in the income or loss from
        continuing operations.
 
 
 F-15
  
 MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
  **NOTE
        6 - LONG-TERM DEBT**
 
 Long-term
        debts consists of the following:
 
 Interest Rate
              
              Due
                Date
              
              December
                  31,
                2004Secured
                  mortgage payable in monthlyinstallments
                  of $16,800 includinginterest,
                  secured by certain Utah facilities
              
              
              8.75
              %
              
              2018
              
              $
              1,586,792Secured
                  mortgage payable in monthlyinstallments
                  of $4,594 including interest,secured
                  by certain Utah facilities
              
              
              7
              %
              
              2015
              
              
              636,341Secured
                  note payable to bank in monthlyinstallments
                  of $45,833 plus interest,secured
                  by certain property
              
              
              Prime
                  + 3
              %
              
              2010
              
              
              2,887,500Secured
                  note payable to bank in monthlyinstallments
                  of $2,416 plus interest,secured
                  by certain equipment
              
              
              Prime
                  + 1
              %
              
              2005
              
              
              12,116Secured
                  mortgage payable in monthlyinstallments
                  of $2,146 including interest,secured
                  by certain property inMassena,
                  NY
              
              
              5.25
              %
              
              2009
              
              
              108,046Secured
                  note payable in monthly installmentsof
                  $529 including interest, secured bycertain
                  property
              
              
              4
              %
              
              2013
              
              
              45,422Secured
                  note payable to AssociatesCommercial
                  Corporation payable inmonthly
                  installments of $730 includinginterest,
                  secured by certain transportationequipment
              
              
              10.5
              %
              
              2005
              
              
              4,936Note
                  payable in monthly installments of$2,897
                  including interest, secured by certainproperty
                  and guaranteed by certain officers
              
              
              3
              %
              
              2013
              
              
              227,780Secured
                  second mortgage payable in monthlyinstallments
                  of interest only secured bycertain
                  Utah facilities
              
              
              9
              %
              
              2005
              
              
              800,0006,308,933Less
                  current maturities
              
              
              
              
              
              
              
              
              1,624,892$
              4,684,041
  F-16
 MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 **NOTE
        6 - LONG-TERM DEBT (Continued)**
  Long-term
        debt matures as follows:
  Fiscal
                  year ending December 31,2005
              
              $
              1,504,4052006
              
              
              684,3932007
              
              
              694,1412008
              
              
              704,6582009
              
              
              654,956After
              
              
              2,066,380Total
              
              $
              6,308,933
  In
        late
        2005, the Company received notification of default from both the first and
        second mortgage holder for the Company’s premises in Utah. In December 2005, the
        Company made payments aggregating $132,875 for amounts due on the mortgages,
        thereby withdrawing their notices of default.
  NOTE
        7
        - CAPITAL LEASE OBLIGATIONS
  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.
 
 F-17
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        7
        - CAPITAL LEASE OBLIGATIONS (Continued)
 
 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.
 
 Yale
        Financial Services
 
 The
        Company leases a used 1999 Yale forklift under capital lease arrangements
        with
        Yale Financial Services. The lease has been classified as a capital lease
        since
        the payments represent in excess of 90% of the equipment’s cost. The lease dated
        November 13, 2001 includes 24 monthly payments of $644 beginning January
        2002.
        This is equal to the cost to amortize the cost of the equipment over 2 years
        with no interest payable.
 
 Ogdensburg
        Bridge and Port Authority
 
 The
        Company leased a building and land located at 820 Commerce Park Drive,
        Ogdensburg from the Ogdensburg Bridge and Port Authority dated March 29,
        2002.
        The lease was for 180 months with monthly payments of $5,907, which is equal
        to
        the cost to amortize $700,000 over 15 years at an interest rate of 6% per
        annum.
        In June 2004, the Company and the lessor of its Ogdensburg facilities reached
        an
        agreement whereby the lessor agreed to terminate the lease. The termination
        of
        the lease resulted in a loss of $31,895.
 
 Yale
        Financial Services
 
 The
        Company leased two reconditioned 1997 Yale lift trucks under capital lease
        arrangements with Yale Financial Services on April 25, 2002. 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 at
        fair
        market value. The lease has been classified as a capital lease since the
        payments represent in excess of 90% of the equipment’s cost. The lease is for 24
        monthly payments of $674 beginning April 2002, which is equal to the cost
        to
        amortize the cost of the equipment over two years with no interest
        payable.
 
 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 of 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 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.
  F-18
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARY
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
  NOTE
        7
        - CAPITAL LEASE OBLIGATIONS (Continued)
 
 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.
 
 Future
        minimum lease payments are as follows:
 
 Year
                  Ended December 31,2005
              
              $
              298,4142006
              
              
              8,6882007
              
              
              8,6882008
              
              
              8,6882009
              
              
              8,688After
              
              
              16,162349,328Less
                  interest portion
              
              
              15,915Present
                  value of net minimum lease payments
              
              
              333,413Less
                  current portion
              
              
              287,532$
              45,881
   F-19
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
  NOTE
        8
        - 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 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 has 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 was 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 was converted into 2,400,000 shares of
        the
        Company’s common stock (after giving effect to the 3 for 1 stock split). The
        Company has recorded a beneficial conversion feature totaling $100,000 and
        $50,000, respectively, which were recorded as a discount on the debentures
        and
        are being 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. At December
        31,
        2004, the balance of the remaining beneficial conversion feature totaled
        $43,832.
  F-20
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
  NOTE
        9
        - RETIREMENT PLAN
 
 Effective
        March 1, 1993, the Company established a Deferred Savings and Profit Sharing
        Plan that covers substantially all employees. The plan expense was $9,868
        and
        $21,729 for fiscal periods ended December 31, 2004 and 2003. The pension
        plan
        contributions were in accordance with requirements of the pension plan trustee.
        The net assets of the plan as of December 31, 2004 were $867,094.
 
 NOTE
        10 - 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
        11 - INCOME TAXES
  Deferred
        income taxes reflect the net tax effects of temporary differences between
        the
        carrying amount of assets and liabilities for financial reporting purposes
        and
        the amounts used for income tax purposes using the enacted tax rates in effect
        in the years in which the differences are expected to reverse.
  F-21
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
  NOTE
        11 - INCOME TAXES (continued)
  Deferred
        income tax liabilities and assets are comprised as follows:
 
 December
                  31,
                2004Deferred
                  tax assets:Net
                  operating loss
              
              $
              1,976,000Other
              
              
              50,1202,026,120Less:
                  valuation allowance
              
              
              2,026,120—
  The
        Company believes that due to the questionable likelihood that this net deferred
        tax asset will be realized in future periods and, accordingly, a full valuation
        allowance has been recorded. The Company's income tax expense before
        discontinued operations consists of the following:
 
 Year
                  Ended
                December
                  31,
                2004
              
              March
                  1, 2003
                to
                December
                  31,
                2003Current:Federal
              
              $
              —
              
              $
              —State
              
              
              1,025
              
              
              1,0251,025
              
              
              1,025Deferred:Federal
              
              
              578,933
              
              
              (475,678
              )State
              
              
              43,576
              
              
              (35,801
              )622,509
              
              
              (511,479
              )Income
                  taxes (benefit)
              
              $
              623,534
              
              $
              (510,454
              )
  F-22
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
  NOTE
        11- INCOME TAXES (Continued)
  A
        reconciliation of the difference between the expected income tax rate using
        the
        statutory Federal tax rate and the Company's effective rate is as
        follows:
 
 December
                  31,
                2004
              
              March
                  1, 2003
                to
                December
                  31,
                2003U.S.
                  Federal income tax statutory rate
              
              
              (34
              )%
              
              (34
              )%State
                  income tax, net of Federal income tax benefit
              
              
              (7
              )
              
              (7
              )Other
                  - primarily net operating losses and recording ofvaluation
                  allowance
              
              
              56
              
              
              5Effective
                  tax rate
              
              
              15
              %
              
              (36)%
 
 The
        Company has available approximately $7,600,000 of net operating loss
        carryforwards available to reduce future taxable income expiring through
        2024.
 
 NOTE
        12 - 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 obligations in a timely
        manner.
 
 During
        2005 and 2006, the Company has 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. The Company has 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 the 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-23
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        13 - 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 and simultaneously a Personal Services Agreement with
        Mr.
        Charles Arnold. 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 approximately $290,000 for damages,
        interest, legal and administrative fees, which has been reflected as expense
        during the fourth quarter of 2005.
 
 DEPOSIT
        ON EQUIPMENT
 
 In
        July
        2004, The Company entered into an agreement for the sale of certain of its
        equipment located in the Utah facilities for $675,000. The Company received
        $300,000 as a deposit on equipment. In September 2004, the distributor sold
        six
        machines for a total of $315,000. The Company reported a gain of $26,688
        on the
        sale. In October 2004, the Company terminated the contract and no further
        equipment was sold.
 
 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.
 
 F-24
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        13 - COMMITMENTS (continued)
 
 LEGAL
        SERVICES AGREEMENT
 
 In
        June
        2004, the Company entered into an agreement with an unrelated party which
        is to
        provide legal services through June 2005. Fees for these services are comprised
        of options to purchase 1,100,000 shares of the Company's common stock at
        an
        exercise price of the lesser of par value or $0.0001 per share. The agreement
        calls for 650,000 of the shares to be registered under form S-8 and the
        remaining 450,000 shares are restricted shares. Additionally, the agreement
        calls for the Company to issue options to purchase an additional 666,666
        shares
        at an exercise price of $0.15 per share. These options will also be registered
        under Form S-8. In July 2004, the option to purchase 666,666 shares of the
        Company's common stock was exercised. Proceeds from the exercise totaled
        $100,000.
 
 In
        September 2004, the Company amended the agreement for legal services with
        one of
        its attorneys. The amendment extends the termination date of the original
        agreement from June 22, 2005 to January 22, 2006. The amendment requires
        the
        Company to issue the attorney options, with a term of 2 years, to purchase
        500,000 shares of the Company's common stock at a price of $.32 per share,
        options also with a term of 2 years to purchase 200,000 shares of the Company's
        common stock at a price of $.20 per share, and 753,000 shares of the Company's
        common stock which will be registered under Form S-8.
 
 CORNELL
        EQUITY LINE
 
 In
        November 2004, the Company signed a Standby Equity Distribution Agreement
        with
        Cornell Capital Partners, LP ("Cornell") whereby Cornell has agreed to purchase,
        during the next 2 years, up to $10,000,000 of the Company's common stock
        pursuant to the terms and conditions of the Standby Equity Distribution
        Agreement. The Company has not borrowed funds pursuant to this
        agreement.
  F-25
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        13 - COMMITMENTS (continued)
 
 COLLATERAL
        SHARE AGREEMENT
 
 In
        October 2004, the Company entered into a Collateral Share Agreement (the
        "Agreement") with Ginette and Thomas Gramuglia the President and Vice President
        of the Company respectively. The Agreement calls for the Company to issue
        Thomas
        Gramuglia and Ginette Gramuglia 3 million 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 remains
        with
        the Company unless an event of default occurs under the guaranteed loans
        set
        forth in the Agreement, however Tom and Ginette Gramuglia have voting rights
        for
        the shares during the term of the 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 5 day trading period
        during
        the term of the agreement. The 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 agreement is the shorter of 10 years or the term of the loan
        guarantees.
 
 NOTE
        14 - SUBSEQUENT EVENTS
 
 ACCOUNT
        RECEIVABLE PURCHASE AGREEMENT
 
 In
        May
        2005, the Company entered into a one 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-26
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        14- SUBSEQUENT EVENTS (continued)
 
 SALE-LEASEBACK
        OF EQUIPMENT
 
 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.
 
 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 were converted into 8,100,000 shares
        of the
        Company’s common stock. At that time, the remaining beneficial conversion
        feature will be expensed.
 
 PROPOSED
        ACQUISITION OF MEDIA BOOKS
 
 In
        September 2004, the Company signed a letter of intent to acquire Media Books,
        LLC, an entity which is 50% owned by an officer/director of the
        Company.
  F-27
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        14 - SUBSEQUENT EVENTS (continued)
 
 CAPITAL
        LEASE ON EQUIPMENT
  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.
 
 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.
 
 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.
  F-28
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        14 - SUBSEQUENT EVENTS (continued)
 
 SUBSEQUENT
        FINANCINGS
 
 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
        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
        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 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.
 
 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.
  F-29
  MICHELEX
        CORPORATION
 AND
        SUBSIDIARIES
 
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 DECEMBER
        31, 2004
 
 NOTE
        14- SUBSEQUENT EVENTS (continued)
 
 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 $15,000 (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
        $60,000 (the market value of the shares on the date of the
        issuance.
 
 ISSUANCE
        OF SHARES TO VENDOR
 
 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.
 
 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.
 
 ISSUANCE
        OF SHARES TO EMPLOYEES
 
 In
        March
        2006, the Company issued 472,500 shares of common stock to
        employees.
  F-30
 **Item
        8. Changes in and Disagreements with Accountants on Accounting
        and****Financial
        Disclosure.**
  None
 
 **PART
        III**
 
 **Item
        9. Directors, Executive Officers, Promoters and Control
        Persons;**  **Compliance
        with Section 16(a) of the Exchange Act.**
  **Identification
        of Directors and Executive Officers**
  The
        following table sets forth the names of our Company’s directors and executive
        officers. These persons will serve until the next annual meeting of the
        stockholders or until their successors are elected or appointed and qualified,
        or their prior resignation or termination.
 
 Name
              
              Positions
                  Held
              
              Date
                  of Election or Designation
              
              Date
                  of Termination or ResignationThomas
                  Gramuglia
              
              
              President
              
              
              7/23/03
              
              
              *Director
              
              
              7/23/03
              
              
              *Sharon
                  Bishop
              
              
              Secretary
              
              
              7/23/03
              
              
              *Director
              
              
              7/23/03
              
              
              *
  *
        These
        persons presently serve in the capacities indicated.
  **Business
        Experience.**
  Thomas
        Gramuglia, President, and Director. Mr. Gramuglia is 56 years of age. He
        was
        born in Englewood, New Jersey. He is the founder of Michele Audio Corporation
        and Michele Audio Corporation of Canada, which was sold in 1979. Mr. Gramuglia
        is also the owner-operator of Hindsight Records. He attended schools in Fort
        Lee, New Jersey, graduating in 1967. Mr. Gramuglia attended New York Institute
        of Technology, majoring in Behavioral Science. He has networked extensively
        throughout Europe, the Far East, and South America in a continuing effort
        to
        expand international relations with industry majors.
  Sharon
        Bishop, Secretary and Director. Ms. Bishop, age 43, was born in Torrance,
        California. She began working for Michele Audio in December, 1980, evolving
        with
        the music and plastics industry from LP/8 track in the early 1980’s to audio and
        video cassettes later that decade, CD’s in the 1990’s and to the present day, in
        which DVD’s are prevalent.
  **Involvement
        in Certain Legal Proceedings.**
  During
        the past five years, no present or former director, executive officer or
        person
        nominated to become a director or an executive officer of our
        Company:
  (1)
        was a
        general partner or executive officer of any business against which any
        bankruptcy petition was filed, either at the time of the bankruptcy or two
        years
        prior to that time;
  (2)
        was
        convicted in a criminal proceeding or named subject to a pending criminal
        proceeding (excluding traffic violations and other minor offenses);
  17
  (3)
        was
        subject to any order, judgment or decree, not subsequently reversed, suspended
        or vacated, of any court of competent jurisdiction, permanently or temporarily
        enjoining, barring, suspending or otherwise limiting his involvement in any
        type
        of business, securities or banking activities; or
  (4)
        was
        found by a court of competent jurisdiction (in a civil action), the Commission
        or the Commodity Futures Trading Commission to have violated a federal or
        state
        securities or commodities law, and the judgment has not been reversed, suspended
        or vacated.
  **Compliance
        with Section 16(a) of the Exchange Act**
  Each
        of
        our current directors and executive officers filed a Form 3 Initial Statement
        of
        Beneficial Ownership of Securities with the Securities and Exchange Commission
        on July 28, 2003. There have been no changes in any of these persons’ stock
        ownership since that time.
  **Code
        of Conduct.**
  The
        Company has adopted a Code of Conduct which is attached to this Report as
        Exhibit 14. See Part III, Item 13 of this Report.
  **Audit
        Committee.**
  The
        Board
        of Directors does not have an audit committee. Due to each member’s involvement
        in the day-to-day operations of the Company and their intimate familiarity
        with
        the financial condition and controls inherent in the Company, each member
        of the
        Board regularly monitors, reviews and makes suggestions regarding the Company’s
        financial and operating procedures and control mechanisms.
 
 **Item
        10. Executive Compensation.**
 
 **Cash
        Compensation**
  The
        following table sets forth the aggregate compensation paid by the Company
        for
        services rendered during the periods indicated:
 
 SUMMARY
        COMPENSATION TABLE
 
 Long
                  Term CompensationAnnual
                  Compensation
              
              Awards
              
              Payouts(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)
              
              (i)Name
                  and Principal Position
              
              Year
                  or Period Ended
              
              Salary
                  ($)
              
              Bonus
                  ($)
              
              Other
                  Annual Compen-
              
              Restricted
                  Stock
              
              Securities
                  Underlying Options
              
              LTIP
                  Payouts
              
              All
                  Other Compensat’nThomas
              
              
              12/31/03
              
              $
              82,915
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              $
              2,188Gramuglia,
              
              
              12/31/04
              
              $
              63,218.94
              
              
              
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              $
              0President,Director,SharonBishop,
              
              
              12/31/03
              
              $
              90,009
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              $
              2,684Director,
              
              
              12/31/04
              
              $
              103,083.21
              
              
              
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0Secretary
  18
  No
        cash
        compensation, deferred compensation or long-term incentive plan awards were
        issued or granted to the Company’s management during the years ended December
        31, 2004 or 2003. None of our officers or directors have been granted any
        option
        or stock appreciation rights; accordingly, no tables relating to such items
        have
        been included within this Item.
  **Compensation
        of Directors.**
  There
        are
        no standard arrangements pursuant to which the Company’s directors are
        compensated for any services provided as a director. No additional amounts
        are
        payable to the Company’s directors for committee participation or special
        assignments.
  Employment
        Contracts and Termination of Employment and Change-in-Control Arrangements.
  There
        are
        no employment contracts, compensatory plans or arrangements, including payments
        to be received from the Company, with respect to any director or executive
        officer of the Company which would in any way result in payments to any such
        person because of his or her resignation, retirement or other termination
        of
        employment with the Company, any change in control of the Company, or a change
        in the person’s responsibilities following a change in control of the Company.
 
 **Item
        11. Security Ownership of Certain Beneficial Owners and
        Management.**
  **Security
        Ownership of Certain Beneficial Owners.**
  The
        following table sets forth the share holdings of those persons who own more
        than
        five percent of the Company’s common stock as of the date hereof:
 
 Name
                  and Address
              
              Number
                  of Shares Beneficially Owned
              
              Percentage
                  of
                of
                  ClassGinette
                  Gramuglia
              
              
              25,488,000
              
              
              24.07
              %50
                  Westwood DriveMassena,
                  NY 13662Thomas
                  Gramuglia
              
              
              16,120,360
              
              
              15.23
              %12
                  Sierra Lane
                Massena,
                  NY 13662Vincent
                  Gramuglia
                39
                  Joyous Lane
                Glenville,
                  NY 12302
              
              
              8,128,500
              
              
              7.68
              %
  **Security
        Ownership of Management.**
  The
        following table sets forth the share holdings of the Company’s directors and
        executive officers as of the date hereof:
  Name
                  and Address
              
              Number
                  of Shares Beneficially Owned
              
              Percentage
                  of
                of
                  ClassGinette
                  Gramuglia
              
              
              25,488,000
              
              
              24.1
              %50
                  Westwood DriveMassena,
                  NY 13662Thomas
                  Gramuglia
              
              
              16,120,360
              
              
              15.2
              %12
                  Sierra LaneMassena,
                  NY 13662Sharon
                  Bishop
              
              
              150,000
              
              
              0All
                  directors and executive officers as a group
              
              
              41,758,360
              
              
              39.3
              %


**Changes
      in Control.**




There
      are
      no present arrangements or pledges of the Company’s securities which may result
      in a change in control thereof.





19


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





**Transactions
      with Management and Others.**




The
      only
      transactions between our Company and members of management, nominees to become
      a
      director or executive officer, five percent stockholders, or promoters or
      persons who may be deemed to be parents of our Company were: (i) in August,
      2002, the officers of Michele Audio borrowed $50,000 personally from Key Bank
      and then lent to Michele Audio, which was making scheduled monthly payments
      of
      $5,000 principal plus interest at the Bank’s Prime Rate plus 2%; this loan was
      repaid in 2003; (ii) we have made interest free advances to Media Books, LLC,
      Hindsight Records, Inc. Michelex Plastics and Michelex Trimark, which are owned
      principally by certain shareholders of the Company; (iii) 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.




**Parents
      of the Issuer.**




Our
      Company has no parents, except to the extent that Ms. Gramuglia and Mr.
      Gramuglia may be deemed to be a parent by virtue of their beneficial ownership
      of approximately 72% of its outstanding common stock. See the caption “Security
      Ownership of Certain Beneficial Owners and Management” of this Report.




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





**Reports
      on Form 8-K**





8-K
      Current Report dated July 23, 2003, as amended, filed July 28, 2003 and October
      6, 2003, respectively .


8-K
      Current Report dated August 19, 2003, filed August 21, 2003


8-K
      Current Report dated July 23, 2003, filed December 17, 2003


8-K
      Current Report dated April 13, 2005, filed April 13, 2005


8-K
      Current Report dated May 4, 2005, filed May 4, 2005





Exhibits*





Where
                Incorporated in this ReportRegistration
                Statement on Form 10-SB, filed July 13, 1999**
            
            
            Part
                IRegistration
                Statement on Form 10-SB-A1, filed September 10, 1999**
            
            
            Part
                IRegistration
                Statement on Form 10-SB-A2, filed October 18, 1999**
            
            
            Part
                IAnnual
                Report on Form 10KSB for the year ended December 31,
                1999**
            
            
            Part
                IAnnual
                Report on Form 10KSB for the year ended December 31,
                2000**
            
            
            Part
                IAnnual
                Report on Form 10KSB for the year ended December 31,
                2001**
            
            
            Part
                I


Annual
                Report on Form 10KSB for the year ended December 31,
                2002**
            
            
            Part
                IAnnual
                Report on Form 10KSB for the year ended December 31,
                2003**
            
            
            Part
                I


Exhibit
                  10.1 8% Convertible Debenture Agreement with Vincent Gramuglia
                  (to be
                  filed by amendment)
              
              
              Part
                  IIExhibit
                  10.3 Amended and Restated Promissory Note with Pittsford Capital
                  Mortgage
                  Partners, LLC**
              
              
              Part
                  IIExhibit
                  10.4 Revolving Line of Credit Agreement with Ringsport
                  Ltd.**
              
              
              Part
                  IIExhibit
                  10.5 Accounts Receivable Purchase Agreement with Commercial
                  Capital**
              
              
              Part
                  IIExhibit
                  10.6 Agreement of Sale of Hindsight Records**
              
              
              Part
                  IIExhibit
                  10.7 Assumption Agreement with Franklin Funding Inc. (to be filed
                  by
                  amendment)
              
              
              Part
                  IIExhibit
                  10.8 St. Lawrence County Industrial Development Agency**
              
              
              Part
                  IIExhibit
                  10.9 Equipment Lease with NTB Logistics**
              
              
              Part
                  IIExhibit
                  10.10 Convertible Debenture Purchase Agreement with
                  Highgate**
              
              
              Part
                  IIExhibit
                  10.11 Sale of Property to MPG Development LLC**
              
              
              Part
                  IIExhibit
                  10.12 Sale of Property to 3553 Main LLC (to be filed by
                  amendment)
              
              
              Part
                  IIExhibit
                  10.13 Office/Warehouse Lease with Local Pages**
              
              
              Part
                  IIExhibit
                  10.14 Asset Purchase Agreement with Utica Leaseco LLC**
              
              
              Part
                  IIExhibit
                  10.15 Investor Relations Agreement with Carmac Associates, Inc.
                  (to be
                  filed by amendment)
              
              
              Part
                  IIExhibit
                  10.16 Secured Convertible Promissory Note with Ayuda Funding Corp.
                  (to be
                  filed by amendment)
              
              
              Part
                  IIExhibit
                  10.17 Securities Purchase Agreement with NIR, dated July 28,
                  2006**
              
              
              Part
                  II
 Exhibit
                  10.18 Consulting Agreement (to be filed by amendment)
              
              
              Part
                  IIExhibit
                  10.19 Balloon Deed of Trust Note with Level One Capital Partners
                  (to be
                  filed by amendment)
              
              
              Part
                  IIExhibit
                  10.20 Mortgage Note with Madison Realty Capital, LP (to be filed
                  by
                  amendment)
              
              
              Part
                  II





Exhibit
                Number
            
            Description14
            
            Code
                of Ethics31.1
            
            302
                Certification of Thomas Gramuglia31.2
            
            302
                Certification of Thomas Gramuglia32
            
            906
                Certification





*
      Summaries of all exhibits contained within this Report are modified in their
      entirety by reference to these Exhibits.




**
      These
      documents and related exhibits have been previously filed with the Securities
      and Exchange Commission and are incorporated herein by reference.





20




**Item
      14. Controls and Procedures.**




As
      of the
      end of the period covered by this Annual Report, we carried out an evaluation,
      under the supervision and with the participation of our President and Treasurer,
      of the effectiveness of the design and operation of our disclosure controls
      and
      procedures. Based on this evaluation, our President and Treasurer concluded
      that
      our disclosure controls and procedures are effective in timely alerting them
      to
      material information required to be included in our periodic Securities and
      Exchange Commission reports. It should be noted that the design of any system
      of
      controls is based in part upon certain assumptions about the likelihood of
      future events, and there can be no assurance that any design will succeed in
      achieving its stated goals under all potential future conditions, regardless
      of
      how remote. In addition, we reviewed our internal controls, and there have
      been
      no significant changes in our internal controls or in other factors that could
      significantly affect those controls subsequent to the date of our last
      evaluation.




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




The
      following is a summary of the fees billed to Michelex by its principal
      accountants during the calendar years ended December 31, 2004, and December
      31,
      2003:





Fee
                category
            
            2004
            
            2003Audit
                fees
            
            $
            59,106
            
            $
            44,970Audit-related
                fees
            
            $
            -0-
            
            $
            -0-Tax
                fees
            
            $
            -0-
            
            $
            -0-All
                other fees
            
            $
            -0-
            
            $
            -0-Total
                fees
            
            $
            59,106
            
            $
            44,970




Audit
      fees. Consists of fees for professional services rendered by our principal
      accountants for the audit of our annual financial statements and the review
      of
      financial statements included in our Forms 10-QSB or services that are normally
      provided by our principal accountants in connection with statutory and
      regulatory filings or engagements.




Audit-related
      fees. Consists of fees for assurance and related services by our principal
      accountants that are reasonably related to the performance of the audit or
      review of our financial statements and are not reported under “Audit
      fees.”




Tax
      fees.
      Consists of fees for professional services rendered by our principal accountants
      for tax compliance, tax advice and tax planning.




All
      other
      fees. Consists of fees for products and services provided by our principal
      accountants, other than the services reported under “Audit fees,” “Audit-related
      fees” and “Tax fees” above.





21




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the Company has caused
      this Report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


**MICHELEX
                CORPORATION**Date:
                November 2, 2006
            By:
            /s/
                Tom GramugliaName:
                Tom GramugliaTitle:
                President




In
      accordance with the Exchange Act, this Report has been signed below by the
      following persons on behalf of the Registrant and in the capacities and on
      the
      dates indicated.




Date:
                November 2, 2006
            By:
            /s/
                Tom GramugliaName:
                Tom GramugliaTitle:
                President and Director




Date:
                November 2, 2006
            By:
            /s/
                Sharon BishopName:
                Sharon BishopTitle:
                Secretary and Director




22