KOLR Kolorfusion International Inc (CE)

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-KSB

Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended: June 30, 2007

Commission file number: 0-28351

Kolorfusion International, Inc.

(Name of small business issuer in its charter)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value
(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 þ No o

Check here if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B contained in this Form, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

State issuer’s revenues for its most recent fiscal year (ending June 30, 2007): $1,561,776

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of June 30, 2007: $1,308,641

Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years.

N/A

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes o No o

Applicable Only to Corporate Registrants

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the most practicable date:

Documents Incorporated By Reference

If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 “Securities Act”). The listed documents should be clearly described for identification purposes.

None.

Transitional Small Business Disclosure Format (Check one): Yes o No þ

 

 

NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report includes or is based upon estimates projections or other “forward looking statements”. Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. Such forward-looking statements are based on the beliefs of Kolorfusion International, Inc. When used in this Annual Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intends” and similar expressions, as they relate to us, are intended to identify forward-looking statements, which include statements relating to, among other things, the ability of our company to continue to successfully compete in the product surface enhancement technology industry. While these forward looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current information and judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Such estimates, projections or other “forward looking statements” involve various risks and uncertainties. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other “forward-looking statements”.

Available Information

Kolorfusion International, Inc. files annual, quarterly and current reports and other information with the Securities and Exchange Commission (the “Commission”). You may read and copy documents referred to in this Annual Report that have been filed with the Commission at the Commission’s Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission filings by going to the Commission’s website at http://www.sec.gov. A direct link to our filings kept at the Commission’s web site can be found on our web site at www.kolorfusion.com.

PART I

Industry Overview

The surface finishing industry is considered to be a low to medium technology industry because technology changes and advances have arrived slowly. Products continue to be coated in much the same way as they have been for many decades. Furthermore, plastic products are still molded with equipment that may be as old as thirty years. There is and has been over the last few years a significant demand for a breakthrough in surface finishing. Many products become mature in their classification since the manufacturer has no way to readily revise the appearance or function of their respective products. Every manufacturer competes to sell their products in many ways, including price, quality, features-benefits, and appearance. In many markets or product categories, it is the final appearance that may be deciding factor for the final purchase decision. Very few consumer products are sold without some form of surface decoration or treatment, whether it is in the packaging or on the product itself. The “Kolorfusion” process can assist the manufacturer in some of the following areas:

	(i)		Product differentiation is a significant attribute that every manufacturer seeks to achieve. For instance, in a market as mature as elevators, the manufacturers of elevators still want to differentiate themselves from their competition by providing distinctive interior designs and coverings to satisfy the very diverse desires of architects and interior designers. If an architect/designer wants the interior of an elevator to have a granite look and feel, the designer and owner is constrained by weight and cost. Utilizing our Kolorfusion process removes such constraints as an alternate material, such as a coated resin or metal, can look and feel like granite with our Kolorfusion process. Additionally, the granite look provided will be at a fraction of the weight and at a fraction of the cost than previously could be provided by other materials.
	(ii)		Adding new life to a mature product category is also a defined need. A typical electric toaster has an average life usage of 7-10 years. The consumer does not usually replace a toaster until it fails, as toasters have been looking the same for almost 10-20 years now. Using our Kolorfusion process, a manufacturer of toasters can now provide new finishes that may coordinate with the kitchen décor and prompt or facilitate the consumer to replace the toaster prior to it actually failing to work. This planned product obsolescence already occurs in products such as snow skis where new designs are introduced every year, yet little to no significant improvement in performance has been added for the recreational skier.
	(iii)		Durability and consistency of a process and the ease of implementation of the process are additional considerations when defining the need within a manufacturing organization. We have developed consistent print systems and can provide processing for those manufacturers, which are not ready to license. The cost to implement is relatively low, as the process requires an oven to handle projected volumes and the installation of a vacuum.
	(iv)		Shelf appeal is an attribute manufacturers are constantly seeking. Marketing needs to identify the desires of the purchaser, which include functions, price points, size and design. Manufacturers need to identify how to achieve the costing and production output required by marketing for their sales plan. Our Kolorfusion process adds value to the product through better shelf appeal of the product. However, functionality and cost of the surface enhancement remains to be evaluated by manufacturers and engineers.

Marketing Strategy

We believe we are in a good position to expand our base of operations into many market segments and also into strategic geographic locations with proper funding. We have established a 3 ^rd party licensee in China with facilities in Shenzhen and another in Shanghai. We believe these new facilities will assist us in securing more accounts for our process in Asia. A critical bridge was achieved during 2004 with the development of the digital print capability for sampling and now in 2007 we can provide digital production of our print media for the use in our process. Current targeted markets include the gaming and computer markets.

We utilize an inside sales force to handle new accounts and service existing accounts. The manufacturers typically visit our facility to see and understand the process. Additionally, we have entered into a strategic marketing alliance with Dupont’s Engineered Polymer Division (“Dupont”), wherein Dupont promotes the process on its resins it supplies to various customers. Projects done using the DuPont approach include K2, Burton and Flow International for snowboard bindings. Also, the sales team at RealTree and Mossy Oak who promote copyright camouflage designs assist us in our marketing. We also attend various trade shows (e.g. S.H.O.T. SEMA, Inter-bike, SGIA Home Builder Show) and do specific targeted outbound calling

Material Agreements

Assignment Agreement

For the year ending June 30, 2007 we have removed the previously reported debt from our liabilities as related to the process inventor as described in our previous annual reports, including the language from our June 30 2006 10K. The following, in italics, is the language used in our June 30, 2006 10K filed with the SEC.

On approximately October 17, 1995, we entered into an assignment agreement (the “Assignment Agreement”) with Mr. Jean-Noel Claveau, the holder and owner of the process patent (“Claveau”). Pursuant to the terms and provisions of the Assignment Agreement: (i) Claveau assigned to us his right, title and interest in and to the process patent; and (ii) we will pay an aggregate price of 25,000,000 French Francs, with 2,500,000 French Francs paid upon execution of the Assignment Agreement and the balance payable over a two year period. We did not make the required payments to Claveau under the terms and provisions of the License Agreement.

During June 2001, we re-negotiated the Assignment Agreement and subsequently entered into a new agreement with Claveau (the “Agreement”). Pursuant to the terms and provisions of the Agreement: (i) we would pay Claveau 1,000,000 French Francs; (ii) we would issue 1,000,000 shares of our restricted Common Stock; and (iii) Claveau will provide consulting services to us for a five-year period in consideration of monthly payments by us to Claveau in the amount of 58,333 French Francs. As of the date of this Annual Report, we have paid an aggregate of 10,000,000 French Francs to Claveau. In related matters, on March 31 ^st 2006, the Company entered a Preferred Stock purchase agreement; wherein the purchaser acquired 1,076,923 Series C-1 Preferred Stock, which can convert on a 5:1 basis into the Company’s common shares for a total amount of 5,384,615. The investment included $600,000 in cash payment and the assumption of $655,238 in debt due by the Company to Claveau. The Company has confirmed to the Preferred purchaser that Claveau would agree to receive $100,000 or less to resolve this debt shown on the Company’s balance sheet. The Company has also confirmed to the Preferred purchaser that the Company would assume any liabilities in excess of the $100,000. Management fully expects that the individual will not attempt or be successful in claiming any more than $100,000 for the full settlement of the debt as previously recorded by the Company. We believe this to be true since Claveau has not performed the consulting services as previously agreed. Accordingly, the remaining balance of the $555,238 balance has been classified as long-term debt.

The statutes of any relevant “statutes of limitation” for a collection of debt expired during this past fiscal year, and the Company did not receive any services from the inventor since its inception. We have therefore extinguished the previously reported remaining debt in the amount of $555,238. Additionally, we have canceled 1,000,000 shares of common stock originally valued at $400,000 that were granted to the inventor per the June 2001 Assignment Agreement as a parial payment on the debt owed to him. Due to non-performance on the inventor’ part, these shares have been taken back by the Company and the entire value of the extinguishment of debt at June 30, 2007, was $955,238.

Significant License Agreement

On August 1, 2002, we entered into a license agreement (the “License Agreement”) with Polaris Industries, Inc., a Minnesota corporation (“Polaris”). Pursuant to the terms and provisions of the License Agreement: (i) we granted to Polaris an exclusive, non-transferable, royalty-bearing, worldwide license to use, manufacture, have manufactured and sell Polaris manufactured parts, service parts and accessory parts used in ATVs, utility vehicles, snowmobiles, motorcycles, and personal watercraft sold under a brand name owned by Polaris, which incorporates our licensed patents and licensed know-how until June 30, 2007; and (ii) Polaris paid to us a non-refundable unit royalty prepayment of $750,000 upon execution of the License Agreement. Polaris also purchases its Kolortex from us and pays an annual license fee to us for up to a period of twenty years.

China License Agreements

On March 2, 2006 we entered a License Agreement with Chesta Solutions, Inc. (“Chesta”) with facilities in Shanghai and now also Shenzhen China. Pursuant to the terms and provisions of the China License Agreements, we granted Chesta a non-exclusive, non-transferable license to practice our patented process of decoration by sublimation (the “Licensed Process”) for decorating of our approved customers and their approved products and Chesta will pay to us a royalty or shall subcontract to us the processing costs.

Intellectual Property

Patents and other proprietary rights are vital to our business operations. Our Kolorfusion process and other products have or may have varying degrees of protection from issuance of patents and trademarks. We protect our technology through patents and a trademark that we own and can license. Our policy is to seek appropriate protection both in the United States and abroad for our Kolorfusion process and other products. We have acquired protection, which is described as follows relating to our material patents and trademarks.

Patent

Mr. Jean Noel Claveau (“Claveau”) filed a patent application with the United States Patent and Trademark Office for patent protection of the “Process of Decoration by Sublimation”. On May 3, 1994, the United States Patent and Trademark Office issued to Claveau a patent, patent no. 5,308,426 (the “Patent”). On October 9, 2001, the United States Patent and Trademark Office re-examined the Patent regarding the patentability of the “Process of Decoration by Sublimation: and issued to us as assignee a Reexamination Certificate confirming the validity of the claims issued under the original patent to Claveau.

We may consider filing additional patent applications with respect to our technologies and any novel aspects of our technology to protect our intellectual property. Future patents, if issued, may be challenged, invalidated or circumvented. Thus, any patent that we own or license from third parties may not provide adequate protection against competitors. The patent applications that we may file in the future may not result in issued patents. Also, patents may not provide us with adequate proprietary protection or advantages against competitors with similar or competing technologies. As a result of potential conflicts with the proprietary rights of others, we may in the future have to prove that we are not infringing the patent rights of others or be required to obtain a license to the patent. We do not know whether such a license would be available on commercially reasonable terms, or at all.

Trademark and Know-How

We have received trademark registration. In general, a “trademark” is a distinctive word, phrase, logo, graphic symbol or other device that is used to identify the source of a product and to distinguish a product from anyone else’s. As a general rule, trademark law confers legal protection to names, logos and other marketing devices that are distinctive. We have registered and sought trademark protection of “Kolorfusion” in order to identify our patented processes and products in the marketplace to prevent consumer confusion and to protect the means we chose to identify our product against use by competitors.

On January 20, 1998, the United States Patent and Trademark Office issued a service mark of registration, registration no. 2,131,107, to us for protection of our exclusive use of the trademark “Kolorfusion”. The certificate of registration for “Kolorfusion” was issued under Class 100, 103 and 106 and shall remain in force and effect for ten years from the date of issuance.

We also rely on trade secrets and un-patentable know-how that we seek to protect, in part, by confidentiality agreements. However, it is possible that parties may breach those agreements, and we may not have adequate remedies for any breach. It is also possible that our trade secrets or un-patentable know-how will otherwise become known or be independently developed by competitors. There can be no assurance that third parties will not assert infringement or other claims against us with respect to any existing or future products, or that licenses would be available if our technology were successfully challenged by a third party, or if it became desirable to use any third-party technology to enhance our products. Litigation to protect our proprietary information or to determine the validity of any third-party claims could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we are successful in such litigation.

While we have no knowledge that we are infringing the proprietary rights of any third party, there can be no assurance that such claims will not be asserted in the future with respect to our Kolorfusion process or future products. Any such assertion by a third party could require us to pay royalties, to participate in costly litigation and defend licensees in any such suit pursuant to indemnification agreements, or to refrain from selling an alleged infringing product or service.

COMPETITION

We believe that there is no direct competition to our patented process that is as unique in the market. However, there are companies that are near direct competition.

Cubic Printing

The most direct competition is “cubic printing”, also known as hydro-graphics or the “dip” process, a technology from Japan that has over sixty-five licensees in twenty-two countries. Cubic printing uses a film of patterns and colors floating on a water bath so that when a product is dipped through the bath, the film attaches to the product’s surface, which is then over-coated with a spray on coating. Typical examples of parts decorated with the “cubic printing” method are plastic molded parts in automobiles with a wood grain finish or camouflage decorated parts for archery. Companies currently utilizing cubic type printing in the United States include The Colorworks, Inc., Immersion Graphics, Oakley Inc, Designer Molding, Plastic Dress-up Co., Revolution Technologies, Inc. and Spectrum Cubic Inc.

In Mold Decoration

In mold decoration (“IMD”) covers all decoration technologies that are applied to injection molded plastic parts, as part of the molding process. IMD surfaces being decorated are highly constrained in shape. Only plastics injection molded parts can utilize IMD. Alignment is easy in IMD and therefore functional decoration is possible. One common example of IMD is the changeable face-plates for cellular telephones. Many injection molding job shops utilize IMD.

Paper Sublimation

Paper sublimation is a “heat transfer” process wherein a paper carrier, with the design printed on it, is pressed against the object to be decorated and heated. The design transfers from the paper to the object. Objects with curves in two directions, such as a simple sphere, cannot be decorated without tearing the paper. Companies utilizing paper sublimation include Holt Sublimation, Inc., Quality Spray, Inc. and most ski and snowboard manufacturers.

Indirect competition

Indirect competition can be defined very broadly to include pad printing, screen- printing, hot stamping, specialty paints and coatings. All such methods have limitations to the shape and variant of colors available.

RISK FACTORS

An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.

Risks Related to Our Business

We Have a History of Operating Losses and There Can Be No Assurance We Will Be Profitable in the Future; Need to Raise Capital to Continue Our Growth.

We have a history of operating losses, expect to continue to incur losses, may never be profitable, and must be considered to be in the development stage. Further, we have also been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have realized net income totaling $472,329 for fiscal year ended June 30, 2007. This income versus a loss was generated through extinguishment of debt totaling $955,238. Our operating income was a loss of $449,499 of which this included an inventory write-down of $83,591 and a write-off of a prepaid royalty of $75,000, which the Company believes to be impaired. Our accumulated deficit at June 30, 2007 is $11,304,761. As of June 30, 2007, there exists a working capital deficit of $719,356. Further, we do not know if positive cash flow from operations can be expected in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that we encounter greater costs associated with general and administrative expenses or offering costs. In the event we are unable to obtain additional financing, the Company would continue to reduce operating expenses, as we have done these past fiscal years. If the gross profits were to decline and the market opportunities not forthcoming, then operations would have to cease.

We May Need to Raise Capital to Continue Our Growth.

We will require additional funding in the future. If we cannot obtain capital through financings or otherwise, our ability to execute our development plans and achieve profitable operational levels will be greatly limited. Historically, we have funded our operations through the issuance of equity and short-term debt financing arrangements. We may not be able to obtain additional financing on favorable terms, if at all. Our future cash flows and the availability of financing will be subject to a number of variables, including potential production and the market prices of our products. Further, debt financing could lead to a diversion of cash flow to satisfy debt-servicing obligations and create restrictions on business operations. If we are unable to raise additional funds, it would have a material adverse effect upon our operations.

Our Success Depends on the Ability of Our Licensees With Whom We Have Business Arrangements.

We depend on a number of key licensees, which license and utilize our “Kolorfusion” process. Failure to maintain continuous positive contractual relations with these licensees may have a materially adverse affect on our business. Such licensees may experience business failures and product sale interruptions, of which we have no control, which could adversely affect customer confidence, our business operations and our reputation. Moreover, we may have to indirectly compete with other companies for the use of our Kolorfusion process technology. Because we are a small enterprise and many of these companies with whom we may indirectly compete may have greater financial and other resources than we have, they may have an advantage in the competition. If we experience a significant increase in demand for our Kolorfusion process, we may have to expand our third party licensees. We cannot be assured that additional licensees will be available on terms that are acceptable to us. If we cannot utilize our Kolorfusion process sufficiently to meet demand or delivery schedules, our customers might reduce demand, reduce the price they are willing to pay for our technology or replace our technology with the technology of a competitor, any of which could have a material adverse effect on our financial condition and operations.

Our Continued Operations Depend on the Successful Marketing of our Kolorfusion Process.

Our business plan is based on the marketing, utilization and licensing of our Kolorfusion process. This entails circumstances currently prevailing and the bases and assumptions that certain circumstances will or will not occur, as well as the inherent risks and uncertainties involved in the marketing, utilization and licensing of our Kolorfusion process. There is no assurance that we will be successful in implementing our marketing strategies or that our marketing strategies, even if implemented, will lead to the successful achievement of our objectives. If we are not able to successfully implement our marketing strategies, our business operations and financial performance may be adversely affected. The novelty and the design of our Kolorfusion process is important to our success and competitive position, and if we are unable to continue to develop and offer such a unique patented technological process to our customers, our business could suffer. We cannot be certain that our Kolorfusion process will be or continue to be in demand. Should the competitive demand steer away from our Kolorfusion process, our business could be adversely affected. To date, our business line has consisted primarily of our Kolorfusion process. There can be no assurance that we can successfully sell or license our Kolorfusion process or that we can successfully develop, introduce, or sell any additional technological processes.

Loss of Key Management Personnel.

The loss of Mr. Stephen Nagel or any of our key management personnel would have an adverse impact on our future development and could impair our ability to succeed. Our performance is substantially dependent upon the expertise of our President/Chief Executive Officer, Mr. Stephen Nagel, and other key management personnel and our ability to continue to hire and retain such personnel. Mr. Nagel spends substantially all of his working time with us. It may be difficult to find sufficiently qualified individuals to replace Mr. Nagel or other key management personnel if we were to lose any one or more of them. The loss of Mr. Nagel or any of our other key management personnel could have a material adverse effect on our business, development, financial condition, and operating results. We do maintain “key person” life insurance on Mr. Nagel.

Many of Our Indirect Competitors May be Larger and Have Greater Financial and Other Resources Than We Do.

The product surface enhancement technology industry, in general, is intensely competitive. Our Kolorfusion process competes with other product surface enhancement based products. Such based products are currently marketed by well-established, successful companies that may possess greater financial, marketing, distribution, personnel and other resources than us. Using these resources, these companies may implement extensive advertising and promotional campaigns, both generally and in response to specific marketing efforts by competitors, to enter into new markets rapidly and to introduce their products. Competitors with greater financial resources also may be able to enter the market in direct competition with us, offering attractive marketing tools to encourage the sale of products that may compete with our technological processes or products or present cost features which consumers may find attractive.

If Our Competitors Misappropriate Proprietary Know-How and Our Trade Secrets, it Could Have a Material Adverse Affect on our Business .

The loss of or inability to enforce our patents, trademarks and other proprietary know-how and trade secrets could adversely affect our business. We depend heavily on our patented technology and trade secrets and the technological expertise of our employees. If any of our competitors copy or otherwise gains access to our trade secrets or develops similar technological processes independently, we would not be able to compete as effectively. The measures we take to protect our patents and trade secrets and design expertise may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources. In addition, notwithstanding the rights we have secured in our intellectual property, other persons may bring claims against us that we have infringed on their intellectual property rights or claims that our intellectual property right interests are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate and therefore could have an adverse affect on our business.

RISKS RELATED TO OUR COMMON STOCK

Sale of Restricted Common Stock .

As of June 30, 2007, there are 23,709,540 outstanding shares of our common stock, of which 19,148,505 are restricted securities as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Although the Securities Act and Rule 144 place certain prohibitions on the sale of restricted securities, restricted securities may be sold into the public market under certain conditions. Further, as of June 30, 2007, there are no warrants outstanding. As of June 30, 2007, there are 3,000,000 stock options granted which, if exercised, would result in the issuance of an additional 2,700,000 shares of common stock. The remaining 300,000 stock options are not vested as of June 30, 2007.

Any significant downward pressure on the price of our common stock as certain stockholders sell their shares of our common stock may encourage short sales. Any such short sales could place further downward pressure on the price of our common stock.

The Trading Price of Our Common Stock on the OTC Bulletin Board Has Been and May Continue to Fluctuate Significantly and Stockholders May Have Difficulty Reselling Their Shares.

Our common stock has traded as low as $0.07 and as high as $1.70. In addition to volatility associated with Bulletin Board securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock: (i) changes in the demand for our Kolorfusion process; (ii) disappointing results from our marketing and sales efforts; (iii) failure to meet our revenue or profit goals or operating budget; (iv) decline in demand for our common stock; (v) downward revisions in securities analysts’ estimates or changes in general market conditions; (vi) lack of funding generated for operations; (vii) investor perception of our industry or our business prospects; and (viii) general economic trends.

In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment.

Additional Issuances of Equity Securities May Result in Dilution to Our Existing Shareholders.

Our Articles of Incorporation authorize the issuance of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock. The Board of Directors have the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. On March 31 ^st 2006 the Company entered a Preferred Stock purchase agreement; wherein the purchaser acquired 1,076,923 Series C-1 Preferred Stock, which can convert on a basis of 5:1 into the Company’s common shares for a total amount of 5,384,615 . If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, if you acquire shares of our common stock, your proportionate ownership interest and voting power could be decreased. Further, any such issuances could result in a change of control.

We are authorized to issue shares of preferred stock. Our board of directors, without shareholder approval, may issue shares of preferred stock with rights superior to the rights of the holders of shares of common stock. As a result, shares of preferred stock could be issued quickly and easily, adversely affecting the rights of holders of shares of common stock and could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult. Although we have no present plans to issue any additional shares of preferred stock, the issuance of preferred stock in the future could adversely affect the rights of the holders of common stock and reduce the value of the common stock.

Our Common Stock is Classified as a “Penny Stock” under SEC Rules Which Limits the Market for Our Common Stock.

Because our stock is not traded on a stock exchange or on the NASDAQ National Market or the NASDAQ Small Cap Market, and because the market price of the common stock is less than $5 per share, the common stock is classified as a “penny stock.” Our stock has not traded above $5 per share. SEC Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an “established customer” or an “accredited investor.” This includes the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customers concerning the risk of penny stocks. Many broker-dealers decline to participate in penny stock transactions because of the extra requirements imposed on penny stock transactions. Application of the penny stock rules to our common stock reduces the market liquidity of our shares, which in turn affects the ability of holders of our common stock to resell the shares they purchase, and they may not be able to resell at prices at or above the prices they paid.

A Decline in the Price of Our Common Stock Could Affect Our Ability to Raise Further Working Capital and Adversely Impact Our Operations .

A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise additional capital for our operations. Because our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations. A reduction in our ability to raise equity capital in the future would have a material adverse effect upon our business plan and operations, including our ability to continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

EMPLOYEES

We currently employ nine full-time employees, and we have employed up to an additional twenty-five employees for processing services when required.

REPORTS TO STOCKHOLDERS

We are currently a reporting issuer in the U.S. and are subject to reporting requirements under section 13 or 15(d) of the U.S. Securities Exchange Act of 1934 , as amended. We are required to file the following with the U.S. Securities and Exchange Commission (the “SEC”): (i) quarterly reports on Form 10-QSB; (ii) an annual report on Form 10-KSB; (iii) a Form 8-K to report the occurrence of certain reportable events; (iv) Forms 3, 4 and 5 to report insider sales and acquisition of our securities; and (v) proxy statements. We are required to deliver an annual report to our stockholders prior to or with the distribution of proxy materials relating to annual stockholder meetings.

Part II

Kolorfusion Stock Incentive Plan

On April 7, 1997, our Board of Directors unanimously approved and adopted a stock incentive plan (the “Stock Incentive Plan”). The purpose of the Stock Incentive Plan is to advance our interests and the interests of the shareholders by affording our employees an opportunity for investment and the incentive advantages inherent in stock ownership. Pursuant to the provisions of the Stock Incentive Plan, we set aside 1,000,000 shares of restricted common stock to be purchased pursuant to exercise of stock options (the “Stock Incentive Options”). The Stock Incentive Options may be granted to our key employees, generally defined as a person designated by the board of directors upon whose judgment, initiative and efforts we may rely including any director, officer, employee or consultant.

As of the date of this Annual Report, we have granted an additional 2,000,000 stock options to one of our directors.

RECENT SALES OF UNREGISTERED SECURITIES

Preferred Stock

During fiscal year ended June 30, 2006, we entered on March 31 ^st 2006 a Preferred Stock purchase agreement; wherein the purchaser acquired 1,076,923 Series C-1 Preferred Stock, which can convert on a basis of 5:1 into the Company’s common shares for a total amount of 5,384,615. The investment included a $600,000 cash payment and the assumption of $655,238 in debt due by the Company to an individual. The Company had confirmed to the Preferred purchaser that the debt holder would have agreed to receive $100,000 or less to resolve this debt shown on the Company’s balance sheet. The Company had also confirmed to the Preferred purchaser that the Company would assume any liabilities in excess of the $100,000. However, due to this guarantee, only $100,000 of the debt was reclassified to additional paid-in capital as additional consideration for the Preferred Stock at June 30, 2006. The remaining balance of $555,238 would remain in long-term debt until the matter was to be settled or extinguished. The Company extinguished the entire debt at June 30, 2007 due to nonperformance and the running of all statute of limitations for collection of the debt. We issued the shares of our restricted stock in accordance with the transactional exemption under Section 4(2) of the Securities Act of 1933, as amended (the “1933 Securities Act”). The purchaser acknowledged that the securities to be issued have not been registered under the 1933 Securities Act and that they understood the economic risk of an investment in the securities.

Common Stock

During fiscal year ended June 30, 2007, we canceled the 1,000,000 common shares as related to the Assignment Agreement the Company had with the inventor in June 2001 for non-performance. The Company did sell 400,000 of these shares for $90,500 in the final quarter of its year ending June 30, 2007.

RESULTS OF OPERATIONS

The results for fiscal year ended June 30, 2007 include a decrease in cost of sales and selling, general and administrative expenses. However, our gross sales and license revenues decreased by 25% resulting in a significant increase in our net operating loss in 2007. We continue to build a team of experienced industry professionals that can lead us to success in product surface enhancement technology industry. In Spring of 2007 we have installed a new digital print system and associated printers that will allow us to create new designs at no cost to the customer and allow us to do short or long runs of the same images. This new system should allow us to expand our customer base more easily. We believe our operating systems as implemented reduce errors and increase logistic efficiencies and customer service. As a result of management’s efforts, we believe we have successfully negotiated the lowest costs of our services and payment terms.

Fiscal Year Ended June 30, 2007 Compared to Fiscal Year Ended June 30, 2006

We have net income during fiscal year ended June 30, 2007 of $472,329 compared to a net loss of ($292,378) during fiscal year ended June 30, 2006 (a difference of $764,707). During fiscal year ended June 30, 2007, we generated $1,222,092 in gross product sales compared to $1,818,200 in gross sales for fiscal year ended June 30, 2006 (a decrease of $596,108). During fiscal year ended June 30, 2007, we also generated $339,684 in license and royalty revenue compared to $268,558 in license and royalty revenue for fiscal year ended June 30, 2006 (an increase of $71,126). Other income for the fiscal year was $921,828 compared to other expense of $51,818 for the prior year. The increase was entirely related to the debt extinguishment of $955,238. Cost of sales decreased during fiscal year ended June 30, 2007 to $977,553 (includes inventory write down of $83,591 for obsolescent due to our new print technology replacing old print methods) from $1,225,132 for fiscal year ended June 30, 2006 primarily in relation to the decrease in sales. As a percentage of total sales and license revenue, cost of sales was 62.6% in fiscal year ended June 30, 2007 compared to 58.7% for the comparable period. This slight increase was due to higher margin revenues from license fees. Selling, general and administrative expenses also decreased during fiscal year ended June 30, 2007 to $1,033,722 from $1,102,186 for fiscal year ended June 30, 2006. The above resulted in an operating loss of $449,499 for fiscal year ended June 30, 2007 compared to an operating loss of $240,560 during fiscal year ended June 30, 2006, as further discussed below.

During fiscal year ended June 30, 2007, we recorded operating expenses consisting of general, selling and administrative of $1,033,722 which included $128,342 of write-offs which included leasehold improvements made at the previous premises under lease, compared to $1,102,186 during fiscal year ended June 30, 2006 (a decrease of $68,464), some of the key expense are compared as follows: (i) $190,487 (2006: $292,059) in salaries and wages; (ii) $80,727 (2006: $74,857) in consulting fees since no additional fees were accrued; (iii) $48,839 (2006: $122,702) in office rent; (iv) $52,119 (2006: $44,352) in legal and accounting; (v) $89,562 (2006: $55,216) in office and general, including supplies, utilities and telephone; (vi) $72,087 (2006: $90,566) in travel and entertainment; (vii) $56,764 (2006: $67,199) in insurance and insurance related expenses; (viii) $25,471 (2006: $33,316) in depreciation; (ix) $246,168 (2006: $246,168) in amortization; (x) $33,667 (2006: $51,817) in interest expense; and (xi) $19,907 (2006: $23,935) in taxes.

Our net income during fiscal year ended June 30, 2007 was $472,329 or $0.02 per share compared to a net loss of ($292,378) or ($0.01) per share for fiscal year ended June 30, 2006. The weighted average number of shares outstanding was 24,233,924 at June 30, 2007 compared to 24,166,694 at the fiscal year ended June 30, 2006.

Gross Sales/License Revenue and Gross Margins

Gross sales and license/royalty revenues were $1,222,092 and $339,684, respectively, for fiscal year ended June 30, 2007 aggregating $1,561,776 a decrease of 25% over last year’s gross sales and license/royalty revenues aggregating $2,086,758. The decrease in gross revenue from fiscal year 2007 to 2006 is primarily the result of our primary customer having a down turn in its sales and certain customer revenues, converting from processing revenues to licensee revenues, which result in a lower dollar value per unit but have a higher gross margin.

Operating Expenses

Total operating expenses for fiscal year ended June 30, 2007 were $2,011,275 consisting of $977,553 in cost of sales and $1,033,722 in selling, general and administrative expenses compared with $2,327,318 consisting of $1,225,132 in cost of sales and $1,102,186 in selling, general and administrative expenses for the same period in 2006. The decrease in cost of sales in 2007 from 2006 is a result of different revenue streams from our customer base and a decrease in sales to our primary customer. The decrease in selling, general and administrative expenses in 2007 from 2006 is a result of lowering of administrative labor costs and facility rent, which was off-set by a write off of our prepaid royalty asset in the amount of $75,000 due to lack of any sales occurring from the intended transaction. We also wrote off $53,342 related to our leasehold improvements that were remaining at our old facility and incurred moving costs of $21,293, since we vacated said facilities during the fiscal year. For fiscal year ended June 30, 2007, salaries and wages totaled $187,971 compared with $292,059 for 2006. The decrease is related to the decrease in our management team. Interest costs for fiscal year ended June 30, 2007 decreased to $33,667 compared with $52,763 for the same period in 2006.

Net Income (Loss)

The net income for fiscal year ended June 30, 2007 was $472,329 compared to a net loss of ($292,378) for fiscal year ended June 30, 2006. The increase in profitability is primarily due to the recording of a debt extinguishment totaling $955,238. The income per share basic was $0.02 for fiscal year ended June 30, 2007 as compared to a loss of ($0.01) per share basic for fiscal year ended June 30, 2006.

During fiscal year ended June 30, 2007, net cash provided by financing activities was $108,881 compared with net cash provided by financing activities of $390,643 during fiscal year ended June 30, 2006. The decrease is primarily related to lower stock sales in 2007.

PLAN OF OPERATION

We have historically had more expenses than income in each year of our operations. The accumulated deficit from inception to June 30, 2007 was $11,304,761 and current liabilities are in excess of current assets. As a result of this, our independent auditor has issued a going concern opinion. We have been able to maintain a positive cash position solely through operation revenues, management deferral of compensation and financing activities. We are working to secure additional investments or lines of credit of $750,000 and management believes there is a good likelihood of obtaining a significant portion of this funding due to the continued business improvements. We have continued to reduce overhead during the past two years.

We have been, since our inception, reliant on external investment to finance ongoing operations as we are not yet operating profitably. At June 30, 2007, we owed an approximate aggregate amount of $464,203 to officers/stockholders and related parties for amounts loaned to us in order to support our operations or debt due to an individual, which we believe will be settled without significant cash payments. While we expect that we will achieve profitable operations in the future, there can be no assurance that our revenue, margins, and profitability will increase or be sufficient to support our operations in the long term. We expect we will need to raise additional capital to meet short and long-term operating requirements. We believe that private placements of equity capital and debt financing may be adequate to fund our long-term operating requirements. We may also encounter business endeavors that require significant cash commitments or unanticipated problems or expenses that could result in a requirement for additional cash. If we raise additional funds through the issuance of equity or convertible debt securities other than to current shareholders, the percentage ownership of our current shareholders would be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict our business operations. We are continuing to pursue external financing alternatives to improve our working capital position and to grow our business to the greatest possible extent. In the event gross profits were to diminish or market opportunities to be not forth coming, then our operations would have to cease.

There are no known trends, events or uncertainties that are likely to have a material impact on the short or long term liquidity, except perhaps declining sales. We have a significant amount of debt, which is due within the next twelve months. As mentioned, the primary source of liquidity in the future will be increased sales and some additional outside investment. In the event that sales should decline we may have to seek additional funds through equity sales or debt. There are no material commitments for capital expenditures. There are no known trends, events or uncertainties reasonably expected to have a material impact on the net sales or revenues or income from continuing operations. There are no significant elements of income or loss that do not arise from continuing operations. There are no seasonal aspects to our business as we expand our customer base.

MATERIAL COMMITMENTS

A significant commitment for fiscal year ending June 30, 2007 relates to a bank loan payable on demand but no later than January 8, 2008, in the aggregate principal amount of $200,000 bearing interest at 5.5% per annum and collateralized by substantially all of our assets and guaranteed and further collateralized by the assets of one of our stockholders. This note has been extended upon each renewal since 2002.

A significant commitment for fiscal year ending June 30, 2007 relates to the note payable to a related party in the aggregate amount of $98,597 bearing interest at the rate of 12% per annum. The due date of the note expired and payment terms have been extended month-to-month.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this Annual Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2006, Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting treatment (recognition and measurement) for an income tax position taken in a tax return and recognized in a company’s financial statements. The new standard also contains guidance on “derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition”. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of this statement but we believe the adoption of FIN 48 will not have a material impact on our consolidated financial position or results of operations. This pronouncement is effective for our fiscal year beginning July 1, 2007.

In September 2006, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). This SAB addresses diversity in practice of quantifying financial statement misstatements. It establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. The SAB is effective for financial statements issued for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have an impact on our financial position or results of operations.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a material impact on our financial position or results of operations.

CRITICAL ACCOUNTING PRONOUNCEMENTS

Inventory Valuation

As described in Note 1 of the Notes to the Financial Statements, inventories consist primarily of raw materials, and are valued at the lower of cost or market (first-in, first-out method).

Revenue Recognition

As described in Note 1 to the Financial Statements, license and royalty revenue is recognized upon completion of the earnings process. We recognize sales when products are shipped, collection is probable and the fee is fixed or determined. In addition, we have various contracts, which are amortized into revenues over the contract period pursuant to Staff Accounting Bulletin No.104, Revenue Recognition (SAB”104”).

Patent Rights

As noted in Note 1 to the Financial Statements, the cost of the patent rights is being amortized using the straight-line method over nine years. In accordance with SFAS No. 144, we evaluate whether changes have occurred that would require revision of the remaining estimated lives of recorded long-lived assets, or render those assets not recoverable. If such circumstances arise, recoverability is determined by comparing the undiscounted cash flows of long-lived assets to their respective carrying values. The amount of impairment, if any, is measured on the projected cash flows using an appropriate discount rate.

ITEM 7. FINANCIAL STATEMENTS

KOLORFUSION INTERNATIONAL, INC.

Audited Financial Statements

June 30, 2007

Index

Report of Independent Registered Public Accounting Firm dated September 24, 2007

F-1

Balance Sheets

F-2

Statements of Operations

F-3

Statements of Stockholders’ Defcit

F-4

Statements of Cash Flows

F-5

Notes to Financial Statements

F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Kolorfusion International, Inc.

We have audited the accompanying balance sheets of Kolorfusion International, Inc. as of June 30, 2007 and 2006, and the related statements of operations, stockholders’ deficit and cash flows for the years then ended. 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 Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kolorfusion International, Inc. as of June 30, 2007 and 2006, and the results of its operations and its cash flows for the years then ended, 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 2 to the financial statements, the Company has suffered recurring losses from operations and its total liabilities exceed its total assets. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Carver Moquist & O’Connor, LLC

Minneapolis, Minnesota
September 24, 2007

See accompanying notes to financial statements.

See accompanying notes to financial statements.

KOLORFUSION INTERNATIONAL, INC.

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Years Ended June 30, 2007 and 2006

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

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:

In August 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which superseded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets to be Disposed Of,” among other items. The Company adopted the provisions of SFAS No. 144 as of July 1, 2002. Similar to SFAS No. 121, SFAS No. 144 established procedures for review of recoverability, and measurement of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 144 also requires that long-lived assets to be disposed of other than by sale shall continue to be classified as held and used until disposal. Further, SFAS No. 144 specifies the criteria for classifying long-lived assets as “held for sale” and requires that long-lived assets to be disposed of by sale be reported as the lower of carrying amount or fair value less estimated selling costs. Management believes that there has not been any impairment of the Company’s long-lived assets.

SHIPPING AND HANDLING COSTS:

Shipping and handling costs charged to customers have been included in sales. Inbound and outgoing freight and handling costs incurred by the Company have been included in cost of sales.

REVENUE RECOGNITION:

The Company records sales when products are shipped, collectability is probable, and the fee is fixed or determinable. License and royalty revenue is recognized upon completion of the earnings process. The Company ensures that transactions comply with SEC Staff Accounting Bulletin (SAB) 101, as amended by SAB 104. In addition, the Company has various contracts that are amortized into revenues over the contract period pursuant to SAB 104. Any revenue not entered at the end of a reporting period is recorded as deferred revenue.

ADVERTISING:

The Company expenses advertising costs as incurred. Advertising costs were approximately $105 and $12,000 for the years ended June 30, 2007 and 2006, respectively.

EARNINGS (LOSS) PER COMMON SHARE:

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share includes the effect of all dilutive potential common shares (primarily related to stock options and converted preferred shares), unless the effect is anti-dilutive. For the year ended June 30, 2007 there were dilutive Preferred Series C-1 shares, which can convert to 5,384,615 of common shares. There were no common stock equivalents that would be considered dilutive (based on the treasury stock method) for the outstanding stock options for fiscal year ended June 30, 2007 and 2006. The total number of potentially anti-dilutive shares at June 30, 2007 and 2006 were 8,384,615 and 8,164,615, respectively.

SEGMENT REPORTING

The Company operates as one reporting segment.

CREDIT RISK AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Accounts receivable were reduced by an allowance for un-collectible accounts of $18,900 and $8,500 at June 30, 2007 and 2006, respectively. The Company reviews customers’ credit history before extending unsecured credit and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers and other information. Invoices are due net 30 days. Accounts receivable over 60 days are considered past due. The Company does not accrue interest on past due accounts receivable. The Company writes off accounts receivable when they are deemed un-collectible.

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Years Ended June 30, 2007 and 2006

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

STOCK-BASED EMPLOYEE COMPENSATION:

Effective July 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment,” which requires the fair value of share based-based payments, including grants of employee stock options and employee stock purchase plan shares, recognized in the income statement based on their fair values unless a fair value is not reasonably estimable. Prior to the Company’s adoption of SFAS No. 123(R), the company followed the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” The fair value of the Company’s stock options issued prior to the adoption of SFAS No. 123(R) was estimated using a Black-Scholes pricing model, which assumes no expected dividends and estimates the option expected life, volatility and risk-free interest rate at the time of the grant. Any expense for stock option grants for years ending prior to July 1, 2006 were reported on a pro forma basis. Pro forma information for the year ended June 30, 2006 is as follows:

The per share, weighted-average fair value of each option granted is calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants for the years ended June 30:

During the fiscal years ended June 30, 2007 and 2006 there were stock options grants of 100,000 and 50,000, respectfully. The weighted average fair value of options granted during the year ended June 30, 2007 and 2006 were $.04 and $.08, respectively.

OTHER ASSETS:

The Company has other assets of $27,600 and $104,507 for the fiscal years ended June 30, 2007 and 2006 respectively. For fiscal year ended June 30, 2006 other assets consisted of prepaid royalties and security deposits. In 2007, the prepaid royalties totaling $75,000 were written off and now other assets only comprise security deposits.

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Years Ended June 30, 2007 and 2006

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

ESTIMATES AND ASSUMPTIONS:

The preparation of the 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 revenues and expenses during the reporting period. Significant estimates include the lives of patent rights and leasehold improvements and equipment and the extinguished debt. Actual results could differ from these estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The Company’s financial instruments are recorded on its balance sheet. The carrying amount for cash, accounts receivable, accounts payable, and accrued expenses approximates fair value due to the immediate or short-term maturity of these financial instruments. The fair value of long-term debt approximates the carrying amounts based upon the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:

In July 2006, Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting treatment (recognition and measurement) for an income tax position taken in a tax return and recognized in a company’s financial statements. The new standard also contains guidance on “derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition”. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of this statement but we believe the adoption of FIN 48 will not have a material impact on our consolidated financial position or results of operations. This pronouncement is effective for our fiscal year beginning July 1, 2007.

In September 2006, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). This SAB addresses diversity in practice of quantifying financial statement misstatements. It establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. The SAB is effective for financial statements issued for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have an impact on our financial position or results of operations.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a material impact on our financial position or results of operations.

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Years Ended June 30, 2007 and 2006

Note 2. Company’s continued existence:

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial accumulated losses totaling $11,304,761 as of June 30, 2007. At June 30, 2007 the Company’s current liabilities exceeded current assets by $719,356. Management believes that with the continued growth within its existing customer base and additional known licensing negotiations in progress the Company can achieve a positive cash-flow. Management is also seeking an additional investment or line of credit to support its plans for future growth and working capital needs. The Company, however, may not be able to obtain such financing on acceptable terms or at all. If the Company is unable to obtain such financing, it will be required to significantly revise its business plans and drastically reduce operating expenditures such that it may not be able to develop or enhance is products, gain market share in the United States of America or respond to competitive pressures or unanticipated requirements, which could seriously harm its business, financial position and results of operations.

Note 3. Extinguishment of Debt.

The Company has recognized as other income $955,238 from extinguishment of debt related to the note payable to the inventor of its patented system for transferring color patterns to metal, plastic, wood and glass products in accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Service of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125 (“FAS 140”) paragraph 16. The extinguishment of debt occurred judicially by the Colorado Statute of Limitations in June of 2007. The Company was no longer obligated to pay the debt of $555,238 due to the passage of time under the law and because of non-performance on the inventor’s part. In conjunction with the debt, there were consulting services not performed and there were common shares issued for a value of $400,000 or 1,000,000 shares of common stock, which were never delivered to the inventor as a form of payment on the orginal debt. The total debt recorded as extinguished was $955,238.

Interest expense incurred to stockholder and related party of the Company totaled $12,857 and $24,417 for the years ended June 30 2007 and 2006, respectively.

Future maturities of long-term debt for years ending after June 30, 2007 are as follows:

Note Payable to Individual

The Company, on October 17, 1995, purchased certain U.S. and Canadian patent rights as part of an assignment agreement granted at a total price of twenty-five million French francs. The agreement was collateralized by the patent rights. The Company had not made the required payments on this agreement.

In June 2001, the Company entered an agreement in principle with the individual (inventor) whereby the individual would receive 1,000,000 French francs, 1,000,000 shares of Company common stock, and a five year consulting agreement calling for monthly payments of 58,333 French francs in exchange for a settlement of the payable related to the October 1995 agreement and certain patent rights and other exclusive rights. The individual has not provided any bona fide services pursuant to the agreement.

In fiscal 2003, the Company hired a French lawyer in order to enforce the agreement that was signed in June 2001. As a result, the Company recorded the debt restructuring during the year ended June 30, 2003. According to the initial agreement, the Company would have owed $1,191,176, however the updated agreement, resulted in the Company having a $655,238 balance remaining at June 30, 2005 . On March 31, 2006, the Company entered a Preferred Stock sale agreement with a current shareholder; wherein the purchaser assumed the first $100,000 of this debt. This debt was eliminated at the year ending June 30, 2007, as any legal statute of limitation for collection expired during the fiscal year. (See Note 2 for additional details on the extinguishment of this debt)

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Years Ended June 30, 2007 and 2006

Note 6. Stockholders’ Deficit:

Preferred stock: The Series C-1 Convertible Preferred Stock is non-interest bearing and each share shall have the right to vote on a 5 to 1 basis with the common shareholders. Approximately each share of Series C-1 Preferred stock issued can be converted immediately into 5 shares of common stock for a period of 36 months from the date of issuance. After 36 months the Company can extend the Agreement. The Company may redeem the preferred shares from the Purchaser upon 30 days written notice, the purchaser can accept the redemption offer or elect to convert the preferred shares requested for redemption, if the purchaser elects to be paid, the Company shall pay the purchaser the full purchase price plus a redemption fee equal to 1% per month for each month the Purchaser held the preferred shares.

The Company currently has 1,076,923 Series C-1 Preferred issued and outstanding as of June 30, 2007 and 2006. As of June 30, 2007, these shares are convertible into 5,384,615 common shares.

The Company canceled the 1,000,000 common shares to be distributed to the inventor under an Assignment Agreement of June 2001, such services were never performed by the inventor. The Company sold 400,000 of these shares for $90,500 during the fourth quarter of the year ended June 30, 2007

Stock Options: The Company has one stock option plan called The Stock Incentive Plan. As of June 30, 2007, an aggregate of 1,000,000 shares of common stock may be granted by the board of directors. There is an additional 2,000,000 shares that have been granted and not approved by the security holders of the plan. The stock options may be granted to directors, officers, employees or consultants of the Company. Options granted under this plan are non-qualified stock options and have exercise prices and vesting terms established by the Board of Directors at the time of each grant. Vesting terms of outstanding options range from three to five years. The options expire from three to five years from the date of the grant.

Effective July 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 123(R), “Share-Based Payment,” which requires the fair value of share-based payments, including grants of employee stock options and employee stock purchase plan shares, to be recognized in the income statement based on their fair values unless a fair value is not reasonably estimable. Prior to the Company’s adoption of SFAS No. 123(R), the Company followed the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related interpretations, as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” The fair value of the Company’s stock options issued prior to the adoption of SFAS No. 123(R) was estimated using a Black-Scholes pricing model, which assumes no expected dividends and estimates the option expected life, volatility and risk-free interest rate at the time of grant.

The Company elected to adopt the modified prospective transition method, under which prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). The valuation provisions of SFAS No. 123(R) apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. The Company has stock options that were outstanding as of the effective date that would need to be recognized over the remaining service period using the compensation cost estimated for the SFAS No. 123 pro forma disclosures. The Company’s financial statements as of and for the year ended June 30, 2007, reflects the impact of SFAS 123(R).

During the year ended June 30, 2007, the Company granted stock options to one employee to purchase up to an aggregate of 250,000 shares of common stock, with a weighted-average-grant-date fair value of $0.04 per share. The Company recorded $10,355 related compensation expense for the year ended June 30, 2007. This expense is included in selling, general and administrative expense. There was no tax benefit from recording this non-cash expense due to the Company having a full valuation allowance against its deferred tax assets. The compensation expense had no impact on the June 30, 2007 basic income (loss) per common share by calulation. There remains approximately $21,983 of total unrecognized compensation expense, which is expected to be recognized over future periods, approximately 5 years.

SFAS 123 (R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of operations. The Company uses the Black-Sholes-Merton (“Black Sholes”) option-pricing model as a method for determining the estimated fair market value for employee stock awards. Compensation expense for employee stock awards is recognized on a straight-line basis over the vesting period of the award. The adoption of SFAS 123 (R) also requires certain changes to the accounting for income taxes and the method used in determining diluted shares, as well as additional disclosure related to the cash flow effects resulting from share-based compensation. The relevant interpretive guidance of Staff Accounting Bulletin 107 was applied in connection with its implementation and adoption of SFAS 123 (R).

The Black-Scholes valuation model incorporates a range of assumptions that are disclosed in the table below and in Note 1. The risk-free interest rate is based on the United States Treasury yield curve at the time of grant with a remaining term equal to the expected life of the awards. The expected life assumption was calculated based on the contractual term of the options. Expected volatility was computed based on fluctuations in the daily price of our common stock.

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2007 and 2006

Note 9. Deferred Revenue

The Company had a deferred revenue for various licensing contracts balance at June 30, 2007 of $90,709. In August 2002, the Company signed a license and royalty agreement that allowed a third party the exclusive right to use the Company’s patents on certain applications through June 30, 2007, with the potential to extend through June 2008, if the third party ships in excess of the units stated in the agreement by June 2006. At June 30, 2006 and 2007 there were -$0- and $253,522 related to this Agreement in deferred revenue respectively.

Note 10. Income Taxes:

The Company has available net operating loss carry-forwards of approximately $5,950,000 at June 30, 2007 which will expire at various times from 2013 to 2024.

The following is a summary of deferred taxes:

A reconciliation of the Company’s statutory tax rate to the effective date is as follows:

Federal tax rules impose limitations on the utilization of net loss carry-forwards following certain changes in ownership. When such changes occur, the limitation reduces the amount of benefits that are available to offset future taxable income each year, starting with the year of ownership changes.

Note 11. Major Customers:

The Company derived more than 10% of its revenues from the following unaffiliated customers and had receivable balances from those customers in the following amounts:

AUDIT COMMITTEE

Our Board of Directors has not established an audit committee. The respective role of an audit committee has been conducted by our Board of Directors. We are contemplating establishment of an audit committee as required by the SEC. When established, the audit committee’s primary function will be to provide advice with respect our financial matters and to assist our Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The audit committee’s primary duties and responsibilities will be to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our quarterly financial performance as well as its compliance with laws and regulations; (iv) oversee management’s establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our Board of Directors.

The Board is fully aware that there is a lack of segregation of duties due to the small number of employees dealing with general administrative and financial matters. However, the Board has determined that considering the employees involved and the control procedures in place, risk associated with such lack of segregation are insignificant and the potential benefits of adding employees to clearly segregate duties does not justify the expenses associated with such increases at this time.

Part III

a manufacturer of construction materials. He founded and was the chief executive officer of Selectronics, Inc. (1983-1991), a consumer electronics and software publisher. Mr. Nagel arranged a public underwriting for each of these companies and subsequently their sale or merger. Under his leadership, Selectronics, Inc. grew from being a start-up company to generating $34,000,000 in sales when it merged with a Xerox controlled company. Mr. Nagel holds an Master in Business Administration from Arizona State University and a Juris Doctorate from the University of Wyoming. He is a member of the Wyoming Bar Association.

Kenneth Bradley. Mr. Bradley has been our Secretary since September 1999. Mr. Bradley has also worked with us since our inception as a financial advisor to management. He currently is a partner with the accounting firm of Porter, Muirhead, Cornia & Howard located in Casper, Wyoming.

Thomas LeFort. Mr. LeFort has been a director since 2004. Mr. LeFort provides us with marketing expertise. He was the former vice president of marketing for Doublet SA France (1993-1996), which is a large provider of format printing goods and event related equipment in Europe. He was also the president and chief executive officer of Doublet Mfg. Inc. based in San Francisco, California, a subsidiary of Doublet SA until 2003. Mr. LeFort is currently a partner in the food industry in San Francisco providing various products in William-Sonoma and operating two restaurants located in San Francisco and New York City. Mr. LeFort graduated from Ecole Superieure de Commerce de Reims (CESEM degree), a leading French business school. He also has a Bachelor of Arts in European Business Administration from Middlesex Business School in London.

FAMILY RELATIONSHIPS

There are no family relationships among our directors or officers.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

During the past five years, none of our directors, executive officers or persons that may be deemed promoters is or have been involved in any legal proceeding concerning (i) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (ii) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (iii) being 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 involvement in any type of business, securities or banking activity; or (iv) being found by a court, the Securities and Exchange 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

Section 16(a) of the Exchange Act requires directors and officers, and the persons who beneficially own more than 10% of common stock, of certain companies to file reports of ownership and changes in ownership with the Securities and Exchange Commission. We are not required to file reports under Section 16 of the Exchange Act.

Stock Options/SAR Grants In Fiscal Year Ended June 30, 2006

As of the date of this Annual Report, we have a Stock Incentive Plan in effect. The following reflects that information for fiscal year ended June 30, 2007 regarding stock options.

Long Term Incentive Plan (“LTIP”) Awards Table

We have no long-term incentive plans in place and therefore there were no awards made under any long-term incentive plan to any of the above executive officers during fiscal year ended June 30, 2007.

EMPLOYMENT AGREEMENTS

As of the date of this Annual Report, we do not have any employment agreements with our executive officers, but we may enter into such agreements with our senior executive officers in the future.

ITEM 13. EXHIBITS

(a)

Exhibit List

	31.1		Certificate pursuant to Rule 13a-14(a)
	31.2		Certificate pursuant to 18 U.S.C. Subsection 1350

SIGNATURES

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

Kolorfusion International, Inc. (Registrant)
By		/s/ Stephen Nagel
Stephen Nagel President/Chief Executive Officer Date September 25, 2007

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.

By		/s/ Stephen Nagel   Stephen Nagel
		Director
Date September 25, 2007
By		/s/ Thomas Gerschman   Thomas Gerschman
		Director
Date September 25, 2007
By		/s/ Thomas LeFort
		Thomas LeFort
		Director
Date September 25, 2007

EXHIBIT INDEX

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