SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-KSB
(Amendment No. 1)

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the fiscal year ended June 30, 2003
Commission File No. 0-28351

KOLORFUSION INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

|Colorado                          |  | 84-1317836                        | 
|--------------------------------- |  | --------------------------------- | 
|(State or other jurisdiction      |  | (IRS Employer Identification No.) | 
|of Incorporation or Organization) | 

7347 S. Revere Parkway 
Centennial, Colorado 80112
(Address of principal executive office) (Zip Code)

Registrants telephone number: (303) 690-2910

Securities registered pursuant to Section 12(b) of the Act:
Common Stock

Securities registered pursuant to Section 12(g) of the Act:
None

Common Stock, ($.001 par value)
(Title of Class)

Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 X  No

The aggregate market value of the
voting stock held by non-affiliates of the Registrant on June 30, 2003, based on the
average bid and asked prices of Common Stock in the over-the-counter market on that date
was $2,685,432.

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23,226,144 shares of
Registrants Common Stock, $.001 par value were outstanding on June 30, 2003, prior
to the effectiveness of the latest practicable date.

Purpose of Amendment No. 1

The filing is made to restate, per
the SECs request in January 2004, the Companys fiscal 2003 financial
statements and related Managements Discussions and Analysis to reflect license
revenue being recognized on a straight line basis over the life of the agreement. The
change relates to a license and royalty agreement signed with a third party in August
2002. The Company had previously recognized the entire $750,000 fee related to this
agreement into revenue in 2003. The Company restated its financial statements to recognize
revenue ratably over the maximum term (August 2002 through June 2008) of the exclusivity
agreement. As reflected in the statement of operations, revenue and net income decreased
by $633,802, as a result of this adjustment. The $633,802 is included in deferred revenue
at June 30, 2003. In addition, earnings per share declined $.03 for the year ending June
30, 2003, as a result of this adjustment. The restatement did not impact the
Companys cash flow for the period presented.

On the statement of operations, the
Company reclassified the extraordinary income, related to the forgiveness of debt, as a
separate line item within other income (expense). All references to such an extraordinary
item were deleted throughout the 10KSB. This had no impact on the Companys net
income or cash flow for the period presented.

The amendment does not reflect the
effect of any events subsequent to the original filing of the Form 10-KSB for year ended
June 30, 2003, except for the aforementioned restatement, which restates in part items 1,
6 and 7 in the Form 10-KSB as described above.

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CONTENTS

|         | Page
|-------- | ----
|PART I   |     
|Item 1.  |     
|Item 2.  |     
|Item 3.  |     
|Item 4.  |     
|PART II  |     
|Item 5.  |     
|         |     
|Item 6.  |     
|Item 7.  |     
|Item 8.  |     
|Item 9.  |     
|PART III |     
|Item 10. |     
|Item 11. |     
|         |     
|Item 12. |     
|Item 13. |     
|         |     
|Item 14. |     

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PART I

Item 1.  BUSINESS

Kolorfusion
International, Inc. is a Colorado corporation, formed on May 17, 1995, to develop and
market a system for transferring color patterns to metal, wood, glass and plastic
products. Its principal office is located at 7347 S. Revere Parkway, Centennial, Colorado.

Kolorfusion
is a process that allows the transfer of colors and patterns into coated metal, wood, and
glass and directly into a plastic surface that can be any shape or size.

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 as a promotional vehicle. The Company currently has customers such as
Polaris  all terrain vehicles, Garrity  flashlights, Daisy  air guns,
Gerber  hand tools, Tru-Glo  bow sights, Allied Wheel Company  steel
wheel rims, Sunrise Medical  wheel chairs, Master Lock  padlocks, and others.
Other applications are anticipated as the Company is currently working with other
manufacturers in various markets.

The
process uses a transfer material (Kolortex(TM)) with special inks that may be of any
design or color that the user desires. The only limitations are the imagination and
desires of the customer. The Kolortex is placed around the product. The product, wrapped
in the Kolortex, is then placed in a carrier that allows for a total vacuum. The carrier
is then placed in a heating chamber which allows the inks to leave the Kolortex and
penetrate into the coated product. Plastic and aluminum may be treated directly, steel,
glass and other surfaces must first be coated. Temperature heating ranges from 280 to 400
degrees Fahrenheit, and the time of heating is dependent on the product and its
characteristics.

The
process patents for the U. S. and Canada were purchased by the Company from the inventor
in 1995, and in 2001 the Company entered into an agreement to secure the rights to the
patents in Russia, Brazil and Japan, and the right to purchase the European patents in
January, 2005. The U. S. and Canadian patents expire 20 years from the date of
application, which will be November 16, 2012. Additional related patents have been
developed by the Company, which expire in 2018.

3

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The
Company has registered its tradename and trademark design in the United States, Canada and
Brazil.

The
Company has established a processing center at its place of business in suburban Denver,
Colorado, and it is actively using the process to process products. The Company has
dedicated 27,000 square feet of its 32,000 square feet of space to production, with four
Koloclav processing units.

Transportation
of the products to be processed creates an expense problem for certain customers, and the
Company believes that it will be necessary to open additional centers in key geographical
centers to attract those customers for which transportation cost is a factor. The Company
has 2 licensees, one in California and one in Minnesota, that can do the Companys
process for agreed upon customers and products, as approved by the Company.

The
Company has had no dependence upon a significant customer or supplier to date, except as
noted in the Financial Statements, footnote 8.

COMPETITION

There
is no direct competition because the Company uses a patented process that is unique in the
market. There are companies that are near direct competition. The most direct competition
is cubic printing, also known as hydrographics. This is a technology from
Japan that has over 65 licensees in 22 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. This system is quoted in the market as significantly higher in cost than the
Kolorfusion Process, and is not capable of full three dimension printing. As with all
superficially applied decoration durability and abrasion resistances are inferior to the
Companys process. 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 of archery. Companies now using cubic printing in the United States include The
Colorworks, Inc., Immersion Graphics, Revolution Technologies, Inc. and Spectrum Cubic,
Inc. Cubic printing is mostly limited to the esthetic segment of the decoration market
because the graphic will severely distort when applied and alignment of the graphic on the
part in a specific position is impossible. Only when the esthetic design is also
functional, such as in camouflage patterns can cubic printing add a practical value to a
product. Other liabilities of the cubic printing process are that it requires an overcoat,
and lead times to obtain new designs are many months. The Company currently has many
customers that formerly used the cubic process.

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In
mold decoration covers all decoration technologies that are applied to injection molded
parts as part of the molding process. Included in this family are multi-shot, multi-color
molding which is where several different colored polymers are combined into a single
molded part using a complex injection tool. First a base color polymer is injected
creating the body of the part. In mold decoration does not compete directly with the
Company, because it is limited to plastic parts with high volumes, usually small in size.
In essence it is laminating a decal to a plastic surface, control switches in autos is a
good example.

Indirect
competition can be defined very broadly to include pad printing, screen printing, hot
stamping, specialty paints and coatings. Pad printing can conform to minor curves and
contours, as can screen painting and hot stamping. All are surface decorations and are
therefore prone to scratching. All serve both esthetic and decorative market segments,
except specialty paints and coatings, which includes textures and suspensions of glitter
or metallic flakes. Other decoration methods such as silk screening or decals have limited
utilization as the cost and/or durability make them non competitive for most dimensional
decoration requirements. Many products are decorated with a combination of colored
coatings with silk screen and decals.

Management
of the Company has had extensive discussions with customers and prospects, and have found
that in most instances the process will reduce the finishing cost of the product, and in
some instances will increase the cost. Pricing is based on several factors, including
volume, type of product, amount of Kolortex used and handling and processing time.

LICENSING

The
Company continues to enter license agreements with manufacturers for their specific
products when the process is to be used on a large scale. The Company has license
agreements with Polaris Industries for ATVs and other applications, Garrity Industries for
flashlights, Moen, Inc. for plumbing fixtures, Sunrise Medical Corporation for
wheelchairs, Dee Zee for aluminum truck accessories such as tool boxes, mud flaps, bed
caps, step-up bars, Saef, Inc. for countertops, PSE, Inc. for archery, Powder Coat
Services, Inc. of Los Angeles and PodCo, Inc. of Lancaster, Minnesota. The license
agreements that the Company has entered into generally last for four periods of five
years. The Company charges an annual license fee based upon the size and scope of the
market or array of products under the 20 year license agreements. The Company also sells
the required printed goods (Kolortex) or charges a royalty for each product that utilizes
its decoration process.

In
August, 2002 the Company signed a license agreement with Polaris Industries that allowed
Polaris the right to use the Companys patents on certain applications

5

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through June, 2007, with the
potential to extend through June 2008 if Polaris ships in excess of the units stated in
the agreement by June 2006. The Company received $750,000 from Polaris that will be
recognized over the maximum term of exclusivity. The Company will also receive royalties
on each unit shipped in excess of the units stated in the agreement, and an annual license
fee of $10,000 from Polaris for each product line that uses the patented technology.

Item 2.  PROPERTY

The
Company leases office, warehouse and production space in suburban Denver, Colorado for a
current monthly rental of $16,000 per month. In addition the Company has issued 288,000
shares of its common stock in lieu of paying real estate taxes and other rental expenses
for fiscal 2003.

There
are currently 26 employees in addition to the officers.

Item 3. LEGAL PROCEEDINGS

The
Company is currently in arbitration against George Industries of Los Angeles, a former
licensee of the Companys process for aluminum anodized products. The Companys
management believes it will either prevail on its claims, or will come to a satisfactory
commercial settlement of its claims.

The
Companys primary patent was placed for re-examination to the U.S. Patent Trademark
Office in 1999. The Patent Office ruled in 2001that the Companys patents will remain
valid as stated in the original claims filed. The Company will contest any present or
future claims as they may arise against the Companys intellectual property currently
owned or later developed.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

Item 5.  MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The
Companys common stock has been traded since August, 1998 on the OTC Bulletin Board,
with the symbol KOLR, before that time there was no activity. As of June 30, 2003 the
following brokerage firms were making a market in the Companys common stock: Wien
Securities, Hill Thompson Magid & Co., Knight Equities Market, Inc., Pershing Trading
Company, Fleet Trading, GVR Company, and Schwab Capital Markets.

The
following table sets forth for the periods indicated the range of high and low closing bid
quotations per share as reported by the over-the-counter market. These quotations
represent inter-dealer prices, without retail markups, markdowns or commissions and may
not necessarily represent actual transactions.

|                                        | Price per Share
|--------------------------------------- | ---------------
|
|Fiscal year 2002                        |                
|First Quarter (July 1, 2001 through     |                
|September 30, 2001)                     |                
|Second Quarter (October 1, 2001 through |                
|December 31, 2001)                      |                
|Third Quarter (January 1, 2002          |                
|through March 31, 2002)                 |                
|Fourth Quarter (April 1, 2002           |                
|through June 30, 2002)                  |                
|Fiscal year 2003                        |                
|First Quarter (July 1, 2002             |                
|through September 30, 2002)             |                
|Second Quarter (October 1, 2002         |                
|through December 31, 2002)              |                
|Third Quarter (January 1, 2003          |                
|through March 31, 2003)                 |                
|Fourth Quarter (April 1, 2003           |                
|through June 30, 2003)                  |                

There
are over 350 holders of the common stock of the Company. There have never been any
dividends, cash or otherwise, paid on the common shares of the Company.

7

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Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS  OF OPERATIONS

Forward-Looking Statements

Certain
statements in this Report constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. These
statements appear in a number of places in this report and can be identified by the use of
terminology such as anticipate, believe, estimate,
intend, may, could, possible,
plan, will, forecast, and similar words or
expressions. The Companys forward-looking statements generally relate to, among
other things: (i) the Companys financing plans; (ii) trends affecting the
Companys financial condition or results of operations; (iii) the Companys
growth strategy and operating strategy; and (iv) the declaration of any payment of
dividends. Investors must carefully consider forward-looking statements and understand
that such statements involve a variety of risks and uncertainties, known and unknown, and
may be affected by inaccurate assumptions. Consequently, no forward-looking statement can
be guaranteed and actual results may vary materially. The Company undertakes no obligation
to update any forward-looking statement.

Current
year sales result from production runs and license fees. The Company increased its sales
during the fiscal year, and anticipates this trend to continue as it adds more customers
and licensees. The Company plans to enter into processing contracts and additional
licensing agreements to achieve this continuous growth in sales.

YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2002.

Revenues
increased in 2002 to $1,443,795 from $566,199 in 2001. There were increased license and
royalty fees and higher sales in 2002 to account for the difference.

Costs
of sales increased in 2002 to $1,240,443 from $682,611 in 2001 as a result of higher sales
in 2002.

Selling,
general and administrative expenses increased in 2002, to $1,100,875 from $1,039,392 in
2001. The selling, general and administrative expense increased because of higher sales.
Interest expense was more in 2002, $20,510, from $1,356 in 2001.

The
result was that there was a net loss of $940,091 in 2002, compared to a net loss of
$1,131,771 in 2001. The net loss per share in 2002 was $.04 compared to a net loss per
share of $.06 in 2001.

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YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2003.

Revenues
increased in 2003 to $1,748,471 from $1,443,795 in 2002. The increase was the result of
increased sales along with license and royalty fees

Costs
of sales decreased in 2003 to $1,071,114 from $1,240,443 in 2002 as a result of lower
production labor costs.

Selling,
general and administrative expenses increased in 2003, to $1,558,001 from $1,100,875 in
2002. The selling, general and administrative expense increase was the result of higher
travel and marketing expense.

Other
income in 2003 was $1,319,533 (includes settlement of payable owed to individual),
compared to other expense of $22,058 in 2002. This increase is due to the debt
restructuring that took place in 2003 and resulted in the reduction of a payable owed to
an individual.

The
Company had net income of $402,878 in 2003, compared to a net loss of $940,091 in 2002.
Net income per share in 2003 was $.02 compared to a net loss per share of $.04 in 2002.
The net income in 2003 included other income of $1,191,176 related to the settlement of a
payable owed to an individual.

The
sales of the Company and the expenses have increased in the past two years, and the
Company has made every effort to increase the sales and hold down the expenses. There were
two items in the last year that affected sales and earnings. The Polaris agreement
increased sales, and the settlement with the holder of the patent increased earnings.
Management of the Company feels that it has several opportunities to increase sales in the
coming year, but there can be no assurance that it will be successful. The Company
continues to expand its business with new accounts in many categories, including outdoor
product manufacturers, household and building products. Additionally, existing accounts
continue to expand the use of the Companys process resulting in higher revenues.

LIQUIDITY AND CAPITAL RESOURCES

Kolorfusion
International, Inc. has historically had more expenses than income in each year of its
operations. The accumulated deficit from inception to June 30, 2003 was $10,297,332 and
current liabilities are in excess of current assets. It has been able to maintain a
positive cash position solely through financing activities. The Company also plans to
continue to include additional outside financing or lines of credit. As a result of this
the independent auditor has issued a going concern opinion.

The
Company entered into an agreement in June of 2001 with the holder of the patent where the
holder would receive 1,000,000 French Francs, 1,000,000 shares of the common stock of the
Company, and a 5 year consulting agreement for 58,333 French Francs per month, in exchange
for the debt. The Company believes the individual will not provide any bona fide services
pursuant to the agreement. The Company retained a French attorney to enforce the
agreement. In the event that there is a restructuring of the agreement, which the Company
feels is remote, the changes to the agreement would not be material to the Companys
financial statements.

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. The primary source of
liquidity in the future will be increased sales. In the event that sales should decline
the Company may have to seek additional funds through equity sales or debt. The Company
has not identified any sources of long term liquidity at this time. Additional equity
sales could have a dilutive effect. The debt financing, if any, would most likely be
convertible to common stock, which would also have a dilutive effect. 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 the
business of Kolorfusion International, Inc.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In
June 2002, Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 requires the recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred versus the
date the Company commits to an exit plan. In addition, SFAS No. 146 states the liability
should be initially measured at fair value. The requirements of SFAS No. 146 are effective
for exit or disposal activities that are initiated after December 31, 2002. Adoption of
SFAS No. 146 did not have a material effect on the Companys financial statements.

In
October 2002, FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. SFAS No. 147 is effective October 1, 2002. The Company believes the
adoption of SFAS No. 147 will not have a material effect on the Companys financial
statements.

In
November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 clarifies the requirements for a
guarantors accounting for and disclosure of certain guarantees issued and
outstanding. The initial recognition and initial measurement provisions of FIN 45 are
applicable to guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 are effective for financial statements for periods ending after
December 15, 2002. The adoption of FIN 45 did not impact the Companys financial
statements.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure. SFAS No. 148 is an amendment to SFAS No. 123
providing alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and also provides additional
disclosures about the method of accounting for stock-based employee compensation.
Amendments are effective for financial statements for fiscal years ending after December
15, 2002 and for the interim periods beginning after December 15, 2002. The Company
adopted the annual disclosure provision of SFAS No. 148 during the year ended June 30,
2003. The Company has currently chosen to not adopt the voluntary change in the fair value
based method of accounting for stock-based employee compensation pursuant to SFAS No. 148.

In
January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN No. 46 states that companies that have exposure to the
economic

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risks and potential rewards from
another entitys assets and activities have a controlling financial interest in a
variable interest entity and should consolidate the entity, despite the absence of clear
control through a voting equity interest. The consolidation requirements apply to all
variable interest entities created after January 31, 2003. For variable interest entities
that existed prior to February 1, 2003, the consolidation requirements are effective for
annual or interim periods beginning after June 15, 2003. Disclosure of significant
variable interest entities is required in all financial statements issued after January
31, 2003, regardless of when the variable interest was created. The adoption of FIN No. 46
did not have a material impact on the Companys financial statements.

In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, effective for contracts entered into or modified
after June 30, 2003. This amendment clarifies when a contract meets the characteristics of
a derivative, clarifies when a derivate contains a financing component and amends certain
other existing pronouncements. The Company believes the adoption of SFAS No. 149 will not
have a material effect on the Companys financial statements.

In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003. SFAS
No. 150 requires the classification as a liability of any financial instruments with a
mandatory redemption feature, an obligation to repurchase equity shares, or a conditional
obligation based on the issuance of a variable number of its equity shares. The Company
does not have any preferred shares or other financial instruments with a mandatory
redemption feature. The Company believes adoption of SFAS 150 will not have a material
effect on the financial statements.

SIGNIFICANT ACCOUNTING POLICIES

Financial
Reporting Release No. 60, which was recently released by the Securities and Exchange
commission, requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. Note 1 of the Notes to the
Financial Statements includes a summary of the significant accounting policies and methods
used in the preparation of our Financial Statements. The following is a brief discussion
of the more significant accounting policies and methods used by the company. In addition,
Financial Reporting Release No. 61 was recently released by the SEC to require all
companies to include a discussion to address, among other things, liquidity, off-balance
sheet arrangements, contractual obligations and commercial commitments.

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General

The
preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the dates of the financial statements and reported
amounts of revenues and expenses during the reporting periods. The most significant
estimates and assumptions relate to the valuation of inventory and the liability for the
stock bonus plan. Actual amounts could differ from these estimates.

Inventory
Valuation

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

Revenue
Recognition

As
noted in Note 1 to the Financial Statements, license and royalty revenue is recognized
upon completion of the earnings process. The Company recognizes sales when products are
shipped, collectibility is probable and the fee is fixed or determined. In addition, the
Company has various contracts which are amortized into revenues over the contract period
pursuant to SAB 104.

Patent
Rights

At
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,
the Company evaluates 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 AND SUPPLEMENTARY DATA

The
financial statements are attached following Item 14.

Item 8.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

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Item 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The
executive officers and directors of the Company, with a brief description, are as follows:

|Name             | Age |    | Position
|---------------- | --- | -- | --------
|Thomas Gerschman |     | 46 |         
|Stephen Nagel    |     | 53 |         
|Kenneth Bradley  |     | 55 |         

Thomas
Gerschman, Mr. Gerschman is the Chairman, and a Director of the Company. Mr. Gerschman has
been the President of Mount Keene, Inc., a corporation for investment banking, since 1989
and of Summore Plastics, Inc., a plastic molding company, since 1990. Neither business
interferes with the Company. He became a director of the Company, and Chairman in 1999.

Stephen
Nagel, Mr. Nagel is President and a Director. Mr. Nagel was the CEO of Rescon Technology,
a manufacturer of construction materials from 1976 to 1992, and the founding CEO of
Selectronics, a consumer electronics and software publisher from 1983 to 1991, both public
companies. He has an MBA from Arizona State University and a JD from the University of
Wyoming. Mr. Nagel has been President and a Director since inception of the Company.

Kenneth
Bradley, Mr. Bradley is the Secretary. Mr. Bradley is a partner for the accounting firm of
Porter, Muirhead & Howard since 1976. He is in Casper, Wyoming. Mr. Bradleys
duties are minimal, and he spends very little time on the affairs of the Company.

The
directors of the Company are elected annually by the shareholders for a term of one year
or until their successors are elected and qualified. The officers serve at the pleasure of
the Board of Directors.

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PART III

Item 10.  EXECUTIVE COMPENSATION.

There
are no officers or directors that received compensation in excess of $100,000 or more
during the last year. The Company incurred approximately $80,000 to Nagel Enterprises, as
consulting fees, an entity wholly owned by Stephen Nagel, in lieu of compensation to Mr.
Nagel. There is no written contract or obligation for the payments to Mr. Nagel. The
Company also incurred $60,000 in consulting fees to Mount Keen, an entity owned by Thomas
Gershman, The Company owes these two persons $371,000 as of June 30, 2003.

Item 11.  SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

There
are presently 23,226,144 shares of the Companys common shares outstanding. The
following table sets forth the information as to the ownership of each person who, as of
June 30, 2003, owns of record, or is known by the Company to own beneficially, more than
five percent of the Companys common stock, and the officers and directors of the
Company.

|Name                              | Shares ofCommon Stock |            | Percent ofOwnership
|--------------------------------- | --------------------- | ---------- | -------------------
|                                 
|Thomas Gerschman (1)              |                       | 2,046,875  |                    
|Stephen Nagel                     |                       | 6,229,000  |                    
|Philippe Nordman                  |                       | 10,236,690 |                    
|Directors and Officers as a group |                       | 8,275,875  |                    

|(1) | The shares owned by Mr. Gershman include 46,875 shares of common stock and
options to purchase 2,000,000 shares of common stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------

In
June 2001, the Company entered an agreement in principle with an individual who had
previously sold the Company U.S. and Canada patent rights. Under this agreement, the
individual would receive 1,000,000 French francs, 1,000,000 shares of Company common
stock, and a five year consulting agreement calling for monthly payments of 58,333 French
francs in exchange for a settlement of the payable related to the previous patents
purchased by the Company. The debt restructuring was not

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recorded in the prior years due to
the individuals interest in modifying certain terms of the new agreement. In fiscal
2003, the Company retained a French lawyer to enforce the agreement in principle that was
signed in June 2001. Therefore, the Company recorded the debt restructuring during the
year ended June 30, 2003. These 1,000,000 shares of common stock were valued at $.40 per
share.

In
February 2003, the Company signed a new lease agreement through January 2013. In addition
to the monthly rent payments made to the lessor, the Company will issue 288,000 shares of
common stock in each of the first three years in lieu of paying real estate taxes and
other rental expenses. As of June 30, 2003, 288,000 shares have been issued to the lessor
and were valued at $.50 per share.

In
connection with these sales, we relied on the exemption from registration provided by
Sections 4(2) and 4(6) of the Securities Act of 1933, as well as Rule 506 of Regulation D
based on (i) our belief that the issuances did not involve a public offering, (ii) the
transactions involved one purchaser each, and (iii) because we had a reasonable basis to
believe that each of the shareholders were either accredited or otherwise had sufficient
knowledge and sophistication, either alone or with a purchaser representatives, to
appreciate and evaluate the risks and merits associated with their investment decision.

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None

Item 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

None

Item 14.  CONTROLS AND PROCEDURES

It
is the responsibility of the chief executive officer and chief financial officer to ensure
the company maintains disclosure controls and procedures designed to provide reasonable
assurance that material information, both financial and non-financial, and other
information required under the securities laws to be disclosed is identified and
communicated to senior management on a timely basis. The companys disclosure
controls and procedures include mandatory communication of material subsidiary

15

---

events, automated accounting
processing and reporting, management review of monthly and quarterly results, periodic
subsidiary business reviews, an established system of internal controls and rotating
internal control reviews by the companys internal auditors.

The
chief executive officer and chief financial officer evaluated the companys
disclosure controls and procedures as of the end of the fiscal year, and have concluded
the controls and procedures currently in place are adequate to ensure material information
and other information requiring disclosure is identified and communicated on a timely
basis.

Additionally,
there have been no material changes to the Companys system of internal controls or
changes in other factors affecting the operation of the internal controls in the year
since Kolorfusion International management last evaluated the system of internal controls
in conjunction with the preparation of financial statements for the year ended June 30,
2002.

The
Company paid its auditor, Virchow, Krause & Company, LLP, audit and related fees of
$19,530 in the past year.

| | (a)    Attached
are the Financial Statements and Independent Auditors Report on
Examination of Financial Statements for the years ended June 30, 2003, and June
30, 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)   Attached
are the following Financial Statement Schedules and Auditors Report on
Schedules,
| | ------------------------------------------------------------------------------------------------

| | None
| | ----

| | All schedules
are omitted because they are not required or not applicable or the information
is shown in the financial statements or notes thereto.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)   No report was filed on Form 8-K.
| | --------------------------------------

| | (d)   Exhibits.
| | ---------------

| | Exhibit 31   Certification of Stephen Nagel pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Rules 13a and 15d-14 of the Exchange Act)
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Exhibit 32   Certification
of Stephen Nagel pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. sec. 1350)
| | ---------------------------------------------------------------------------------------------------------------------------

16

---

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated   April 30, 2004

| |                          |                                 |  |                     | 
| | ------------------------ | ------------------------------- |  | ------------------- | 
| |                          | KOLORFUSION INTERNATIONAL, INC.
| |                          | by                              |  | /s/   Stephen Nagel | 
| |                         
| | Stephen Nagel, President |                                

17

---

INDEPENDENT AUDITORS REPORT

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

We
have audited the accompanying balance sheets of Kolorfusion International, Inc., as of
June 30, 2003 and 2002, and the related statements of operations, stockholders
deficit and cash flows for the years ended June 30, 2003 and 2002. 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 auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the accompanying financial statements referred to above present fairly, in
all material respects, the financial position of Kolorfusion International, Inc. as of
June 30, 2003 and 2002, and the results of its operations and its cash flows for the years
ended June 30, 2003 and 2002, in conformity with accounting principles generally accepted
in the United States of America.

As
discussed in Note 10 to the financial statements, the Company has restated its balance
sheet and related statement of operations, stockholders equity and cash flows for
the year ended June 30, 2003 to recognize license revenue on a straight line basis over
the life of the agreement.

The
accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements, the
Companys current liabilities exceeded its current assets as of June 30, 2003. This
raises substantial doubt about the Companys ability to continue as a going concern.
Managements plans regarding these matters also are described in Note 1. The
financial statements do not include any adjustments that might result from the outcome of
this uncertainty.

/s/   Virchow, Krause & Company, LLP

Minneapolis, Minnesota
September 24, 2003
(except for Notes 3, 6, 8, 9 & 10
as to which the date is April 12, 2004)

F-1

---

KOLORFUSION INTERNATIONAL, INC.

BALANCE SHEETS
June 30, 2003 and 2002

|                                                  | (Restated)2003 |  | 2002
|------------------------------------------------- | -------------- |  | ----
|ASSETS                                            |                |  |     
|CURRENT ASSETS:                                   |                | 
|Cash and cash equivalents                         |                |  | $   
|Trade accounts receivable, no allowance for       |                | 
|doubtful accounts considered necessary            |                |  |     
|Inventories                                       |                |  |     
|                                                  |                |  |     
|Total current assets                              |                |  |     
|                                                  |                |  |     
|OTHER ASSETS:                                     |                | 
|Patents, less accumulated amortization           
|2003 $2,461,699; 2002 $2,215,529                  |                |  |     
|Other                                             |                |  |     
|                                                  |                |  |     
|                                                  |                |  |     
|LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET         |                |  |     
|                                                  |                |  |     
|                                                  |                |  | $   
|                                                  |                |  |     
|LIABILITIES AND STOCKHOLDERS DEFICIT             |                | 
|CURRENT LIABILITIES:                              |                | 
|Accounts payable                                  |                |  | $   
|Deferred revenue                                  |                |  |     
|Current portion of long-term debt                 |                |  |     
|Accrued expenses                                  |                |  |     
|Accrued expenses due stockholders                 |                |  |     
|                                                  |                |  |     
|Total current liabilities                         |                |  |     
|                                                  |                |  |     
|LONG-TERM DEBT, net of current portion            |                |  |     
|DEFERRED REVENUE                                  |                |  |     
|                                                  |                |  |     
|STOCKHOLDERS DEFICIT:                            |                | 
|Preferred stock, $.001 par value, 10,000,000      |                | 
|shares authorized,none issued or outstanding      |                | 
|Common stock, $.001 par value, 100,000,000 shares |                | 
|authorized, 2003 23,226,144; 2002 21,918,144      |                | 
|shares issued and outstanding                     |                |  |     
|Additional paid-in capital                        |                |  |     
|Accumulated deficit                               |                |  |     
|                                                  |                |  |     
|                                                  |                |  |     
|                                                  |                |  |     
|                                                  |                |  | $   
|                                                  |                |  |     

See accompanying notes to financial statements.

F-2

---

KOLORFUSION INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS
Years Ended June 30, 2003 and 2002

|                                                    | (Restated)2003 |  | 2002
|--------------------------------------------------- | -------------- |  | ----
|Revenues:                                           |                |  |     
|Sales                                               |                |  | $   
|License and royalty revenue                         |                |  |     
|                                                    |                |  |     
|                                                    |                |  |     
|Expenses:                                           |                | 
|Cost of sales                                       |                |  |     
|Selling, general and administrative expenses        |                |  |     
|                                                    |                |  |     
|Operating loss                                      |                |  |     
|Other income (expense):                             |                | 
|Other income (expense)                              |                |  |     
|Settlement of payable owed to individual            |                |  |     
|Interest expense                                    |                |  |     
|                                                    |                |  |     
|                                                    |                |  |     
|                                                    |                |  |     
|Net income (loss)                                   |                |  | $   
|                                                    |                |  |     
|EARNINGS (LOSS) PER COMMON SHARE BASIC AND DILUTED: |                |  | $   
|Weighted average shares used in computing basis and
|diluted earnings (loss) per common share            |                |  |     
|                                                    |                |  |     

See accompanying notes to financial statements.

F-3

---

KOLORFUSION INTERNATIONAL, INC.

STATEMENTS OF STOCKHOLDERS DEFICIT
Years Ended June 30, 2003 and 2002

|                                    | Common Stock |  | AdditionalPaid-In |            | Accumulated |  
|----------------------------------- | ------------ |  | ----------------- | ---------- | ----------- | -
|
|Balance at June 30, 2001            |              |  |                   | 21,658,144 |             | $
|Common shares issued for services   |              |  |                   | 60,000     |             |  
|Common shares issued for cash       |              |  |                   | 200,000    |             |  
|Net loss                            |              |  |                   |           |             |  
|                                    |              |  |                   |            |             |  
|Balance at June 30, 2002            |              |  |                   | 21,918,144 |             |  
|Common shares issued for rent       |              |  |                   | 288,000    |             |  
|Common shares issued for settlement
|of payable owed to individual       |              |  |                   | 1,000,000  |             |  
|Common shares issued for cash       |              |  |                   | 20,000     |             |  
|Net income  Restated               |              |  |                   |           |             |  
|                                    |              |  |                   |            |             |  
|Balance at June 30, 2003            |              |  |                   | 23,226,144 |             | $
|                                    |              |  |                   |            |             |  

See accompanying notes to financial statements.

F-4

---

KOLORFUSION INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS
Years Ended June 30, 2003 and 2002

|                                                          | (Restated)2003 |  | 2002
|--------------------------------------------------------- | -------------- |  | ----
|CASH FLOWS FROM OPERATING ACTIVITIES:                     |                |  |     
|Net income (loss)                                         |                |  | $   
|Adjustments to reconcile net income (loss) to net         |                | 
|cash provided by (used in) operating activities:          |                | 
|Other income  settlement of payable owed to individual   |                |  |     
|Depreciation and amortization                             |                |  |     
|Common stock issued for rent                              |                |  |     
|Loss on disposal of leasehold improvements and equipment  |                |  |     
|(Increase) decrease in trade accounts receivable          |                |  |     
|Increase in inventories                                   |                |  |     
|Increase in other assets                                  |                |  |     
|Increase (decrease) in accounts payable                   |                |  |     
|Increase in deferred revenue                              |                |  |     
|Increase (decrease) in accrued expenses                   |                |  |     
|Increase in accrued expenses due stockholders             |                |  |     
|                                                          |                |  |     
|Net cash provided by (used in) operating activities       |                |  |     
|                                                          |                |  |     
|CASH FLOWS FROM INVESTING ACTIVITIES:                     |                | 
|Purchases of leasehold improvements and equipment         |                |  |     
|                                                          |                |  |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                     |                | 
|Proceeds from long-term debt                              |                |  |     
|Payments on long-term debt                                |                |  |     
|Net proceeds from issuance of common shares               |                |  |     
|                                                          |                |  |     
|Net cash provided by (used in) financing activities       |                |  |     
|                                                          |                |  |     
|Increase (decrease) in cash and cash equivalents          |                |  |     
|Cash and cash equivalents:                                |                | 
|Beginning                                                 |                |  |     
|                                                          |                |  |     
|Ending                                                    |                |  | $   
|                                                          |                |  |     
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:        |                | 
|Cash payments for interest                                |                |  | $   
|                                                          |                |  |     
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING                |                | 
|AND FINANCING ACTIVITIES:                                 |                | 
|Finance of leasehold improvements and equipment additions
|through long-term debt                                    |                |  | $   
|                                                          |                |  |     
|Common stock issued in exchange for settlement of payable |                | 
|owed to individual                                        |                |  | $   
|                                                          |                | 
|Common stock issued for rent                              |                |  | $   
|                                                          |                | 

See accompanying notes to financial statements.

F-5

---

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS
Years Ended June 30, 2003 and 2002

|Note 1. |  | Nature of
Business, Summary of Significant Accounting Policies and Restatement:
|------- |  | -------------------------------------------------------------------------------

| | 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 and development 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 in targeting its
sales efforts currently to the United States and Canada.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A summary of the
Companys significant accounting policies follows:
| | -------------------------------------------------------------------

| | CASH AND CASH EQUIVALENTS:
| | --------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
carryforwards 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | INVENTORIES:
| | ------------

| | Inventories
consist of raw materials and are valued at the lower of cost or market
(first-in, first-out method). The Company recorded a $30,000 inventory
obsolescence reserve as of June 30, 2003. There was no reserve as of June 30,
2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PATENTS:
| | --------

| | The Company
purchased the patent rights 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 $246,170 for each of the years ended June 30,
2003 and 2002. Patent amortization expense will be $246,170 for each of the next
five years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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         |      
|Production equipment           |      
|Office furniture and equipment |      

| | Depreciation
expense for each of the years ended June 30, 2003 and 2002 was $48,962.
| | ------------------------------------------------------------------------------------

F-6

---

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

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

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

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

| | SHIPPING AND HANDLING COSTS:
| | ----------------------------

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

| | REVENUE RECOGNITION:
| | --------------------

| | The Company
records sales when products are shipped, collectibility 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 the transaction
complies with the seven conditions and six considerations contained in
Accounting and Auditing Release No. 108 of the Securities Exchange Commission
(SEC)and SEC Staff Accounting Bulletin (SAB) 101, as amended by SAB 104. In
addition, the Company has various contracts which are amortized into revenues
over the contract period pursuant to SAB 104.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ADVERTISING:
| | ------------

| | The Company
expenses advertising costs as incurred. Advertising costs were approximately
$60,000 and $69,000 for the years ended June 30, 2003 and 2002, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EARNINGS (LOSS) PER COMMON SHARE:
| | ---------------------------------

| | Basic earnings
(loss) per common share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted earnings (loss)
per common share includes the effect of all dilutive potential common shares
(primarily related to stock options), unless the effect is anti-dilutive. For
the years ended June 30, 2003 and 2002, there were no common stock equivalents
that would be considered dilutive (based on the treasury stock method). The
number of anti-dilutive shares at June 30, 2003 and 2002 is 2,700,000 and
4,505,823, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | CREDIT RISK AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
| | ------------------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-7

---

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

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

| | STOCK-BASED EMPLOYEE COMPENSATION:
| | ----------------------------------

| | The Company uses
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for employee stock options. Under the intrinsic
value method, compensation expense is recorded only to the extent that the
market price of the common stock exceeds the exercise price of the stock option
on the date of grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In December
2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 is an
amendment to SFAS No. 123 providing alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation and also requires additional disclosures about the method
of accounting for stock-based employee compensation. The amendments are
effective for financial statements for fiscal years ending after December 31,
2002 and for the interim periods beginning after December 15, 2002. The Company
adopted the annual disclosure provision of SFAS No. 148 during the year ended
June 30, 2003. The Company has currently chosen to not adopt the voluntary
change to the fair value based method of accounting for stock-based employee
compensation, pursuant to SFAS No. 148.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company has
adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no
compensation cost has been recognized with respect to stock options. Had
compensation cost for stock options been determined based on the fair value
methodology prescribed by SFAS 123, the Companys net income (loss) and
earnings (loss) per common share for the years ended June 30, 2003 and 2002
would have been reduced to the pro forma amounts indicated below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | 2003 |  | 2002
|----------------------------------------------- | ---- |  | ----
|Net income (loss)  as reported                 |      |  | $   
|Net income (loss)  pro forma                   |      |  | $   
|Earnings (loss) per share  basic  as reported |      |  | $   
|Earnings (loss) per share  basic  pro forma   |      |  | $   
|Stock based compensation  as reported          |      |  | $   
|Stock based compensation  pro forma            |      |  | $   

| | The
pro forma amounts may not be representative of the effects on reported net income (loss)
for future years. 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:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | 2003 |  | 2002
|----------------------- | ---- |  | ----
|Dividend yield          |      |  |     
|Volatility              |      |  |     
|Risk-free interest rate |      |  |     
|Expected lives          |      |  |     

| | The weighted
average fair value of options granted during the years ended June 30, 2003 and
2002 were $.00 and $.00, respectively, as no options were issued in either year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | OTHER ASSETS:
| | -------------

| | The Company has
other assets consisting primarily of a prepayment of rent on a new lease
agreement signed in February 2003. The majority of the prepayment was in the
form of 288,000 shares of common stock issued, as described in Note 6.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8

---

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

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

| | ESTIMATES AND ASSUMPTIONS:
| | --------------------------

| | The preparation
of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Significant
estimates include the lives of patent rights and leasehold improvements and
equipment. Actual results could differ from these estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FAIR VALUE OF FINANCIAL INSTRUMENTS:
| | ------------------------------------

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

| | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT:
| | -----------------------------------------

| | In June 2002,
the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 requires the recognition of a liability
for a cost associated with an exit or disposal activity when the liability is
incurred versus the date the Company commits to an exit plan. In addition, SFAS
No. 146 states the liability should be initially measured at fair value. The
requirements of SFAS No. 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have
a material effect on the Companys financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In October 2002,
the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. SFAS No. 147 is effective October 1, 2002. The adoption of
SFAS No. 147 did not have a material effect on the Companys financial
statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In April 2003,
the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, effective for contracts entered into
or modified after June 30, 2003. This amendment clarifies when a contract meets
the characteristics of a derivative, clarifies when a derivate contains a
financing component and amends certain other existing pronouncements. The
Company believes the adoption of SFAS No. 149 will not have a material effect on
the Companys financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In May 2003, the
FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 requires the classification as a
liability of any financial instruments with a mandatory redemption feature, an
obligation to repurchase equity shares, or a conditional obligation based on the
issuance of a variable number of its equity shares. The Company does not have
any authorized preferred shares or other financial instruments with a mandatory
redemption feature. The Company believes the adoption of SFAS No. 150 will not
have a material effect on the Companys financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In November
2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 clarifies the
requirements for a guarantors accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements for periods ending after December 15, 2002. The adoption of
FIN 45 did not impact the Companys financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9

---

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

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

| | In January 2003,
the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN No. 46 states that companies that have exposure to
the economic risks and potential rewards from another entitys assets and
activities have a controlling financial interest in a variable interest entity
and should consolidate the entity, despite the absence of clear control through
a voting equity interest. The consolidation requirements apply to all variable
interest entities created after January 31, 2003. For variable interest entities
that existed prior to February 1, 2003, the consolidation requirements are
effective for annual or interim periods beginning after June 15, 2003.
Disclosure of significant variable interest entities is required in all
financial statements issued after January 31, 2003, regardless of when the
variable interest was created. The adoption of FIN No. 46 did not have a
material impact on the Companys financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | RECLASSIFICATIONS:
| | ------------------

| | Certain accounts
in the prior year financial statements have been reclassified for comparative
purposes to conform with the presentation in the current period financial
statements. These reclassifications had no effect on net loss or
stockholders deficit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 losses. The Company may arrange for the sale of additional
shares of stock to obtain additional operating capital throughout the year and
intends to increase cash flows from operations. There can be no assurance the
Company will be able to obtain capital on acceptable terms.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 2. |  | Leasehold Improvements and Equipment:
|------- |  | -------------------------------------

|                                               | 2003 |  | 2002
|---------------------------------------------- | ---- |  | ----
|Office equipment and furniture                 |      |  | $   
|Leasehold improvements                         |      |  |     
|Production equipment                           |      |  |     
|                                               |      |  |     
|                                               |      |  |     
|Less accumulated depreciation and amortization |      |  |     
|                                               |      |  |     
|                                               |      |  | $   
|                                               |      |  |     

F-10

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KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

|Note 3. |  | Long-Term
Debt/Settlement of Payable Owed to Individual:
|------- |  | --------------------------------------------------------

|                                                    | 2003 |  | 2002
|--------------------------------------------------- | ---- |  | ----
|Note payable, bank payable on demand but no later   |      |  |     
|than December 19, 2003, including interest at       |      | 
|2.25%, collateralized by substantially all          |      | 
|assets and guaranteed by a Company stockholder      |      | 
|and secured by assets of a Company stockholder      |      |  | $   
|Payable to individual, see description below        |      |  |     
|Loan payable, payable in monthly principal and      |      | 
|interest installments of $1,922 including           |      | 
|interest at 10%, through February 2008,             |      | 
|collateralized by substantially all assets          |      | 
|and guaranteed by a Company stockholder             |      |  |     
|Note payable, payable in monthly principal and      |      | 
|interest installments of $965 including             |      | 
|interest at 15%, through March 2008, collateralized |      | 
|by substantially all assets and guaranteed by a     |      | 
|Company stockholder                                 |      |  |     
|Note payable, payable in monthly principal and      |      | 
|interest installments of $19,513 including interest |      | 
|at 10%, through December 2003, unsecured            |      |  |     
|                                                    |      |  |     
|Totals                                              |      |  |     
|Less: Current portion                               |      |  |     
|                                                    |      |  |     
|Long-term debt portion                              |      |  | $   
|                                                    |      |  |     

| | Future
maturities of long-term debt for years ending after June 30, 2003 are as
follows:
| | ----------------------------------------------------------------------------------------

|                     | Total
|-------------------- | -----
|Year Ending June 30: |      
|2004                 |      
|2005                 |      
|2006                 |      
|2007                 |      
|2008                 |      
|                     |      
|                     |      
|                     |      

| | The Company, on
October 17, 1995, purchased certain U.S. and Canadian patent rights as part of
an assignment agreement granted at a total price of twenty-five million French
francs. The agreement was collateralized by patent rights. The Company had not
made the required payments on this agreement as of June 30, 2002 and, as a
result, the entire amount due had been classified as a current liability. The
amount outstanding at June 30, 2002 was $2,246,414 and was included in current
portion of long-term debt.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In June 2001,
the Company entered an agreement in principle with the individual whereby the
individual would receive 1,000,000 French francs, 1,000,000 shares of Company
common stock, and a five year consulting agreement calling for monthly payments
of 58,333 French francs in exchange for a settlement of the payable related to
the October 1995 agreement and certain patent rights and other exclusive rights.
The Company believes the individual will not provide any bona fide services
pursuant to the agreement. In the prior years financial statements, this
debt restructuring was not recorded due to the individuals interest in
modifying certain terms of the new agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In fiscal 2003,
the Company hired a French lawyer in order to enforce the agreement in principle
that was signed in June 2001. Therefore, the Company recorded the debt
restructuring during the year ended June 30, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

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KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

|Note 3. |  | Long-Term Debt/Settlement of Payable Owed to Indiviudal (Continued):
|------- |  | --------------------------------------------------------------------

| | The
restructuring resulted in the forgiveness of indebtedness and accrued interest
payable to the individual that was accounted for as a troubled debt
restructuring. Accordingly, the Company recorded a gain of $1,191,176. The gain
relates to the following:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Original debt to the individual (including accrued   |  |  |   |           |  
|---------------------------------------------------- |  |  | - | --------- | -
|interest payable)                                    |  |  | $ | 2,246,414 |  
|Less the fair value of 1,000,000 shares of common    |  | 
|stock (valued at fair market value of $.40 on        |  | 
|June 30, 2003)                                       |  |  |   | (400,000  | )
|Less the 1,000,000 French francs (converted to US $) |  |  |   | (173,913  | )
|Less the present value of the five year consulting   |  | 
|agreement (converted to US $ and discounted to       |  | 
|present value using a rate of 10%)                   |  |  |   | (481,325  | )
|                                                     |  | 
|Settlement of Payable Owed to Individual             |  |  | $ | 1,191,176 |  
|                                                     |  | 

| | Since this
agreement is in the process of being enforced by the Company, it represents a
significant estimate made by management. There is a remote chance that a change
in the estimate will occur in the near term. Management feels that any changes
to the agreement would not be material to the financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 4. |  | Stockholders Deficit:
|------- |  | ----------------------

| | Preferred stock:
| | ----------------

| | The voting
powers and rights of the preferred stock are subject to approval and amendment
by the Board of Directors and will be described upon issuance. As of June 30,
2003 and 2002, no shares of preferred stock have been issued or are outstanding.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Warrants:
| | ---------

| | The Company has
issued warrants to purchase 50,000 shares of common stock at a purchase price of
$1.30 per share. The warrants expire on August 1, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | As part of the
conversion of subordinated convertible debentures, the Company issued 636,915
Class A warrants and 1,592,128 Class B warrants. These warrants contained
various anti-dilution rights which provide for proportionate adjustment of the
warrant purchase price in the event of: a) Any subdivision or combining of the
outstanding shares of Common Stock; b) Declaration of a dividend payable in
Common stock; or c) Issuance of securities at a price that is less than the
purchase price of the warrant in effect immediately prior to such issuance.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Class A
warrants allow the holder to purchase unrestricted shares of Company stock at a
purchase price of $1.75 per share. These warrants expired on September 1, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Class B
warrants allow the holder to purchase unrestricted shares of Company stock at a
purchase price of $2.25 per share. These warrants expired on September 1, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock incentive plan:
| | ---------------------

| | The Company
adopted a Stock Incentive Plan on April 7, 1997 which authorizes 1,000,000
shares for issuance of stock options and stock appreciation rights and expires
10 years from the effective date of the plan. In addition, the Company has
granted certain stock options outside of the plan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

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KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

|Note 4. |  | Stockholders Deficit (Continued):
|------- |  | ----------------------------------

| | Information
relating to stock options is as follows:
| | ----------------------------------------------------

|                                | 2003 |  | 2002
|------------------------------- | ---- |  | ----
|
|Under option, beginning of year |      |  |     
|Granted                         |      |  |     
|Expired                         |      |  |     
|                                |      |  |     
|Under option, end of year       |      |  |     
|                                |      |  |     
|Exercisable at end of year      |      |  |     
|                                |      |  |     

| | The range of
exercise prices at June 30, 2003 is from $.38 to $1.00 per share.
| | ------------------------------------------------------------------------------

|Note 5. |  | Related Party Transactions:
|------- |  | ---------------------------

| | The Company
incurred consulting fees of approximately $140,000 and $196,000 to two members
of the Board of Directors who are also stockholders of the Company for the years
ended June 30, 2003 and 2002, respectively. The Company owes these two
individuals $371,000 and $261,000 as of June 30, 2003 and 2002, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 6. |  | Commitments and Contingencies:
|------- |  | ------------------------------

| | The Company
leased office, warehouse and production space under a lease which called for
approximate monthly payments of $12,000 through January 2003. This lease
agreement expired in January 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In February
2003, the Company signed a new lease agreement through January 2013. This lease
agreement calls for the following monthly payments: years 1-3, $16,000; years
4-5, $18,667; years 6-7, $20,000; years 8-10, $21,353. In addition, the Company
issued the lessor 288,000 shares of common stock in each of the first three
years in lieu of paying real estate taxes and other rental expenses. The shares
of common stock issued in the first year were valued at $.50 per share at the
time the agreement was signed.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Combined rental
expense on the above operating leases was approximately $241,000 and $208,000
for the years ended June 30, 2003 and 2002, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company
leases various office equipment under operating leases. Rental expense on these
leases was approximately $19,000 for each of the years ended June 30, 2003 and
2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Minimum lease
payments at June 30, 2003 are as follows:
| | -------------------------------------------------------

|                     | Facility |  | Equipment |           | Total
|-------------------- | -------- |  | --------- | --------- | -----
|Year Ending June 30: |          |  |           |           |      
|2004                 |          |  | $         | 192,000   |      
|2005                 |          |  |           | 192,000   |      
|2006                 |          |  |           | 205,333   |      
|2007                 |          |  |           | 224,000   |      
|2008                 |          |  |           | 230,667   |      
|Thereafter           |          |  |           | 1,148,720 |      
|                     |          |  |           |           |      
|                     |          |  | $         | 2,192,720 |      
|                     |          |  |           |           |      

F-13

---

KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

|Note 6. |  | Commitments and Contingencies (Continued):
|------- |  | ------------------------------------------

| | In August 2002,
the Company signed a license and royalty agreement that allowed a third party
the exclusive right to use the Companys patents on certain applications
through June 30, 2007, with the potential to extend through June 2008, if the
third party ships in excess of the units stated in the agreement by June 2006.
The Company, in return, received $750,000 from this third party that is being
recognized into revenue ratably over the maximum term of exclusivity ending June
2008. In addition, the Company will receive royalties on each unit shipped in
excess of units stated in the agreement, along with an annual license fee of
$10,000 from the third party for each product line that incorporates the
patented technology.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 7. |  | Income Taxes:
|------- |  | -------------

| | The
Company has available net operating loss carryforwards of approximately $6,200,000 at
June 30, 2003 which will expire at various times from 2013 to 2022.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following is a summary of deferred taxes:
| | ---------------------------------------------

|                              | June 30
|----------------------------- | -------
|
|Deferred tax assets:          |        
|Operating loss carryforwards  |        
|Depreciation and amortization |        
|                              |        
|                              |        
|Valuation allowance           |        
|                              |        
|                              |        
|                              |        

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

|                       | 2003 |  | 2002
|---------------------- | ---- |  | ----
|Federal statutory rate |      |  |     
|State taxes            |      |  |     
|Other                  |      |  |     
|Valuation allowance    |      |  |     
|                       |      |  |     
|                       |      |  |     
|                       |      |  |     

| | Federal tax
rules impose limitations on the utilization of net loss carryforwards 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 8. |  | 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 approximate amounts of:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           | 2003 |  | 2002
|---------- | ---- |  | ----
|
|Customer A |      |  | $   
|Customer B |      |  |     
|Customer C |      |  |     
|Customer D |      |  |     

F-14

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KOLORFUSION INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Years Ended June 30, 2003 and 2002

|Note 9. |  | Subsequent Event:
|------- |  | -----------------

| | In 2001, the
Company reached a settlement agreement with a former employee of the Company.
Under the settlement, shares of stock were to be transferred to the Company from
the former employee. In 2004, the shares were transferred to a consultant in
exchange for cash and an immaterial amount of services. The cash consideration
was recognized into income in 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Note 10. |  | Restatement:
|-------- |  | ------------

| | The accompanying
financial statements for fiscal 2003 have been restated, per the SECs
request in January 2004, to recognize license revenue on a straight line basis
over the life of the agreement. The change relates to a license and royalty
agreement signed with a third party in August 2002. The Company had previously
recognized the entire $750,000 fee related to this agreement into revenue in
2003. The Company restated its financial statements to recognize revenue ratably
over the maximum term (August 2002 through June 2008) of the exclusivity
agreement. As reflected in the statement of operations, revenue and net income
decreased by $633,802, as a result of this adjustment. The $633,802 is included
in deferred revenue at June 30, 2003. In addition, earnings per share declined
$.03, as a result of this adjustment. The restatement did not impact the
Companys cash flow for any of the periods presented.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On the statement
of operations for the year ended June 30, 3003, the Company reclassified the
extraordinary income, related to the forgiveness of debt, as a separate line
item within other income(expense). All references to such an extraordinary item
were deleted throughout the 10KSB. This had no impact on the Companys net
income or cash flow for the period presented as a result of this change.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The following
tables represent the impact of the restatement of balances as reported, adjusted
and restated for all periods presented.
| | --------------------------------------------------------------------------------------------------------------------------------------

# Balance Sheet

|                                           | As of June 30, 2003
|------------------------------------------ | -------------------
|
|Total assets                               |                    
|                                           |                    
|Deferred revenue  current                 |                    
|                                           |                    
|Total current liabilities                  |                    
|Deferred revenue  LT                      |                    
|                                           |                    
|Total liabilities                          |                    
|Accumulated deficit                        |                    
|                                           |                    
|Total stockholders equity                 |                    
|                                           |                    
|Total liabilities and stockholders equity |                    
|                                           |                    

# Statement of Operations

|                             | For the year ended June 30, 2003
|---------------------------- | --------------------------------
|
|Sales                        |                                 
|License & royalty revenue    |                                 
|Cost of sales                |                                 
|S, G, & A                    |                                 
|Other income                 |                                 
|Settlement of payable        |                                 
|Interest expense             |                                 
|Extraordinary income         |                                 
|                             |                                 
|Net income                   |                                 
|                             |                                 
|Net income per common share: |                                 
|Basic and diluted            |                                 

F-15

---