When attacked outside of a nightclub by Marines in October, Michaels was forced to surrender the title due to injuries.

A few months later, Michaels returned at Royal Rumble and again took the victory in the Royal Rumble event. Michaels brought in his old trainer, Jose Lothario, to manage him for his big title shot.

Michaels, Razor Ramon, Diesel, and Hunter Hearst Helmsley all broke character at a house show in Madison Square Garden to say farewell to the departing Hall and Nash.

When his tag partner for an upcoming event, the Ultimate Warrior, bailed again on the WWF, Michaels brought back Sid, who turned on him AGAIN for the title opportunity. Sid took the belt from Michaels in November. Jose Lothario quit when Sid attacked his son in December.

Michaels won the title back from Sid in January of 1997, but then surrendered it in February because of injuries. Shawn was out only a month before returning to heat up a feud between him and Bret Hart, who had just turned heel. When Bret was injured, Michaels wanted other Hart Foundation members, and was forced to team up with "Stone Cold" Steve Austin to face Owen Hart and the British Bulldog for the tag titles. The duo came up victorious, but hated each other so much that they fought each other at the next pay-per-view… Michaels was injured again and forced to surrender the tag title.

Michaels returned to referee the title match between the Undertaker and Bret Hart. Michaels accidentally nailed the Undertaker with a chair-shot meant for Bret and was forced to give him the win… When the fans booed him the next day, Michaels became angry and turned heel. Of course, the Undertaker was angry, and began feuding with Michaels, culminating in the instantly-classic "Hell in the Cell" match at Summerslam.

Hunter Hearst Helmsley and Michaels were forced together to face tag champs Steve Austin and Mankind, and brought in Rick Rude as their "insurance policy"... Helmsley, Michaels, Chyna, and Rude formed Degeneration X shortly thereafter.

Michaels took the European title from Davey-Boy Smith at a PPV in England in September.

At Survivor Series, the infamous screw-job ending occurred where Michaels took the World title from Bret Hart.

Michaels held onto the title against Ken Shamrock on PPV in December, losing the match by disqualification when DX interfered. Owen Hart rescued Shamrock, having returned to take revenge on DX for the wrongs committed against the Hart Foundation, but has to settle for Helmsley since Michaels has feuds with the Undertaker and Austin in the works.

In December, when ordered to give Hunter Hearst Helmsley a title shot, the two had a mock match, and Michaels laid down and let Helmsley pin him.

This year so far, Michaels beat the Undertaker in a casket match at the Royal Rumble, with help from Kane.

"Stone Cold" Steve Austin won the Royal Rumble and the title match at Wrestlemania, for which Mike Tyson was announced to be the special "outside enforcer"… In February, Tyson was revealed to be a member of Degeneration X… Tyson turned out to be an impartial referee, and gave Austin the three-count over Michaels when the regular referee was knocked out. Michaels confronted Tyson and took a swing at him, and Tyson laid Michaels out.

The next night, Hunter Hearst Helmsley announced that Michaels had dropped the proverbial Degeneration-X "ball" and that he was picking it up, forming the DX Army.