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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission File Number: 0-28351
 KOLORFUSION INTERNATIONAL, INC.
  COLORADO
    
    84-1317836(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer Identification Number)
 nd  (Address and zip code of principal executive offices)
 (Registrants telephone number, including area code)
  þ o
 24,309,540 1,076,923




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PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Balance Sheets September 30, 2006 (Unaudited) and June 30, 2006
    
    
    1Statements of Operations Three month periods ended September 30, 2006 and 2005 (Unaudited)
    
    
    2Condensed Statements of Cash FlowsThree month periods ended September 30, 2006 and 2005 (Unaudited)
    
    
    3Selected Notes to Condensed Financial Statements (Unaudited)
    
    
    4-5Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    6Item 3
    
    Controls & ProceduresPART II
    
    OTHER INFORMATION
    
    
    7-9Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
 
   September 30,
    
    
    June 30,2006
    
    
    2006(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    110,130
    
    
    $
    139,424Trade accounts receivable, allowance for
doubtful accounts of $8,500 and $8,500, respectively
    
    
    92,200
    
    
    
    177,366Inventories
    
    
    253,782
    
    
    
    198,266Prepaid rent
    
    
    12,711Total current assets
    
    
    468,823
    
    
    
    515,056LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET
    
    
    108,627
    
    
    
    87,685OTHER ASSETS:Patents, less accumulated amortization of
$3,261,747 and $3,200,205, respectively
    
    
    430,783
    
    
    
    492,325Other
    
    
    102,599
    
    
    
    104,507Total Other Assets
    
    
    533,382
    
    
    
    596,832TOTAL ASSETS
    
    $
    1,110,832
    
    
    $
    1,199,573LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    80,969
    
    
    $
    175,665Deferred revenue
    
    
    264,101
    
    
    
    296,647Current portion of long-term debt
    
    
    373,395
    
    
    
    301,949Accrued expenses
    
    
    20,404
    
    
    
    13,600Accrued expenses due stockholders
    
    
    333,373
    
    
    
    333,373Total current liabilities
    
    
    1,072,242
    
    
    
    1,121,234LONG-TERM DEBT, net of current portion
    
    
    577,795
    
    
    
    563,148DEFFERRED REVENUE
    
    
    2,500
    
    
    
    Total Liabilities
    
    
    1,652,537
    
    
    
    1,684,382STOCKHOLDERS EQUITY (DEFICIT):Preferred stock, $.001 par value, 10,000,000 shares authorized, 1,076,923 shares issued and outstanding
    
    
    1,077
    
    
    
    1,077Common stock, $.001 par value, 100,000,000 shares authorized, 24,309,540 shares issued and outstanding
    
    
    24,310
    
    
    
    24,310Additional paid-in capital
    
    
    11,268,724
    
    
    
    11,266,894Accumulated deficit
    
    
    (11,835,816
    )
    
    
    (11,777,090
    )Total Stockholders deficit
    
    
    (541,705
    )
    
    
    (484,809
    )Total Liabilities and Stockholders deficit
    
    $
    1,110,832
    
    
    $
    1,199,573
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Three Months EndedSeptember 302006
    
    
    2005Revenues
    
    $
    455,968
    
    
    $
    489,787Cost of sales
    
    
    228,766
    
    
    
    229,024Gross Profit
    
    
    227,202
    
    
    
    260,763Selling, general and administrative expenses
    
    
    282,117
    
    
    
    300,702Operating income (loss)
    
    
    (54,915
    )
    
    
    (39,939
    )Other income (Expense)
    
    
    (3,811
    )
    
    
    (13,578
    )Income / (loss ) before income taxes
    
    
    (58,726
    )
    
    
    (53,517
    )Income taxesNet Income (loss)
    
    $
    (58,726
    )
    
    $
    (53,726
    )Net income (loss) per common share  basic
and diluted
    
    $
    0.00
    
    
    $
    0.00Weighted average outstanding shares  basic
and diluted
    
    
    24,309,540
    
    
    
    24,117,544
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2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net Income (loss)
    
    $
    (58,726
    )
    
    $
    (53,517
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Stock compensation
    
    
    
    
    
    
    1,830Depreciation and amortization
    
    
    64,568
    
    
    
    70,704Loss on disposal of leasehold improvements & equipment
    
    
    
    
    
    
    45,259Change in Operating Assets and LiabilitiesDecrease in trade accounts receivable
    
    
    85,166
    
    
    
    116,784(Increase) decrease prepaid rent
    
    
    (12,711
    )
    
    
    (Increase) decrease inventories
    
    
    (55,516
    )
    
    
    (18,570
    )Increase (decrease) in other assets
    
    
    1,908
    
    
    
    900Increase (decrease) in accounts payable
    
    
    (94,696
    )
    
    
    3,109(Decrease) in deferred revenue
    
    
    (30,046
    )
    
    
    (175,234
    )Increase in accrued expenses
    
    
    6,804
    
    
    
    5,438Net cash (used in) operating activities
    
    
    (46,160
    )
    
    
    (50,386
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of leasehold improvements and equipment
    
    
    (23,697
    )
    
    
    (17,338
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long-term debt
    
    
    50,000
    
    
    
    13,378Payments on long-term debt
    
    
    (9,437
    )
    
    
    (16,047
    )Net cash provided by (used in) financing activities
    
    
    40,563
    
    
    
    (2,671
    )Decrease in cash and cash equivalents
    
    
    (29,294
    )
    
    
    (70,394
    )Cash and cash equivalents:Beginning of period
    
    
    139,424
    
    
    
    152,093End of period
    
    $
    110,130
    
    
    $
    81,699SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Leasehold improvements & equipment financed with debt
    
    $
    45,530
    
    
    
    Cash payments for interest
    
    $
    3,811
    
    
    $
    13,695
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Three months endedSept. 30, 2005Net loss to common shareholders-as reported
    
    $
    (53,517
    )Less: Total stock-based employee compensation expense
Determined under fair value based method for all awards,
Net of related tax effects
    
    
    (1,825
    )Net loss pro forma
    
    $
    (55,342
    )Basic & diluted net loss per common share-as reported
    
    
    0.00Basic & diluted net loss per common share-pro-forma
    
    
    0.00
    WeightedAverageWeighted
    
    
    
    
    
    
    remainingaverage
    
    
    Aggregate
    
    
    contractualNumber
    
    
    exercise
    
    
    intrinsic
    
    
    termof options
    
    
    price
    
    
    value
    
    
    (years)Outstanding at June 30, 2006
    
    
    2,780,000
    
    
    $
    0.70Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    2,780,000
    
    
    $
    0.70
    
    
    $
    0.00
    
    
    
    4.91Exercisable at September 30, 2006
    
    
    2,630,000
    
    
    $
    0.68
    
    
    $
    0.00
    
    
    
    4.65
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September 30, 2006
    
    
    June 30, 2006(unaudited)
    
    
    (audited)Notes payable to related party, due dates expired and
extended on a month-to-month, plus interest at 12%
    
    $
    95,397
    
    
    $
    94,192Note payable to bank, payable on demand but no later
than July 12, 2007, including interest at
5.50% at September 30, 2006 collateralized by
substantially all assets and guaranteed by a Company
stockholder and officer
    
    
    200,000
    
    
    
    201,757Equipment loan payable to a company in monthly
installments of principal of $3,157 at 0% interest through
October 2007
    
    
    41,046
    
    
    
    Note payable to bank in monthly installments of principal
and interest of $3,000 at 10.25% interest through February
2008. This note is guaranteed by a Company stockholder
and officer
    
    
    47,399
    
    
    
    Note payable bank in monthly installments of principal
and interest of $558.46 at 9.75% interest through
September 2008, collateralized by specific equipment and
guaranteed by a Company stockholder
    
    
    12,110
    
    
    
    13,910Payable to individual-See detail below
    
    
    555,238
    
    
    
    555,238Totals
    
    $
    951,190
    
    
    $
    865,097Less: Current portion
    
    
    (373,395
    )
    
    
    (301,949
    )Long-term debt portion
    
    $
    577,795
    
    
    $
    563,148
  Note Payable to Individual
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
              8




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10




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PART II OTHER INFORMATION
            (a)
    
    Exhibits:
 31.1
    
    Certification of Chief Executive Officer pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).*31.2
    
    Certification of Chief Financial Officer pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).*32.1
    
    Certification of Chief Executive Officer pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a) as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a) as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 (b)
    
    No reports on Form 8-K were filed during the three months ended September 30, 2006.
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KOLORFUSION INTERNATIONAL, INC.Date: November  14, 2006
    By:
    /s/ Stephen NagelDirector, President  12




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ExhibitNo.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).32.1
    
    Certification of Chief Executive Officer pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a) as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to
Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a) as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   13