Kolorfusion International Inc - Annual Report (Small Business Issuers) (10KSB)

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, 2008

Commission file number: 0-28351

Kolorfusion International, Inc.

(Name of small business issuer in its charter)


Colorado		84-1317836

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

16075 E. 32 ^nd Ave Suite A, Aurora, Colorado 80011

(Address of principal executive offices)

(303) 340-9994

(Issuer’s telephone number)


Securities registered pursuant to Section 12(b) of the Act:		Name of each exchange on which registered:
None

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 (ended June 30, 2008): $1,518,676

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, 2008:$962,020

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:


Class		Outstanding as of September 26, 2008
Common Stock, $0.001 par value		24,309,540

Preferred Stock $.001 par value		1,076,923

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

KOLORFUSION INTERNATIONAL, INC.

Form 10-KSB


Item 1. Description of Business			3

Item 2. Description of Property			13

Item 3. Legal Proceedings			14

Item 4. Submission of Matters to a Vote of Security Holders			14

Item 5. Market for Common Equity and Related Stockholder Matters			14

Item 6. Management’s Discussion and Analysis or Plan of Operation			17

Item 7. Financial Statements			24

Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure			25

Item 8A. Controls and Procedures			25

Item 8B. Other Information			27

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act			28

Item 10. Executive Compensation			30

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			32

Item 12. Certain Relationships and Related Transactions			32

Item 13. Exhibits			33

Item 14. Principal Accountant Fees and Services			33

Exhibit 31.1
Exhibit 31.2

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

ITEM 1. DESCRIPTION OF BUSINESS

BUSINESS HISTORY AND DEVELOPMENT

Kolorfusion International, Inc. was incorporated under the laws of the State of Colorado on May 17, 1995. In this Annual Report, the terms “Company”, “us”, “we”, “our” and “its” are used as references to Kolorfusion International, Inc. We develop and market a patented system for transferring colors and patterns into coatings on metal, wood, glass and directly into plastic products. Our “Kolorfusion” process is a technological process that allows this transfer of colors and patterns into coated metal, wood and glass and directly into a plastic surface that can be any shape or size.

BUSINESS OPERATIONS

General

We are a developer and provider of technology, products and services for surface enhancement to various manufacturers in different industries. Our proprietary process “Kolorfusion” allows our customer to transfer colors and patterns to coated metal, wood, glass and directly into plastic products that can be any shape or size. We believe that the “Kolorfusion” proprietary process is a compelling value proposition for the manufacturer and its consumer. We believe we have achieved the only major breakthrough in surface finishing which allows manufacturers and end users to create any design or pattern on their respective products. Users are able to determine the nature of the pattern and the end product. The creation of a pattern to be a part of a product’s surface is designed to enhance consumer appeal, create demand for mature products, achieve product differentiation and customization and used as a promotional vehicle. Manufacturers can achieve looks on existing mature products like granite, Southwestern, oriental, floral or any other finish, resulting in a newly revitalized product.

We have obtained patent protection for our proprietary process “Kolorfusion” within the United States and Canada. We own the web site www.kolorfusion.com .

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 the 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 in Shanghai. We believe these new facilities will assist us in securing more accounts for our process in Asia. A critical milestone was achieved during 2007 with the development of the digital print capability for sampling and have been providing digital production of our print media for the use in our process. Current targeted markets include the automotive wheel 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, the sales team at Jordan Outdoor Enterprises, Inc. and Haas Outdoors, Inc. owners of the RealTree and Mossy Oak brands who promote these 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

China License Agreements

On March 2, 2006 we entered a License Agreement with Chesta Solutions, Inc. (“Chesta”) with facilities in Shanghai and 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 remains in force and effect for ten years from the date of its renewal in 2008.

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 a realized net loss totaling $483,455 for fiscal year ended June 30, 2008. Our accumulated deficit at June 30, 2008 is $11,788,216. As of June 30, 2008, there exists a working capital deficit of $885,440. 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, 2008, there are 24,309,540 outstanding shares of our common stock, of which 19,144,505 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, 2008, there are no warrants outstanding. As of June 30, 2008, there are 3,000,000 stock options granted which, if exercised, would result in the issuance of an additional 2,800,000 shares of common stock. The remaining 200,000 stock options are not vested as of June 30, 2008.

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 $0.03 in the past 12 months and as high as $1.70 in 1999. 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, 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 additional 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.

ITEM 2. DESCRIPTION OF PROPERTY

We have dedicated 21,500 square feet of the 24,000 square feet of space to production with four Kolorclav processing units. We intend to lease this space in accordance with our new Sub-lease agreement dated July 31, 2006 (the “Lease Agreement”). Pursuant to the terms and provisions of our Lease Agreement, we will pay a minimum rental amount in monthly installments as follows: (i) $7,928 until December 1, 2008; (ii) $8,530 until December 14, 2009.

ITEM 3. LEGAL PROCEEDINGS

Management is not aware of any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During fiscal year ended June 30, 2008, no matters were submitted to our stockholders for approval.

Part II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON EQUITY

Shares of our common stock are traded on the NASD OTC Bulletin Board under the symbol “KOLR”. The market for our common stock is limited, volatile and sporadic. The following table sets forth the high and low sales prices relating to our common stock on a quarterly basis for the last two fiscal years as quoted by the NASDAQ bulletin board system. These quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions, and may not represent actual transactions.


Quarter Ended	High Bid		Low Bid
June 30, 2008	$	0.15	$	0.03
March 31, 2008	$	0.10	$	0.04
December 31, 2007	$	0.10	$	0.06
September 30, 2007	$	0.10	$	0.07
June 30, 2007	$	0.15	$	0.08
March 31, 2007	$	0.20	$	0.07
December 31, 2006	$	0.11	$	0.04
September 30, 2006	$	0.11	$	0.06

As of June 30, 2008, there were 76 shareholders of record of our common shares as reported by our transfer agent, ComputerShare Services, Inc., which does not include shareholders whose shares are held in street or nominee names. We believe that there are approximately over 450 beneficial owners of our common stock.

DIVIDEND POLICY

No dividends have been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and we do not have any intention of paying cash dividends on our common stock in the foreseeable future.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS

As of the date of this Annual Report, we have one equity compensation plan, the Kolorfusion International, Inc. Stock Incentive Plan. The table set forth below presents the securities authorized for issuance with respect to the Stock Incentive Plan under which equity securities are authorized for issuance as of June 30, 2008. As of the date of this Annual Report, we do not have any warrants issued or outstanding.

Equity Compensation Plan Information

Number of

securities

remaining

Number of

available for future

securities to be

issuance under

issued upon

Weighted-average

equity

exercise of

exercise price of

compensation

outstanding

plans (excluding

options, warrants

securities reflected

and rights

in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

N/A

Equity compensation plans not approved by security holders — Stock Incentive Plan

1,000,000

0.79

-0-

Stock Options Issued

2,000,000

0.66

N/A

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 have been 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 expiration of the statute of limitations for collection of the debt. We issued the preferred 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 re-sell to other 3 ^rd party investors 400,000 of these shares at $.226 per share for $90,500 in the final quarter of its year ended June 30, 2007 and 500,000 shares at $.20 per share in the quarter ended December 31, 2007 for $100,000 and 100,000 shares at $.20 per share in the quarter ended March 31, 2008 for $20,000.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis of our results of operations and financial position should be read in conjunction with our audited financial statements and the notes thereto included elsewhere in this Annual Report.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion is intended to provide an analysis of our financial condition and should be read in conjunction with our audited financial statements and the notes thereto. The matters discussed in this section that are not historical or current facts deal with potential future circumstances and developments. Such forward-looking statements include, but are not limited to, the development plans for our growth, trends in the results of our development, anticipated development plans, operating expenses and our anticipated capital requirements and capital resources. Our actual results could differ materially from the results discussed in the forward-looking statements.

RESULTS OF OPERATIONS


	Year ended
	June 30,
	2008			2007			% Change
Gross Sales/License Revenue	$	1,518,676		$	1,561,776		down 2.8	%
COS/SGA Expenses	$	1,925,584		$	2,011,275		down 4.3	%
Net Operating Loss	$	(406,908	)	$	(449,499	)	down 9.5	%

Basic and Diluted Net Operating Loss per Share	$	(0.02	)	$	(0.02	)

The results for fiscal year ended June 30, 2008 include a decrease in cost of sales and selling, general and administrative expenses. Resulting in a small decrease in our operating loss over the prior year. We continue to build a team of experienced industry professionals that can lead us to success in product surface enhancement technology industry. In the Spring of 2007, we 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. Additionally, we developed new coatings that we can image and give us outdoor stability for various products. The new digital system and coatings 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, 2008 Compared to Fiscal Year Ended June 30, 2007

We have net loss during fiscal year ended June 30, 2008 of ($483,455) compared to a net income of $472,329 during fiscal year ended June 30, 2007, a difference of $955,784. This difference is entirely due to a one-time gain from the debt extinguishment totaling $955,235, which occurred during our fiscal year ended June 30, 2007. During fiscal year ended June 30, 2008, we generated $1,423,634 in gross product sales compared to $1,222,092 in gross sales for fiscal year ended June 30, 2007 (an increase of $201,542). During fiscal year ended June 30, 2008, we also generated $95,042 in license and royalty revenue compared to $339,684 in license and royalty revenue for fiscal year ended June 30, 2007 (a decrease of $244,642). The decrease was primarily a result of less deferred revenue from a previous contract with Polaris Industries, which occurred in 2002 for $750,000 that was deferred over a five year period. Other expense for the fiscal year was ($76,547) compared to other income of $921,828 for the prior year; wherein there was a significant extinguishment of debt of $955,238, which did not occur again in 2008. Cost of sales increased during fiscal year ended June 30, 2008 to $1,014,347 from $977,553 for fiscal year ended June 30, 2007 due to our increased product sales. As a percentage of total sales and license revenue, cost of sales was 66.8% in fiscal year ended June 30, 2008 compared to 62.6% for the comparable period. This slight increase was due to lower margin revenues from processing sales. Selling, general and administrative expenses decreased during fiscal year ended June 30, 2008 to $911,237 from $1,033,722 for fiscal year ended June 30, 2007. The decrease was a result of efforts to lower all expense categories. The above resulted in an operating loss of $406,908 for fiscal year ended June 30, 2008 compared to an operating loss of $449,499 during fiscal year ended June 30, 2007, as further discussed below.

During fiscal year ended June 30, 2008, we recorded operating expenses consisting of general, selling and administrative of $911,237, compared to $1,033,722 during fiscal year ended June 30, 2007, which included $128,342 of write-offs which included leasehold improvements made at the previous premises under lease (a decrease of $122,482) some of the key expenses are compared as follows: (i) $222,602 (2007: $187,971) in salaries and wages; (ii) $68,127 (2007: $80,727) in consulting fees; (iii) $49,641 (2007: $48,839) in office rent; (iv) $58,994 (2007: $52,119) in legal and accounting; (v) $82,960 (2007: $89,562) in office and general, including supplies, utilities and telephone; (vi) $69,814 (2007: $72,087) in travel and entertainment; (vii) $51,582 (2007: $56,764) in insurance and insurance related expenses; (viii) $70,905 (2007: $25,471) in depreciation; (ix) $246,157 (2007: $246,168) in amortization;; and (x) $25,155 (2007: $19,907) in taxes.

Interest expense for the year ended June 30, 2008 was $77,682 compared to $33,667 for the comparable period ended June 30, 2007. This increase of $44,015 was primarily due to our increased debt from the capital leases for our new digital printers, which were purchased late during our fiscal year ended June 30, 2007.

Our net loss during fiscal year ended June 30, 2008 was ($483,455) or ($0.02) per share compared to a net income of $472,329 or $0.02 per share for fiscal year ended June 30, 2007. The weighted average number of shares outstanding was 24,002,691 at June 30, 2008 compared to 24,233,924 at the fiscal year ended June 30, 2007.

Gross Sales/License Revenue and Gross Margins

Gross sales and license/royalty revenues were $1,423,634 and $95,042, respectively, for fiscal year ended June 30, 2008 aggregating $1,518,676, a decrease of 2.8% over last year’s gross sales and license/royalty revenues aggregating $1,561,776. The decrease in gross revenue from fiscal year 2008 to 2007 is primarily the result of license fee revenue decreasing from certain customers and an increase in the sales relating to processing and sales of materials netting an overall decrease of approximately $43,000. Deferred revenues associated with license contracts for the year ended June 30, 2008 were $45,000 as compared to deferred revenues of $69,042 for the year ended June 30, 2007, a decrease of $24,042, primarily caused by timing of payments and renewals.

Operating Expenses

Total operating expenses for fiscal year ended June 30, 2008 were $1,925,584 consisting of $1,014,347 in cost of sales and $911,237 in selling, general and administrative expenses compared with $2,011,275 consisting of $977,553 in cost of sales and $1,033,722 in selling, general and administrative expenses for the same period in 2007. The increase in cost of sales in 2008 from 2007 is a result of different revenue streams from our customer base, as we have higher costs of sales for processing revenues as compared to no cost of sales for license revenues. The decrease in selling, general and administrative expenses in 2008 from 2007 is a result of lowering of administrative labor costs and facility rent, which in 2007 also included a write off of a prepaid royalty asset in the amount of $75,000 due to lack of any sales occurring from the intended transaction. For fiscal year ended June 30, 2008, salaries and wages totaled $222,602 compared with $187,971 for 2007. The increase is related to the increase in our graphics team. Interest costs for fiscal year ended June 30, 2008 increased to $77,682 compared with $33,667 for the same period in 2007 due to the acquisition of digital printers and the related financing costs.

Net Income (Loss)

The net loss for fiscal year ended June 30, 2008 was ($483,455) compared to a net income of $472,329 for fiscal year ended June 30, 2007. The decrease in profitability is primarily due to the one-time recording of a debt extinguishment totaling $955,238 in the fiscal year ended June 30, 2007. The net loss per share basic was ($0.02) for fiscal year ended June 30, 2008 as compared to net income of $0.02 per share basic for fiscal year ended June 30, 2007.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2008, our current assets were $288,324 and our current liabilities were $1,173,764, which resulted in a working capital deficit of $885,440. As of June 30, 2008, total assets were $641,680 consisting of: (i) $7,009 in cash and cash equivalents; (ii) $131,202 in trade accounts receivable (net of allowance for doubtful accounts); (iii) $136,659 in inventory; (iv) $41,054 in other assets and prepaid expenses, and (vi) $325,856 in leasehold improvements and equipment (net).

As of June 30, 2008, total liabilities were $1,307,992 consisting of: (i) $253,998 in accounts payable; (ii) $45,000 in current deferred revenue; (iii) $38,091 in accrued expenses and customer deposits; (iv) $374,341 in accrued expenses due to officer/stockholder and advances from shareholder; and (v) $227,932 in current and long-term portion of capital leases; (vi) $368,630 in current and long-term debt.

Stockholders’ deficit increased from ($311,625) at fiscal year ended June 30, 2007 to ($666,212) at fiscal year ended June 30, 2008.

Net cash flows used in operating activities during fiscal year ended June 30, 2008 was ($64,678) compared with net cash flows used in operating activities of ($209,148) for the same period in 2007. The majority of the change was caused by a decrease in the change in deferred revenues compared to the previous year.

During fiscal year ended June 30, 2008, net cash used in investing activities was $0 compared with net cash used in investing activities of ($37,540) during fiscal year ended June 30, 2007. Net cash used in investing activities during fiscal years ended June 30, 2007, was primarily for the purchase of equipment.

During fiscal year ended June 30, 2008, net cash provided by financing activities was $70,070 compared with net cash provided by financing activities of $108,881 during fiscal year ended June 30, 2007. The decrease is primarily related to increased payments due on debt and capital leases relating to the new digital printers.

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, 2008 was $11,788,216 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 and management believes there is a good likelihood of obtaining a significant 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, 2008, we owed an approximate aggregate amount of $480,038 to officers/stockholders and related parties for amounts loaned to us in order to support our operations or debt due to a stockholder/director totaling $333,373, 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 of approximately $300,000 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 our fiscal year ending June 30, 2009 relates to a bank loan payable on demand but no later than January 3, 2009, in the aggregate principal amount of $200,000 bearing interest at 5.35% 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 our fiscal year ending June 30, 2009 relates to the note payable to a related party in the aggregate amount of $105,697 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.

See our financial statements for the year ended June 30, 2008, included herein, for future principal payments due on our long-term debt and capital lease obligations.

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 June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities . This guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and should be included in the computation of earnings per share using the two-class method outlined in SFAS No. 128, Earnings per Share . The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The adoption of this new guidance on January 1, 2009 should not have an effect on our reported earnings (loss) per share.

In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the Useful Life of Intangible Assets . This guidance addresses the determination of the useful life of intangible assets which have legal, regulatory or contractual provisions that potentially limit a company’s use of an asset. Under the new guidance, a company should consider its own historical experience in renewing or extending similar arrangements. We are required to apply the new guidance to intangible assets acquired after December 31, 2008.

In February 2008, the FASB issued FASB Staff Position FAS 157-2 (“FSP FAS 157-2”) “Effective Date of FASB Statement No. 157” which delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and non-financial liabilities assumed in a business combination. The Company has not applied the provisions of SFAS No. 157 to its non-financial assets and non-financial liabilities in accordance with FSP FAS 157- 2.

In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations”. SFAS No. 141 (revised 2007) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141 (revised 2007) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

CRITICAL ACCOUNTING PRONOUNCEMENTS

Credit risk and Allowance for Doubtful Accounts

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, 2008

Index


Report of Independent Registered Public Accounting Firm dated September 26, 2008

Balance Sheets

Statements of Operations

Statements of Stockholders’ Deficit

Statements of Cash Flows

Notes to Financial Statements

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, 2008 and 2007, 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, 2008 and 2007, 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 26, 2008

F-1

KOLORFUSION INTERNATIONAL, INC.

BALANCE SHEETS
June 30, 2008 and 2007


	2008			2007
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	7,009		$	1,617
Trade accounts receivable, net of allowance for doubtful accounts of $2,678 and $18,900 as of June 30, 2008 and 2007, respectively		131,202			208,987
Inventories, net		136,659			150,763
Prepaid expenses		13,454			12,711


Total current assets		288,324			374,078


LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET		325,856			359,955

OTHER ASSETS:
Patents, less accumulated amortization 2008 $3,692,530; 2007 $3,446,373		—			246,157
Other		27,600			27,600


Total other assets		27,600			273,757


	$	641,780		$	1,007,790


LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES:
Current portion of long-term debt	$	368,630		$	352,693
Current portion of capital lease obligations		93,704			52,543
Accounts payable		253,998			240,117
Deferred revenue		45,000			69,042
Customer deposits		18,015			—
Accrued expenses		20,076			13,433
Accrued expenses due officer/stockholders		333,373			333,373
Advances from stockholder		40,968			32,233


Total current liabilities		1,173,764			1,093,434


Long-term debt, net of current portion		—			13,627

Deferred revenue		—			21,667
Capital lease obligations, net of current portion		134,228			190,687

Total Liabilities		1,307,992			1,319,415


STOCKHOLDERS’ DEFICIT:
Preferred stock Series C-1, $.001 par value, 10,000,000 shares authorized: 1,076,923 issued and outstanding		1,077			1,077

Common stock, $.001 par value, 100,000,000 shares authorized, 2008- 24,309,540; 2006 -23,709,540; shares issued and outstanding		24,310			23,710
Additional paid-in capital		11,096,617			10,968,349
Accumulated deficit		(11,788,216	)		(11,304,761	)


Total Stockholders Deficit		(666,212	)		(311,625	)


Total Liabilities and Stockholders Deficit	$	641,780		$	1,007,790

See accompanying notes to financial statements.

F-2

KOLORFUSION INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS
Years Ended June 30, 2008 and 2007


	2008			2007

Revenues:
Sales	$	1,423,634		$	1,222,092
License and royalty revenue		95,042			339,684

		1,518,676			1,561,776

Expenses:
Cost of sales		1,014,347			977,553
Selling, general and administrative expenses		911,237			1,033,722


Operating loss		(406,908	)		(449,499	)
Other income (expense):
Extinguishment of debt		—			955,238
Other income		1,135			257
Interest expense		(77,682	)		(33,667	)


Total Other Income (expense)		(76,547	)		921,828


Net Income (loss)	$	(483,455	)	$	472,329


NET NCOME (LOSS) PER COMMON SHARE- BASIC	$	(.02	)	$	.02
NET INCOME (LOSS) PER COMMON SHARE-DILUTED	$	—		$	.02

Weighted average shares used in computing basic net income (loss) per common share		24,002,691			24,233,924


Weighted average shares used in computing diluted net income (loss) per common share		24,002,691			29,618,394

See accompanying notes to financial statements.

F-3

KOLORFUSION INTERNATIONAL, INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT
Years Ended June 30, 2008 and 2007


	Preferred Stock				Common Stock					Additional
	Series C-1									Paid in			Accumulated
	Shares		Amount		Shares		Amount			Capital			Deficit			Total

Balance at June 30, 2006		1,076,923	$	1,077		24,309,540	$	24,310		$	11,266,894		$	(11,777,090	)	$	(484,809	)

Stock based employee compensation											10,355						10,355

Canceled shares (related to Extinguishment of debt)						(1,000,000)		(1,000	)		(399,000	)					(400,000	)

Issuance of common stock						400,000		400			90,100						90,500

Net Income														472,329			472,329


Balance at June 30, 2007		1,076,923		1,077		23,709,540		23,710			10,968,349			(11,304,761	)		(311,625	)

Stock based employee compensation											8,868						8,868

Issuance of common stock						600,000		600			119,400						120,000

Net (Loss)														(483,455	)		(483,455	)


Balance at June 30, 2008		1,076,923	$	1,077		24,309,540	$	24,310		$	11,096,617		$	(11,788,216	)	$	(666,212	)

See accompanying notes to financial statements.

F-4

KOLORFUSION INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS
Years Ended June 30, 2008 and 2007


	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(483,455	)	$	472,329
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization		318,733			271,639
Prepaid royalties		—			75,000
Accrued interest converted to principal		7,200			—
Inventory write-off		—			83,591

Stock compensation		8,868			10,355
Extinguishment of debt		—			(955,238	)

Loss on disposal of leasehold improvements and equipment		—			53,342
Changes in Operating Assets and Liabilities:
(Increase) decrease in trade accounts receivable		77,785			(31,621	)
Decrease in inventories		14,104			36,088
(Increase) in prepaid expenses		(743	)		(12,711	)
Decrease in other assets		—			1,907
Increase in accounts payable		13,881			64,452
(Decrease) in deferred revenue		(45,709	)		(205,938	)
Increase (decrease) in accrued expenses		6,643			(167	)
Increase in customer deposits		18,015			—


Net cash provided by (used in) operating activities		(64,678	)		(209,148	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of leasehold improvements and equipment		—			(37,540	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt		75,956			91,805
Payments on debt		(72,111	)		(51,849	)
Payments on capital leases		(53,775	)		(21,575	)
Net proceeds from issuance of common stock		120,000			90,500


Net cash provided by financing activities		70,070			108,881


Increase (decrease) in cash and cash equivalents		5,392			(137,807	)

Cash and cash equivalents:
Beginning of year		1,617			139,424

End of year	$	7,009		$	1,617


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest	$	70,482		$	29,029

Leasehold improvements and equipment financed with capital leases	$	38,477		$	264,804

See accompanying notes to financial statements.

F-5

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
Years Ended June 30, 2008 and 2007

Note 1. Nature of Business, Summary of Significant Accounting Policies

NATURE OF BUSINESS:

Kolorfusion International, Inc. (the Company) was incorporated on May 17, 1995 in the state of Colorado. Since inception, the Company’s efforts have been devoted to raising capital and the purchase, development and manufacturing of a patented system for transferring color patterns to metal, wood, glass and plastic products. The Company currently owns the patents rights for this process for the United States, Canada, Japan, Russia, and Brazil. The Company licenses the system to outside parties and maintains its own production capabilities and is targeting its sales efforts currently in the United States and Canada.

A summary of the Company’s significant accounting policies are as follows:

CASH AND CASH EQUIVALENTS:

CREDIT RISK AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company maintains its cash in high quality financial institutions. The balance, at times, may exceed federally insured limits.

Accounts receivable were reduced by an allowance for uncollectible accounts of $2,678 and $18,900 at June 30, 2008 and 2007, 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 uncollectible.

INVENTORIES:

Inventories consist primarily of raw materials and are valued at the lower of cost or market (first-in, first-out method). The Company reviews inventory on a regular basis and provides for slow-moving, obsolete or unusable inventories by reducing inventory to its estimated useful or scrap value. The Company recorded a $27,550 and $25,000 inventory obsolescence reserve at June 30, 2008 and 2007, respectively.

PATENTS:

The Company purchased the patent rights for the “Kolorfusion” technology for Canada and the United States. The cost of those rights are amortized using the straight-line method over nine years. Patent amortization expense amounted to $246,157 and $246,169 for the years ended June 30, 2008 and 2007, respectively. Patent amortization expense has been fully amortized as of June 30, 2008.

LEASEHOLD IMPROVEMENTS AND EQUIPMENT:

Leasehold improvements and equipment are stated at cost and are being depreciated and amortized using the straight-line method over the following estimated useful lives:


		Years
Leasehold improvements		3
Production equipment		3-10
Office furniture and equipment		3-10

Depreciation expense in the years ended June 30, 2008 and 2007 was $72,576 and $25,471, respectively.

F-6

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2008 and 2007

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

IMPAIRMENT OF LONG-LIVED ASSETS::

Long-lived assets, such as property and equipment and intangible assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the assets exceeds the fair value of the asset. 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 revenue 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 all revenue 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 earned at the end of a reporting period is recorded as deferred revenue.

ADVERTISING:

The Company expenses advertising costs as incurred. Advertising costs were approximately $1,000 and $105 for the years ended June 30, 2008 and 2007, respectively.

INCOME TAXES:

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the financial statement reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment.

FIN No. 48 requires the recognition of a financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority. See Note 9 to the Financial Statements for additional information regarding income taxes.

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, 2008 and 2007, there were dilutive Preferred Series C-1 shares which could be converted to 5,384,615 of common shares and there were 2,800,000 and 2,700,000, respectively, in exercisable stock options. 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, 2008 and 2007 as there exercise prices were above our closing stock price for each respective date. The total number of potentially anti-dilutive shares at June 30, 2008 and 2007 were 8,184,615 and 8,084,615, respectively.

SEGMENT REPORTING

The Company operates as one reporting segment.

F-7

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2008 and 2007

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. The Company’s financial statements as of and for the years ended June 30, 2008 and 2007, reflect the impact of SFAS 123(R). 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 awards that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statements of operations.

OTHER ASSETS:

The Company has other assets of $27,600 for the fiscal years ended June 30, 2008 and 2007. For these fiscal years, other assets consisted of security deposits.

F-8

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2008 and 2007

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. 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.

RECLASSIFICATIONS:

Certain reclassifications have made been to the financial statements for June 30, 2007 in order to match the classifications used in the June 30, 2008 financial statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:

F-9

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 $11,788,216 as of June 30, 2008. As of June 30, 2008, the Company has suffered recurring losses from operation and its current liabilities exceed current assets by $885,440. 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 its 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 recognized in fiscal year ended June 30, 2007 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 and release shares valued at $400,000 (1,000,000 shares of common stock), which were never delivered to the inventor as a form of payment on the original debt due to the passage of time under the law and because of non-performance on certain consulting services by the inventor. The total debt and canceled shares recorded as extinguished was $955,238.

Note 4. Leasehold Improvements and Equipment:


	2008			2007
Office equipment and furniture	$	80,376		$	47,570
Leasehold improvements		33,544			33,544
Production equipment		561,753			562,982


		675,673			644,096
Less accumulated depreciation and amortization		(349,817	)		(284,141	)


	$	325,856		$	359,955

F-10

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2008 and 2007

Note 5. Long-Term Debt:


	2008			2007

Notes payable to related party, due dates expired and extended on a month-to-month, with interest accruing at 12%	$	105,697		$	98,597
Note payable to bank, payable on demand but no later than January, 2009, including interest at 5.35% at June 30, 2008, collateralized by substantially all assets and guaranteed by a Company stockholder		200,000			200,000

Note payable bank payable in monthly installments of principal and interest of $558.46 at 9.75% interest through September 2008, collateralized by specific equipment and guaranteed by a Company stockholder		1,648			7,848

Line of credit-bank-at US Bank at 14% revolving month-to-month		5,057			2,400

Note payable to bank due May 2009, including interest at the New York prime rate plus 2% with total monthly payments of $4,500		56,228			44,846

Equipment purchase note at 9.75%, paid in full		—			12,629


Totals		368,630			366,320
Less: Current portion		(368,630	)		(352,693	)


Long-term debt portion	$	—		$	13,627

Future maturities of long-term debt for years ending after June 30, 2008 are as follows:


	Total
Year ending June 30:
2009	$	368,630

	$	368,630

F-11

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2008 and 2007

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. 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, 2008 and 2007. As of June 30, 2008, these shares are convertible into 5,384,615 common shares.

Common Stock: 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 re-sold 400,000 of these shares at $.226 per share to an outside 3 ^rd party investor for total proceeds of $90,500 during the fourth quarter of the year ended June 30, 2007 and re-sold 600,000 of these shares at $.20 per share to an outside 3 ^rd party in fiscal year ended June 30, 2008 for total proceeds of $120,000.

Stock Options: The Company has one stock option plan called The Stock Incentive Plan. As of June 30, 2008, an aggregate of 1,000,000 shares of common stock have been 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.

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. The Company’s financial statements as of and for the years ended June 30, 2008 and 2007, reflect the impact of SFAS 123(R).

No option grants were made during fiscal year ended June 30, 2008. The Company recorded $8,868 and $10,355 in related compensation expense for the years ended June 30, 2008 and 2007, respectively. 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, 2008 and 2007 basic net income (loss) per common share calculation. There remains approximately $13,113 of total unrecognized compensation expense, which is expected to be recognized over future periods, approximately 4 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.

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:


	2008			2007
Dividend yield		—	%		0	%
Volatility		—	%		94	%
Risk-free interest rate		—	%		4.75	%
Expected lives		N/A			5 years

During the fiscal years ended June 30, 2008 and 2007 there were stock options grants of -0- and 250,000, respectfully. The weighted average fair value of options granted during the year ended June 30, 2008 and 2007 were $0 and $.04, respectively.

F-12

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2008 and 2007

Note 6. Stockholders’ Deficit (Continued):

Information relating to outstanding stock options as of June 30 is as follows:


	2008				2007
			Weighted					Weighted
	Number		Average		Number			Average
	of Shares		Exercise Price		of Shares			Exercise Price
Under option, beginning of year		3,000,000	$	.71		2,780,000		$	.70
Granted		—		—		250,000		$	.83
Expired		—		—		(30,000	)	$	.50


Under option, end of year		3,000,000	$	.71		3,000,000		$	.71


Exercisable at end of year		2,800,000	$	.67		2,700,000		$	.67

The following table summarizes information about stock options outstanding as of June 30, 2008:


Options Outstanding					Options Exercisable
			Weighted
			Average		Weighted				Weighted
Exercise	Number		Remaining		Average		Number		Average
Prices	Outstanding		Contractual Life		Exercise Price		Exercisable		Exercise Price
$.38 –.50		1,325,000		3.13	$	.44		1,325,000	$	.44
$.75 –1.00		1,575,000		5.28	$	.89		1,475,000	$	.89
$1.01 – 1.50		100,000		6.76	$	1.50		—

$.38 –1.50		3,000,000		4.38	$	.71		2,800,000	$	.68

Aggregate Intrinsic Value of all options is zero. The aggregate intrinsic value is the difference between the closing stock price on June 30, 2008 and the exercise price, multiplied by the number of in-the-money options that would have been received by the option holders had all option holder exercised their options on June 30, 2008. No options were exercised during the years ended June 30, 2008 and 2007.

Note 7. Related Party Transactions:

Interest expense incurred for debt with stockholder and related party of the Company totaled $15,918 and $12,857 for the years ended June 30, 2008 and 2007, respectively.

The Company paid consulting fees of $65,000 and $80,757, to one board member during the fiscal years ended June 30, 2008 and 2007, respectively. There was one director being owed $333,373 for past services as of June 30, 2008.

Note 8. Commitments and Contingencies:

In the ordinary course of business, we are a defendant in miscellaneous claims and disputes. While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.

Operating Leases

The Company’s facility lease calls for monthly payments as follows: (i) $7,928 until December 1, 2007; and (ii) $8,530 until December 14, 2009.

The Company leases various office equipment under operating leases. Rental expense on these leases was approximately $13,000 and $10,000 for the years ended June 30, 2008 and 2007, respectively.

Minimum lease payments at June 30, 2008 are as follows:


	Facility		Equipment		Total

Years ending June 30:
2009		102,357		5,316		107,673
2010		51,179				51,179


	$	153,536	$	5,316	$	158,852

Capital Leases

The Company entered into two additional capital lease agreements for equipment during 2008 that expire through January of 2013.

The gross amount of equipment and related accumulated depreciation recorded under capital leases was as follows at June 30, 2008 and 2007:


	2008			2007

Equipment	$	303,283		$	264,806

Less: accumulated depreciation		(57,433	)	$	(11,356	)


	$	245,850		$	253,450

Future minimum capital lease payments are as follows :


Years ending June 30:

2009	$	93,704

2010		66,114

2011		54,012

2012		48,434

2013		18,282


Total		280,546

Less amount representing interest		(52,614	)


Net capital lease obligations		227,932

Less current portion		(93,704	)


Long-term portion	$	134,228

F-13

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2008 and 2007

Note 9. Income Taxes:

The Company has available net operating loss carry-forwards of approximately $8,200,000 at June 30, 2008 which will expire at various times from 2013 to 2025.

The following is a summary of deferred taxes:


	June 30
	2008			2007
Deferred tax assets and liabilities:
Operating loss carry-forwards	$	3,221,000		$	3,115,000
Depreciation and amortization		(29,000	)		(104,000	)
Deferred revenue		17,000			34,000
Stock Compensation		7,000			4,000
Inventory Obsolescence		10,000			10,000
Allowance for doubtful Account		1,000			7,000


		3,227,000			3,066,000

Valuation allowance		(3,227,000	)		(3,066,000	)


Total deferred tax assets	$	—		$	—

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


	2007			2006
Federal statutory rate		35	%		35	%
State taxes, net of federal		3	%		3	%
Other		(4	)%		(4	)%
Valuation allowance		(34	)%		(34	)%


		0	%		0	%

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 10. 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:


	2008				2007
	Sales		Receivables		Sales		Receivables

Customer A	$	326,421	$	26,211	$	259,537	$	50,649
Customer B	$	469,939	$	31,741	$	537,999	$	68,834

F-14

ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Our Board of Directors approved and authorized the engagement of the services of Carver Moquist & O’Connor, LLC (“CMO”), as our principal independent accountants. The address and telephone/facsimile numbers for CMO are as follows: 1550 American Blvd. East, Suite 680, Bloomington, Minnesota 55425, telephone no. 952.854.5700 and facsimile no. 952.854.1163.

We did not previously contact CMO prior to its engagement regarding application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on our financial statements, and no written or oral advice was sought by us from CMO prior to its engagement regarding an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue.

ITEM 8A. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Such information is accumulated and communicated to management, including our Chief Executive Officer / Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

As of June 30, 2008, our management, with the participation of our Chief Executive Officer / Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, the Chief Executive Officer / Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2008, because of the identification of the material weaknesses in internal control over financial reporting described below. Notwithstanding the material weaknesses that existed as of June 30, 2008, our Chief Executive Officer / Chief Financial Officer has concluded that the financial statements included in this Annual Report on Form 10-KSB present fairly, in all material respects, the financial position, results of operations and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Report of Management on Kolorfusion International, Inc.’s Internal Control Over Financial Reporting

Our principal executive officer (chief executive officer and chief accounting officer), and other members of management of Kolorfusion International, Inc., are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, our internal controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. The following material weaknesses have been identified by members of our management and reported to the board of directors:

	•		The Company does not currently have an audit committee that is actively involved with the financial reporting process and thus the Company lacks the board oversight role within the financial reporting process.

	•		We did not maintain proper segregation of duties for the preparation of our financial statements. As of June 30, 2008, the majority of the preparation of the financial statements was carried out by our CEO and an independent contractor. The independent contractor prepared routine and non-routine journal entries, processed certain transactions, prepared certain account reconciliations, selected accounting principles, and prepared interim and annual financial statements (including report combinations and footnote disclosures) in accordance with generally accepted accounting principles without review and approval by someone with financial expertise for overseeing such duties.

	•		Management did not design and maintain effective control relating to the quarter end closing and financial reporting process due to lack of evidence of review surrounding various account reconciliations and journal entries. Due to the Company’s limited resources, the Company has insufficient internal personnel resources and technical accounting and reporting expertise to properly address all of the accounting matters inherent in the Company’s financial transactions. Numerous GAAP audit adjustments were made to the financial statements for the year ended June 30, 2008.

As of June 30, 2008, our management, with the participation of our chief executive officer and chief financial officer, reviewed our control environment, however, management did not assess our internal control over financial reporting based on criteria for effective internal control over financial reporting as described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. As a result of this review, material weaknesses were identified, as described above, and, management has concluded that our internal controls over financial reporting were not effective as of June 30, 2008. Carver, Moquist & O’Connor, an independent registered public accounting firm, was not required to and has not issued a report concerning the effectiveness of our internal control over financial reporting as of June 30, 2008.

(c) Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during the most recent fiscal quarter ended June 30, 2008, that materially affected, or are reasonably likely to materially effect, the Company’s internal control over financial reporting.

The Company is continuing its efforts to address deficiencies in internal control over financial reporting. Management and the Board of Directors believe, as the Company receives further funding through private placements and growth in operations, it will be able to invest in remediating the identified weaknesses.

ITEM 8B. OTHER INFORMATION

Not applicable.

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

All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our Board of Directors and hold office until their earlier death, retirement, resignation or removal.

As of the date of this Annual Report, our directors and executive officers, their ages and positions held are as follows:


NAME	AGE		OFFICES HELD

Thomas Gerschman		51	Director and Chairman of the Board
Stephen Nagel		58	Director, President
Kenneth Bradley		60	Secretary
Thomas LeFort		39	Director

BIOGRAPHIES

The backgrounds of our directors and executive officers are as follows:

Thomas Gerschman. Mr. Gerschman has been a director and the chairman of our Board of Directors since 1999. Mr. Gerschman assists us in corporate finance and strategic European relationships. Mr. Gerschman has an extensive background in investment banking having worked with Warburg Paribus Becker, Inc. (Geneva and New York) in the early 1980s and continuing with Mount Keen & Co., Inc. (New York) as managing director. Additionally, Mr. Gerschman has experience in plastic manufacturing as president of Plastic Technologies Co. (Atlanta) and Summore Plastics, Inc. (Tampa) since 1990.

Stephen Nagel. Mr. Nagel is our founder and has been with us since our inception. Mr. Nagel has been a director and our President/Chief Executive Officer. Mr. Nagel is recognized as one of the leaders in the development and marketing of new technologies in the dye sublimation industry. Mr. Nagel is experienced in all aspects of our business operations, including capital formation, new technology development, sales and marketing and strategic partnering. Prior to our formation, Mr. Nagel was successful in creating and developing several other companies,, both public and private. His prior experience includes services as the chief executive officer of Rescon Technology (1976-1992), 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.

ITEM 10. EXECUTIVE COMPENSATION.

During fiscal years ended June 30, 2008 and 2007, certain officers were compensated for their role as executive officers. As of the date of this Annual Report, we do not have any pension, annuity, insurance, profit sharing or similar benefit plans other than our Stock Incentive Plan. Executive compensation is subject to change concurrent with our requirements. We do not have employment agreements with any of our officers.

Generally, our directors do not receive salaries or fees for serving as directors nor do they receive any compensation for attending meetings of the Board of Directors. However, we may adopt a director compensation policy in the future. We do not currently have any standard arrangement pursuant to which our directors are compensated for services provided as a director or for committee participation or special assignments. Directors are, however, entitled to reimbursement of expenses incurred in attending meetings.

SUMMARY COMPENSATION TABLE

Compensation

We do not currently have a compensation committee. Decisions as to compensation are made from time-to-time by our Board of Directors with no established policies or formulas. The following table sets forth the compensation received by our officers and directors.

Annual Compensation

Long Term Compensation

Other

Awards

Payouts

Annual

Restricted

Securities

All Other

Compen-

Stock

Underlying

LTIP

Compen-

Name and Principal

Salary

Bonus

sation

Award(s)

Options/SARs

Payouts

sation

Position

Year

($)

(#)

($)

Stephen Nagel

2008

65,000

Nil

None

Nil

None

President/Chief Executive Officer and

2007

80,000

Nil

None

Nil

None

Director

2006

72,000

Nil

None

Nil

None

Outstanding Equity Awards Table

No options were exercised by our named executive officers and directors during the year ended June 30, 2008. As of the date of this Annual Report, we have a Stock Incentive Plan in effect. The following reflects that information at June 30, 2008 regarding stock options for our officers and directors.


	Number of
	Securities
	Under		Exercise or
	Options/SARs		Base Price
Name	Exercisable		($/Security)		Option Expiration Date

Thomas Gerschman		500,000	$	0.375	May 1, 2010

		500,000	$	0.50	May 1, 2011

		500,000	$	0.75	May 1, 2012

		500,000	$	1.00	May 1, 2013


		2,000,000

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, 2008.

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 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of the date of this Annual Report, the following table sets forth certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. As of June 30, 2008, there are 24,309,540 shares of common stock issued and outstanding.


		Amount and Nature
		of
	Name and Address ⁽¹⁾ of Beneficial	Beneficial			Percentage
Title of Class	Owner	Ownership			of Class
Common	Thomas Gerschman		2,046,875	⁽²⁾		7.84	%
Common	Stephen Nagel		6,211,000			25.75	%
Common	Philippe Nordman		10,236,690			42.44	%
	Kenneth Bradley		-0-			-0-

	Thomas LeFort		-0-			-0-
Common	Executive Officers/Directors as a Group 2 (Persons)		8,275,875			31.69	%


⁽¹⁾		The address for all management is 16075 E. 32 ^nd Ave #A, Aurora, Colorado 80011.

⁽²⁾		Represents: (i) 46,875 shares of restricted common stock; (ii) assumption of the exercise of 500,000 stock options to purchase 500,000 shares of our common stock at an exercise price of $0.375 per share expiring on May 1, 2010; (iii) assumption of the exercise of 500,000 stock options to purchase 500,000 shares of our common stock at an exercise price of $0.50 per share expiring on May 1, 2011; (iv) assumption of the exercise of 500,000 stock options to purchase 500,000 shares of our common stock at an exercise price of $0.75 per share expiring on May 1, 2012; and (v) assumption of the exercise of 500,000 stock options to purchase 500,000 shares of our common stock at an exercise price of $1.00 per share expiring on May 1, 2013.

CHANGES IN CONTROL

Our Board of Directors is unaware of any arrangement or understanding among the individuals listed in the beneficial ownership table with respect to election of our directors or other matters. We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change in control of our company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As disclosed in “Material Commitments”, we have been able to receive loans for short-term working capital, move-in costs and equipment acquisitions. These loans have all been personally guaranteed by our President, Mr. Nagel.

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

During fiscal year ended June 30, 2008 and 2007, we incurred approximately $44,000 and $45,000, respectively, in fees to our principal independent accountant, Carver Moquist & O’Conner (CMO), for professional services rendered in connection with our year-end audits and the review of our quarterly financial.

Our principal accountants did not bill any other audit-related fees during the respective time periods.

TAX FEES

During the fiscal year ended June 30, 2008 and 2007, we incurred approximately $12,000 and $0 to our principal independent accountants for professional services rendered in connection with tax compliance, consultation, and planning, including preparation of federal income tax returns for the respective periods.

ALL OTHER FEES

During fiscal year ended June 30, 2008 and 2007, we incurred approximately $-0- to our principal independent accountants for professional services other than audit and tax services.

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 29, 2008

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 29, 2008


By		/s/ Thomas Gerschman Thomas Gerschman
		Director

Date September 29, 2008


By		/s/ Thomas LeFort Thomas LeFort
		Director

Date September 29, 2008

EXHIBIT INDEX

	31.1		Certificate pursuant to Rule 13a-14(a)

	31.2		Certificate pursuant to 18 U.S.C. Subsection 1350

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