##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File Number: 0-28351
 KOLORFUSION INTERNATIONAL, INC.
  COLORADO
    
    84-1317836(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer Identification Number)
  
   
  x o
 24,309,540




---



##### 



PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Balance Sheets March 31, 2006 (Unaudited) and June 30, 2005
    
    
    1Statements of Operations Three and nine month periods ended March 31, 2006 and 2005 (Unaudited)
    
    
    2Condensed Statements of Cash Flows Nine month periods ended March 31, 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
    
    
    6-10Item 3.
    
    Controls & Procedures
    
    
    10PART II
    
    OTHER INFORMATION
    
    
    11Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906Preferred Stock Purchase Agreement




---



##### Table of Contents



FINANCIAL INFORMATION
 
 FINANCIAL STATEMENTS
  
  March 31,
    
    
    June 30,2006
    
    
    2005(Unaudited)
    
    
    (Audited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    630,865
    
    
    $
    152,093Trade accounts receivable, allowance for
doubtful accounts of $8,500 and $20,000, respectively
    
    
    58,174
    
    
    
    193,351Inventories
    
    
    314,625
    
    
    
    209,558Total current assets
    
    
    1,003,664
    
    
    
    555,002LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET
    
    
    109,000
    
    
    
    115,589OTHER ASSETS:Patents, less accumulated amortization of
$3,077,121 and $2,954,036, respectively
    
    
    553,867
    
    
    
    738,494Other
    
    
    106,401
    
    
    
    193,000660,268
    
    
    
    931,494$
    1,772,932
    
    
    $
    1,602,085LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    435,235
    
    
    $
    280,830Deferred revenue
    
    
    160,719
    
    
    
    448,843Current portion of long-term debt
    
    
    463,255
    
    
    
    792,752Accrued expenses
    
    
    32,178
    
    
    
    20,415Accrued expenses due stockholders
    
    
    333,373
    
    
    
    683,373Total current liabilities
    
    
    1,424,760
    
    
    
    2,226,213LONG-TERM DEBT, net of current portion
    
    
    38,269
    
    
    
    364,364DEFERRED REVENUE
    
    
    158,452
    
    
    
    253,939STOCKHOLDERS EQUITY (DEFICIT):Common stock, $.001 par value, 100,000,000 shares authorized,
24,309,540 and 24,117,544 shares issued and outstanding,
respectively
    
    
    24,313
    
    
    
    24,118Preferred stock, $.001 par value, 10,000,000 shares authorized,
1,076,923 and 0 shares issued and outstanding, respectively
    
    
    1,077Additional paid-in capital
    
    
    11,472,130
    
    
    
    10,218,163Accumulated deficit
    
    
    (11,346,069
    )
    
    
    (11,484,712
    )151,451
    
    
    
    (1,242,431
    )$
    1,772,932
    
    
    $
    1,602,085
  1




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedMarch 31
    
    
    March 312006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    317,557
    
    
    $
    283,076
    
    
    $
    1,347,605
    
    
    $
    1,604,113Cost of sales
    
    
    195,976
    
    
    
    145,516
    
    
    
    677,007
    
    
    
    971,199Gross Profit
    
    
    121,581
    
    
    
    137,560
    
    
    
    670.598
    
    
    
    632,914Selling, general and
administrative expenses
    
    
    274,225
    
    
    
    350,496
    
    
    
    843,826
    
    
    
    1,113,537Operating income (loss)
    
    
    (152,644
    )
    
    
    (212,936
    )
    
    
    (173,228
    )
    
    
    (480,623
    )Other income
    
    
    350,261
    
    
    
    3,155
    
    
    
    350,377
    
    
    
    7,761Interest Expense
    
    
    (13,208
    )
    
    
    (14,566
    )
    
    
    (38,503
    )
    
    
    (39,231
    )Income/(loss) before income
taxes
    
    $
    184,409
    
    
    
    ($224,347
    )
    
    $
    138,646
    
    
    
    ($512,093
    )Income taxes
Net income ( loss)
    
    $
    184,409
    
    
    
    ($224,347
    )
    
    $
    138,646
    
    
    
    ($512,093
    )Net income (loss) per common
share  basic and diluted
    
    $
    0.01
    
    
    
    ($0.01
    )
    
    $
    0.01
    
    
    
    ($0.01
    )Weighted average outstanding
shares  basic and diluted
    
    
    24,117,544
    
    
    
    23,925,544
    
    
    
    29,502,159
    
    
    
    23,844,877
  2




---



##### Table of Contents



2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net Income (loss)
    
    $
    138,646
    
    
    $
    (512,093
    )Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:Common stock issued to employee for services
    
    
    
    
    
    
    15,000Common stock issued for rent
    
    
    
    
    
    
    144,000Depreciation and amortization
    
    
    212,341
    
    
    
    209,329Forgiveness of accrued expenses due to stockholder
    
    
    (350,000
    )Change in Operating Assets and Liabilities(Increase) decrease in trade accounts receivable
    
    
    135,177
    
    
    
    167,648(Increase) decrease inventories
    
    
    (105,067
    )
    
    
    158,539Decrease in other assets
    
    
    84,000
    
    
    
    (125,730
    )Increase (decrease) in accounts payable
    
    
    154,404
    
    
    
    (127,031
    )Increase (decrease) in deferred revenue
    
    
    (383,611
    )
    
    
    126,580
    )Decrease in accrued expenses
    
    
    11,763
    
    
    
    (29,837
    )Increase in accrued expenses due stockholders
    
    
    
    
    
    
    76,500Net cash provided by (used in) operating activities
    
    
    (102,347
    )
    
    
    102,905CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of leasehold improvements and equipment
    
    
    (18,528
    )
    
    
    (6,607
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long-term debt
    
    
    
    
    
    
    50,000Payments on long-term debt
    
    
    
    
    
    
    (182,880
    )Net proceeds from preferred stock issuance
    
    
    599,647Net cash (used in) financing activities
    
    
    599,647
    
    
    
    (132,880
    )Increase (decrease) in cash and cash equivalents
    
    
    478,772
    
    
    
    (36,582
    )Cash and cash equivalents:Beginning of period
    
    
    152,093
    
    
    
    138,940End of period
    
    $
    630,865
    
    
    $
    102,358SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash payments for interest
    
    $
    36,319
    
    
    $
    39,231
  3




---



##### Table of Contents



Note 1.
    
    Condensed Financial Statements:
   Note 2.
    
    Earnings (Loss) per share:
  Note 3.
    
    Stock Based Compensation:
  4




---



##### Table of Contents



Note 4.
    
    Patents and Other Assets:
   Note 5.
    
    Debt:
   5




---



##### Table of Contents



st
 Note 6.
    
    Stockholders Deficit:
  Note 7.
    
    Companys Continued Existence:
  Note 8.
    
    Revenue:
  6




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      7




---



##### Table of Contents



8




---



##### Table of Contents



st
  9




---



##### Table of Contents



ITEM 3.
    
    CONTROLS & PROCEDURES
  10




---



##### Table of Contents



PART II OTHER INFORMATION
 ITEM 1.
    
    LEGAL PROCEEDINGS
  ITEM 2.
    
    CHANGES IN SECURITIES AND USE OF PROCEEDS
  ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5.
    
    OTHER INFORMATION
  ITEM 6.
    
    Exhibits and Reports on Form 8-K
 Exhibits:
 31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*33
    
    Preferred Stock Purchase Agreement March 31, 2006 and related documents, excluding documents on file with the SEC *
  
 *
    
    Filed herewith. 11




---



##### Table of Contents



KOLORFUSION INTERNATIONAL, INC.Date: May 22, 2006
    By:
    /s/ Stephen NagelDirector, President 12




---



##### Table of Contents



Exhibit No.
    
    Description31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*33
    
    Preferred Stock Purchase Agreement March 31, 2006 and related documents, excluding documents on file with the SEC *