**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 1934**


For
      the
      quarterly period ended March 31, 2006





**OR**





**o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(D) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**


For
      the
      Transition Period from ___________ to ___________





**Commission
      File Number: 333-116255**





**VIVID
      LEARNING SYSTEMS, INC.**


(Exact
      name of Registrant as specified in its charter)





**Delaware**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **42-1623500**
              (I.R.S.
                Employer Identification No.)





**723
      The Parkway**


**Richland,
      Washington 99352**


(Address
      of principal executive offices, including zip code)





**(509)
      943-5319**


(Registrant's
      telephone number, including area code)








Check
      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, and (2) has been subject to such filing requirements for the past 90
      days. Yes x No
**o**





The
      number of shares of the Registrant's common stock issued and outstanding at
      March 31, 2006, was 11,999,424.





Transitional
      Small Business Disclosure Format:  Yes
      **o**  No
x












**VIVID
      LEARNING SYSTEMS, INC.**


**MARCH
      31, 2006** **QUARTERLY REPORT ON FORM 10-QSB**





**TABLE
      OF CONTENTS**








**PAGE**Special
                Note Regarding Forward Looking Statements
            3**PART
                I**
              **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements
            4Item
                2.
            Management’s
                Discussion And Analysis
              Of
                Financial Condition And Results Of Operations
            18Item
                3
            Controls
                and Procedures
            24**PART
                II**
              **OTHER
                INFORMATION**Item
                6.
            Exhibits
            25




2





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





To
      the
      extent that the information presented in this Quarterly Report on Form 10-QSB
      for the quarter ended March 31, 2006, discusses financial projections,
      information or expectations about our products or markets, or otherwise makes
      statements about future events, such statements are forward-looking. We are
      making these forward-looking statements in reliance on the safe harbor
      provisions of the Private Securities Litigation Reform Act of 1995. Although
      we
      believe that the expectations reflected in these forward-looking statements
      are
      based on reasonable assumptions, there are a number of risks and uncertainties
      that could cause actual results to differ materially from such forward-looking
      statements. These risks and uncertainties are described, among other places
      in
      this Quarterly Report, in “Management’s Discussion And Analysis Of Financial
      Condition And Results Of Operations.”





In
      addition, we disclaim any obligations to update any forward-looking statements
      to reflect events or circumstances after the date of this Quarterly Report.
      When
      considering such forward-looking statements, you should keep in mind the risks
      referenced above and the other cautionary statements in this Quarterly
      Report.


3




**PART
      I - FINANCIAL INFORMATION**





**PAGE****ITEM
                1. FINANCIAL STATEMENTS**Consolidated
                Balance Sheets
            5Consolidated
                Statements of Income
            6Consolidated
                Statements of Cash Flows
            7Notes
                to Financial Statements
            8-17




4


INSERT
      BALANCE SHEET




VIVID
        LEARNING SYSTEMS, INC.


CONSOLIDATED
        BALANCE SHEETS
  31-Mar-06
                  (Unaudited)
              
              **30-Sep-05**ASSETSCURRENT
                  ASSETSCash
              
              $
              54,276
              
              $
              16,622Accounts
                  and contracts receivable
              
              
              670,125
              
              
              1,028,197Accounts
                  and contracts receivable, Fluor Hanford
              
              
              29,192
              
              
              81,272Prepaid
                  expenses
              
              
              131,102
              
              
              105,867Other
                  current assets
              
              
              128,807
              
              
              374,059TOTAL
                  CURRENT ASSETS
              
              
              1,013,502
              
              
              1,606,017PROPERTY,
                  PLANT AND EQUIPMENTProperty
                  and equipment
              
              
              1,288,779
              
              
              1,223,847Less:
                  Accumulated depreciation and amortization
              
              
              (847,781
              )
              
              (892,570
              )TOTAL
                  PROPERTY, PLANT AND EQUIPMENT
              
              
              440,998
              
              
              331,277OTHER
                  ASSETSSoftware,
                  net of amortization
              
              
              1,554,003
              
              
              1,654,305Intangibles,
                  net of amortization
              
              
              536,943
              
              
              537,943Goodwill
              
              
              375,000
              
              
              375,000Long-term
                  contracts receivable
              
              
              323,162
              
              
              368,542Deferred
                  tax asset
              
              
              519,494
              
              
              460,081TOTAL
                  OTHER ASSETS
              
              
              3,308,602
              
              
              3,395,871TOTAL
                  ASSETS
              
              $
              4,763,102
              
              $
              5,333,165LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              133,281
              
              $
              129,539Payable
                  to related party
              
              
              916,079
              
              
              1,000,000Accrued
                  contract labor
              
              
              117,030
              
              
              243,879Other
                  current liabilities
              
              
              54,308
              
              
              183,035Unearned
                  revenue
              
              
              19,436
              
              
              44,376Notes
                  payable, related parties
              
              
              75,000
              
              
              75,000Current
                  portion of long-term liabilities
              
              
              36,000
              
              
              36,000TOTAL
                  CURRENT LIABILITIES
              
              
              1,351,134
              
              
              1,711,829LONG-TERM
                  LIABILITIESRelated
                  party payable
              
              
              440,952
              
              
              1,753,145Other
                  long-term liabilities
              
              
              145,098
              
              
              -TOTAL
                  LONG-TERM LIABILITIES
              
              
              586,050
              
              
              1,753,145TOTAL
                  LIABILITIES
              
              
              1,937,184
              
              
              3,464,974COMMITMENTS
                  AND CONTINGENCIES
              
              
              –
              
              
              –STOCKHOLDERS'
                  EQUITYPreferred
                  stock, $0.0001 par value;5,000,000
                  shares authorized, no shares issued and outstanding
              
              
              –
              
              
              –Common
                  stock, $0.0001 par value;200,000,000
                  shares authorized, 11,999,424 and 10,247,996shares
                  issued and outstanding, respectively
              
              
              1,200
              
              
              1,025Additional
                  paid-in capital
              
              
              3,585,362
              
              
              2,512,061Accumulated
                  deficit
              
              
              (760,644
              )
              
              (644,895
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              2,825,918
              
              
              1,868,191TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              4,763,102
              
              $
              5,333,165–
              
              
              –





The
        accompanying condensed notes are an integral part of these interim financial
        statements.


5


INSERT
      INCOME STATEMENT


VIVID
        LEARNING SYSTEMS, INC.
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
  Three
                  Months Ended
              
              Six
                  Months EndedMarch
                    31, 2006(Unaudited)
              
              March
                    31, 2005(Unaudited)
              
              March
                    31, 2006(Unaudited)
              
              March
                    31, 2005(Unaudited)REVENUESTraining
                  subscriptions
              
              $
              428,298
              
              $
              517,523
              
              $
              1,038,905
              
              $
              1,149,335Training
                  subscriptions, Fluor Hanford
              
              
              140,504
              
              
              147,337
              
              
              283,993
              
              
              294,675Custom
                  products and services
              
              
              249,066
              
              
              300,730
              
              
              505,289
              
              
              640,404Custom
                  products and services, Fluor Hanford
              
              
              69,049
              
              
              44,958
              
              
              110,548
              
              
              53,822886,917
              
              
              1,010,548
              
              
              1,938,735
              
              
              2,138,236COST
                  OF REVENUESTraining
                  subscriptions
              
              
              77,828
              
              
              89,133
              
              
              156,944
              
              
              171,605Custom
                  products and services
              
              
              247,988
              
              
              286,051
              
              
              477,634
              
              
              602,767325,816
              
              
              375,184
              
              
              634,578
              
              
              774,372GROSS
                  PROFIT
              
              
              561,101
              
              
              635,364
              
              
              1,304,157
              
              
              1,363,864EXPENSESMarketing
                  and related labor expenses
              
              
              282,193
              
              
              253,264
              
              
              532,602
              
              
              490,508Bad
                  debt expense
              
              
              3,715
              
              
              1,702
              
              
              4,278
              
              
              6,066Reseller
                  commissions
              
              
              118,428
              
              
              63,750
              
              
              154,937
              
              
              172,932Depreciation
                  and amortization
              
              
              14,766
              
              
              17,773
              
              
              29,066
              
              
              37,111Wages
                  and contract labor
              
              
              180,970
              
              
              227,880
              
              
              330,530
              
              
              440,547Other
                  operating expenses
              
              
              183,536
              
              
              278,358
              
              
              421,314
              
              
              554,384TOTAL
                  OPERATING EXPENSES
              
              
              783,608
              
              
              842,727
              
              
              1,472,727
              
              
              1,701,548LOSS
                  FROM OPERATIONS
              
              
              (222,507
              )
              
              (207,363
              )
              
              (168,570
              )
              
              (337,684
              )OTHER
                  INCOME (EXPENSE)Gain
                  on sale of equipment and intangible assets
              
              
              –
              
              
              –
              
              
              30,276
              
              
              –Interest
                  income
              
              
              1,171
              
              
              161
              
              
              1,171
              
              
              431Interest
                  expense
              
              
              (20,643
              )
              
              (12,518
              )
              
              (38,254
              )
              
              (24,115
              )TOTAL
                  OTHER INCOME (EXPENSE)
              
              
              (19,472
              )
              
              (12,357
              )
              
              (6,807
              )
              
              (23,684
              )LOSS
                  BEFORE INCOME TAXES
              
              
              (241,979
              )
              
              (219,720
              )
              
              (175,377
              )
              
              (361,368
              )INCOME
                  TAX BENEFIT
              
              
              82,273
              
              
              74,705
              
              
              59,628
              
              
              122,865NET
                  INCOME (LOSS)
              
              $
              (159,706
              )
              $
              (145,015
              )
              $
              (115,749
              )
              $
              (238,503
              )BASIC
                  AND DILUTED NET LOSS PER SHARE
              
              $
              (0.01
              )
              $
              (0.01
              )
              $
              (0.01
              )
              $
              (0.02
              )BASIC
                  AND DILUTEDWEIGHTED
                  AVERAGE NUMBER OF SHARES
              
              
              11,997,299
              
              
              10,197,996
              
              
              11,280,521
              
              
              10,197,996





The
      accompanying condensed notes are an integral part of these interim financial
      statements.


6


INSERT
      CASH FLOW


VIVID
        LEARNING SYSTEMS, INC.


CONSOLIDATED
        STATEMENTS OF CASH FLOWS
  **Six
                  Months Ended**
              ********
              ****
              **March
                    31,****2006**
                  **(Unaudited)**
              
              **March
                    31,****2005**
                  **(Unaudited)**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (115,749
              )
              $
              (238,503
              )Adjustments
                  to reconcile net income (loss)to
                  net cash provided by operating activities:Depreciation
                  and amortization
              
              
              29,066
              
              
              37,111Amortization
                  of capitalized software
              
              
              138,631
              
              
              147,289Bad
                  debt expenses
              
              
              4,278
              
              
              6,066Gain
                  on sale of assets
              
              
              (30,276
              )Changes
                  in deferred tax assets and liabilities
              
              
              (59,413
              )
              
              –Common
                  stock and options issued for services
              
              
              –
              
              
              20,910Changes
                  in assets and liabilities:Accounts
                  and contracts receivable
              
              
              410,152
              
              
              864,851Prepaid
                  expenses
              
              
              (13,746
              )
              
              (12,451
              )Other
                  current assets
              
              
              245,252
              
              
              (222,547
              )Accounts
                  payable
              
              
              3,742
              
              
              (15,253
              )Accrued
                  payroll and related expenses
              
              
              (126,849
              )
              
              37,001Related
                  party payables, net of line of credit
              
              
              –
              
              
              117,238Long-term
                  receivable contracts
              
              
              58,586
              
              
              (441,042
              )Other
                  current liabilities
              
              
              (153,667
              )
              
              (107,363
              )Net
                  cash provided by operating activities
              
              
              390,007
              
              
              193,307CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of property, equipment and intangible assets
              
              
              (10,890
              )
              
              (147,940
              )Acquisition
                  of software
              
              
              (38,328
              )
              
              (197,450
              )Net
                  cash used by investing activities
              
              
              (49,218
              )
              
              (345,390
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from stock issuances
              
              
              531
              
              
              –Payments
                  on notes payable, related party
              
              
              (219,745
              )
              
              (125,000
              )Payments
                  on line of credit
              
              
              (83,921
              )Proceeds
                  from related party line of credit
              
              
              –
              
              
              227,975Net
                  cash provided (used) by financing activities
              
              
              (303,135
              )
              
              102,975Net
                  increase (decrease) in cash
              
              
              37,654
              
              
              (49,108
              )Cash
                  at beginning of period
              
              
              16,622
              
              
              49,451Cash
                  at end of period
              
              $
              54,276
              
              $
              343SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid
              
              $
              38,254
              
              $
              24,115Income
                  taxes paid
              
              $
              –
              
              $
              –NON-CASH
                  TRANSACTIONS:Common
                  stock and options issued for services
              
              $
              –
              
              $
              20,910Common
                  stock issued for related party debt
              
              $
              1,092,448
              
              $
              –Note
                  receivable for sale of equipment and intangible assets
              
              $
              45,000
              
              $
              –Capital
                  lease for equipment
              
              $
              46,483Leasehold
                  improvements financed
              
              $
              100,000





The
      accompanying condensed notes are an integral part of these interim financial
      statements.


7


**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**







**NOTE
      1 - BUSINESS ORGANIZATION**





Nature
      of Operations


Vivid
      Learning Systems, Inc. (hereinafter “Vivid Washington”) was incorporated in 1995
      in the State of Washington under the name of Applied Tec *Knowledge* y,
      and
      was shortly thereafter renamed Vivid Concepts, Inc. Prior to December 23, 2003,
      Vivid Washington was a wholly owned subsidiary of Nuvotec, Inc., a technology
      commercialization corporation based in Washington State. On December 23, 2003,
      Nuvotec, Inc., exchanged all of its 7,000,000 common stock shares in Vivid
      Washington for 8,100,000 shares of common stock with a par value of $0.0001
      in a
      newly formed Delaware corporation also named Vivid Learning Systems, Inc. The
      Delaware company (“Company” or “Vivid Delaware”) serves as the holding company
      and parent and sole shareholder of the operating entity (“Vivid Washington”).
      The common stock of the Delaware company was held 100% by Nuvotec, Inc., until
      an additional 1,987,996 of the Company’s common stock was issued in a private
      placement to approximately seventy individual shareholders at September 30,
      2004. Vivid Washington develops and provides computer-based training products
      and services, which are marketed nationally. The reorganization caused no change
      in the accounting in the financial statements of Vivid Washington as Vivid
      Washington continues to be the operating company and the financial information
      provided is the historical financial information of Vivid Washington. Vivid
      Delaware and its subsidiaries have a year end of September 30.





Basis
      of Presentation


The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      information and the instructions to Form 10-QSB and Rule 10-01 of Regulation
      S-X. Accordingly, they do not include all of the information and footnotes
      required by accounting principles generally accepted in the United States for
      complete financial statements. In the opinion of management, all adjustments
      (consisting of normal recurring adjustments) considered necessary for a fair
      presentation of interim results have been included. Operating results for the
      six months ended March 31, 2006 are not necessarily indicative of the results
      that may be expected for the fiscal year ending September 30, 2006. For further
      information, refer to the Company’s consolidated audited financial statements
      and footnotes thereto.





Certain
      prior year amounts may have been reclassified to conform to the current period’s
      presentation.





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





This
      summary of significant accounting policies is presented to assist in
      understanding the financial statements. The financial statements and notes
      are
      representations of the Company’s management, which is responsible for their
      integrity and objectivity. These accounting policies conform to accounting
      principles generally accepted in the United States and have been consistently
      applied in the preparation of the financial statements.


8


**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**







Accounting
      Methods and Consolidation


The
      Company’s financial statements are prepared using the accrual method of
      accounting.





The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries, after elimination of inter-company accounts and
      transactions. The wholly owned subsidiaries of the Company are Vivid Washington,
      Inc., and ImageWorks Media Group, Inc.





Earnings
      Per Share


The
      Company has adopted Statement of Financial Accounting Standards No. 128, which
      provides for the calculation of “basic” and “diluted” earnings per share. Basic
      earnings per share includes no dilution and is computed by dividing net income
      available to common shareholders by the weighted average common shares
      outstanding for the period. Diluted earnings per share reflect the potential
      dilution of securities that could share in the earnings of an entity. There
      are
      615,400 common stock equivalents outstanding at March 31, 2006.





Management
      Services Provided by Nuvotec


In
      Vivid’s consolidated statements of income, “other operating expenses” contains
      amounts that represent allocations from Nuvotec of central overhead expenses,
      including rent, director fees, central office overhead expense accounts, legal
      and contracts, finance (including accounting and reporting, receivables and
      collection activities, payables and cash management, budgeting, etc.), executive
      and administrative expenses that are applied to the Vivid operation. Most of
      the
      allocated expenses represent labor related costs.





Provision
      for Taxes


The
      current tax provision represents the federal income tax which the Company would
      have incurred on a separate, stand-alone basis. The Company receives the benefit
      of losses resulting from the federal income tax returns filed on a consolidated
      basis by its majority shareholder, Nuvotec, Inc. The consolidated tax returns
      are filed on a calendar year basis.





Income
      taxes are provided based upon the liability method of accounting pursuant to
      Statement of Financial Accounting Standards No. 109, “Accounting for Income
      Taxes.” Under this approach, deferred income taxes are recorded to reflect the
      tax consequences in future years of differences between the tax basis of assets
      and liabilities and their financial reporting amounts at each year end. A
      valuation allowance is recorded against deferred tax assets if management does
      not believe the Company has met the “more likely than not” standard imposed by
      Statement of Financial Accounting Standard No. 109 to allow recognition of
      such
      an asset.


9


**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**





Recent
      Accounting Pronouncements


In
      May
      2005, the Financial Accounting Standards Board issued Statement of Financial
      Accounting Standards (“SFAS No. 154”), “Accounting Changes and Error
      Corrections,” which replaces Accounting Principles Board Opinion No. 20,
“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim
      Financial Statements -- An Amendment of APB Opinion No. 28”. SFAS No. 154
      provides guidance on accounting for and reporting changes in accounting
      principle and error corrections. SFAS No. 154 requires that changes in
      accounting principle be applied retrospectively to prior period financial
      statements and is effective for fiscal years beginning after December 15, 2005.
      The Company does not expect SFAS No. 154 to have a material impact on our
      consolidated financial position, results of operations, or cash
      flows.





In
      March
      2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations.”
FIN 47 clarifies that the term “conditional asset retirement obligation,” which
      as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers
      to a legal obligation to perform an asset retirement activity in which the
      timing and (or) method of settlement are conditional on a future event that
      may
      or may not be within the control of the entity. The entity must record a
      liability for a “conditional” asset retirement obligation if the fair value of
      the obligation can be reasonably estimated. FIN 47 also clarifies when an entity
      would have sufficient information to reasonably estimate the fair value of
      an
      asset retirement obligation. FIN 47 is effective no later than the end of fiscal
      years ending after December 15, 2005. Management believes the adoption of this
      statement will not have an immediate material impact on the financial statements
      of the Company.





Reseller
      Commissions


Reseller
      commissions are recorded as an expense if the cumulative affirmative impact
      of indicators of gross revenue reporting, as outlined in EITF
      99-19, Indicators 7-14, are met by the Company in the
      transaction. **** The
      Company pays each of the channel partners a commission, or a referral fee,
      recorded as a selling expense, strictly on a success basis as a result of
      selling the Company’s products and services to third party customers. The
      Company has contractual arrangements with each of these partners that range
      from
      one to two years. The Company pays these partners a referral fee, or a
      commission, of between five and fifty percent of net revenue depending upon
      their annual sales levels and other criteria.





None
      of
      these U.S.-based contracts is exclusive, or restricts the Company from selling
      directly or through other channel partners into any markets. The Company does
      have one contract in place with a European reseller that is country-specific,
      exclusive, and has a duration of two years. Such expenses paid to resellers
      are
      recorded as a reduction to the underlying selling price if the cumulative
      affirmative impact of indicators of net revenue reporting, as outlined in EITF
      99-19, Indicators 15-17 are present in the transaction. The Company does not
      provide any consideration to end-users other than negotiated price discounts
      for
      subscriptions based on the size of the contract. Contract size is defined by
      the
      number of employees (seats), number of lessons and length of the
      contract.


10





**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**





The
      Company renewed effective July 1, 2004 for two additional years, a material
      reseller agreement with Element K of Rochester, New York.





Software
      Development Costs


Costs
      incurred for the internal development of software products and enhancements,
      after technological feasibility has been established for the related product,
      are capitalized and stated at the lower of cost or net realizable value.
      Amortization is provided based on the greater of the amount computed using
      (a)
      the ratio that current gross revenues for a product bears to the total of
      current and anticipated future gross revenues for that product, or (b) the
      straight-line method over the remaining estimated economic life of the product,
      not to exceed five years.





Production
      costs incurred subsequent to the establishment of technological feasibility
      are
      capitalized. Also capitalized are the component costs incurred associated with
      the development of product templates in accordance with Statement of Financial
      Accounting Standards No. 86, which consist primarily of labor related costs.
      As
      revenue generation commences on specific training content, additional costs
      incurred are classified as maintenance expense, or customer marketing expense,
      in the period they are incurred. Hours expended via time sheets, and costs
      incurred by production personnel on lesson content development on a per lesson
      basis are maintained so that cost efficiency in software content development
      can
      be analyzed on a lesson content by lesson content basis. Net realizable value
      is
      determined by comparing the unamortized cost of each developed software lesson
      content and the remaining available market (quantified by dollars) for that
      content in the industry in which Vivid is selling the content. The unamortized
      software development cost is then aggregated by lesson content and a grand
      total
      is compared to the total remaining available aggregate market for the content
      to
      determine if a write-down is required. The Company’s amortization method assumes
      that sales of the Company’s existing software products will continue for at
      least the ensuing five years. For the three months ended March 31, 2006 and
      2005, $68,249 and $74,484 of amortization expense were recorded, respectively.





Software
      development costs consist of the following at the dates shown:





**March
                31**
              **2006,**
            ****
            **September
                30,**
              **2005**Software
                development costs
            
            $
            3,412,013
            
            $
            $3,367,614Accumulated
                amortization
            
            
            (1,858,010
            )
            
            (1,713,309
            )$
            1,554,003
            
            $
            $1,654,305





In
      November 2003, the Company purchased software and related materials from
      FoodSafety.com, Inc. for $230,000, which is included in software on the balance
      sheet.


11


**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**







The
      amount charged to amortization expense for the six months ending March 31,
      2006
      was $138,631. The amount charged to amortization expense for the six months
      ending March 31, 2005 was $147,289. The amount of software costs written down
      to
      net realizable value was zero during the six months ended March 31, 2006 and
      2005, respectively.





Use
      of
      Estimates


The
      process of preparing financial statements in conformity with accounting
      principles generally accepted in the United States of America requires the
      use
      of estimates and assumptions regarding certain types of assets, liabilities,
      revenues, and expenses. Such estimates primarily relate to unsettled
      transactions and events as of the date of the financial statements. Accordingly,
      upon settlement, actual results may differ from estimated amounts.





Revenue
      and Cost Recognition


The
      Company’s revenues are recognized at the time of shipment of products or
      performance of the contracted services. The Company sells its products and
      services both directly, using in-house sales employees, and indirectly, using
      channel sales partners. Channel sales partners are classified as independent
      resellers, value-added resellers, industry consultants and industry
      associations. Cost of goods is primarily made up of labor costs associated
      with
      software development and training.





The
      Company’s sales contracts are primarily on a fixed unit rate basis, with
      underlying hourly billing rates negotiated with the customer. The contract
      revenues are earned as hours are expended and reimbursable costs are
      incurred.





Training
      revenues are recognized at the time of shipment of products or performance
      of
      contracted services. Products are shipped FOB shipping point and title passes
      upon shipment. Training contracts may contain elements of both custom contract
      work (contracted services) and subscription arrangements (delivery of training
      products). Training subscription revenues are recorded when collection of the
      subscription is highly probable and no significant Company obligations remain
      after the product has been delivered. The Company defers revenue recognition
      on
      training contracts related to payments received during the current period for
      the portion of the subscription contract that extends into future periods.
      At
      March 31, 2006 and September 30, 2005, no subscription contracts were paid
      in
      advance. In accordance with EITF 01-14, the Company’s reimbursable costs are
      recorded as gross revenue, with the actual costs recorded as a direct
      cost.





The
      Company’s internet sales are less than 0.5% of total revenue. Such internet
      transactions are recorded as training subscriptions and training is delivered
      via the hosted web sites of Vivid. The revenue is recorded when the training
      is
      delivered, when evidence of a persuasive arrangement exists, and when collection
      is reasonably assured.


12


**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**







The
      Company does not offer warranties or returns.





Royalty
      expenses


Reseller
      commissions or royalty payments are recorded as an expense if the Company bears
      the primary responsibility for the fulfillment of the underlying customer’s
      order and for the acceptance by the customer of the training services sold.
      Such
      costs paid to resellers are recorded as a reduction to the underlying selling
      price if the reseller is the primary obligor to the customer in the
      transaction.





**NOTE
      3 - RELATED PARTY TRANSACTIONS**





The
      Company was awarded a three-year contract renewal with a minimum value of
      $1,622,609 with Fluor Hanford, Inc., a Nuvotec, Inc. shareholder, for the period
      from October 2005 to September 30, 2008. The Company provides computer-based
      training monthly for the employees of Fluor Hanford, Inc. and its contractors.
      The accounts receivable due from Fluor Hanford at March 31, 2006 and September
      30, 2005, was $29,192 and $81,272 respectively. Revenue from Fluor Hanford
      for
      the six months ended March 31, 2006 and 2005 was $394,541 and $348,497,
      respectively.





At
      March
      31, 2006 and September 30, 2005 the recorded current related party payable
      consisted of $916,079 and $1,000,000, respectively, of borrowing from Nuvotec,
      Inc.’s line of credit and current amounts due to the former owners of ImageWorks
      of $75,000 in cash or stock. The long-term related party payable at March 31,
      2006 and September 30, 2005, consists of borrowing from Nuvotec of $90,952
      and
      $1,364,145, respectively, and amounts due to the former owners of ImageWorks
      of
      $350,000 and $389,000 respectively.





The
      total
      amount payable by Vivid on Nuvotec’s line of credit at March 31, 2006 and
      September 30, 2005 was $916,079 and $1,000,000, respectively. The portion of
      drawing on the line of credit attributed to Nuvotec as of March 31, 2006 and
      September 30, 2005 was $83,921 and $0, respectively, leaving $0 available for
      use by either company at March 31, 2006.





**NOTE
      4 - STOCKHOLDERS’ EQUITY**





Common
      Stock


During
      the six months ended March 31, 2006 the Company converted $1,092,448 in related
      party long-term debt due to Nuvotec, USA, Inc., into 1,749,303 shares of common
      stock. In addition, 2,125 shares were issued when stock options were exercised
      at $0.25 per share.





Preferred
      Stock


The
      Company has authorized 5,000,000 shares of $0.0001 par value preferred stock,
      which may be issued in one or more series. The Company’s board of directors is
      also authorized to determine or alter the rights, preferences, privileges and
      restrictions granted to or imposed upon any series of preferred
      stock . At
      March
      31, 2006 and September 30, 2005, no preferred stock has been issued by the
      Company.


13





**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**







**NOTE
      5 - STOCK-BASED COMPENSATION**





During
      2004, the Company issued to executives a total of 866,334 common stock options,
      exercisable at $0.25 per share for four years and vesting at a rate of 25%
      per
      year. No expense was recorded at September 30, 2004 because none of the options
      were vested and the benefit period began October 1, 2004.





During
      the year ended September 30, 2005, 318,792 options vested which had been issued
      in 2004, and have a fair value of $25,503.


During
      the year ended September 30, 2005, additional options totaling 87,500 were
      issued of which 21,875 have vested and have a fair value of $3,937. Also during
      the year ended September 30, 2005, 50,000 options were exercised and 399,500
      options originally issued in 2004 expired or were terminated.





The
      fair
      value of each option granted is estimated on the grant date using the
      Black-Scholes Option Price Calculation. The following assumptions were made
      in
      estimating the fair value: risk-free interest is 4%, volatility is 0.3, and
      expected life is 3 to 4 years.





The
      following is a summary of stock option activity:





Equity
                compensation plans approved by shareholders
            
            Number
                of shares to be issued upon exercise of outstanding
                options
            
            Weighted-average
                exercise price of outstanding options
            
            Number
                of shares remaining available for future issuance under equity
                compensation plans2003
                Stock Option Plan
            
            
            527,584
            
            $
            0.25
            
            
            1,822,416Total
            
            
            527,584
            
            
            
            
            
            1,822,416





Number
                  of
                Shares
              
              Weighted
                Average
                  Exercise
                PriceOutstanding
                  at October 1, 2004
              
              
              866,334
              
              $
              0.24Granted
              
              
              87,500
              
              
              0.25Exercised
              
              
              (50,000
              )
              
              0.10Expired
                  or terminated
              
              
              (399,500
              )
              
              0.25Outstanding
                  at September 30, 2005
              
              
              504,334
              
              $
              0.25Options
                  exercisable at September 30, 2005
              
              
              138,584
              
              $
              0.25Outstanding
                  at October 1, 2005
              
              
              504,334
              
              $
              0.25Granted
              
              
              132,816
              
              
              0.70Exercised
              
              
              (2,125
              )
              
              0.25Expired
                  or terminated
              
              
              (19,625
              )
              
              0.25Outstanding
                  at March 31, 2006
              
              
              615,400
              
              $
              0.30Options
                  exercisable at March 31, 2006
              
              
              204,523
              
              $
              0.34





14


**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**





**NOTE
      6** - **ECONOMIC
      DEPENDENCY**





The
      Company provides services in Washington State to a dozen large corporate
      contractors within the framework of a diverse set of programs and tasks. Most
      of
      the funding for these services originates from the Department of Energy/ Federal
      Government. During the six months ended March 31, 2006 and 2005, services
      provided to these contractors aggregated $477,000 and $342,106, representing
      25%
      and 16% of total revenue, respectively. At March 31, 2006 and 2005, amounts
      due
      from these contractors are included in accounts receivable in the amounts of
      $38,289 and $11,019, respectively.





The
      Company’s concentration risks for customer accounts receivable and revenues
      greater than 10% of the total account balances for the respective periods are
      as
      follows:





**Six
                Months Ending March 31, 2006**
            ****
            **Six
                Months Ending March 31, 2005**Revenues—Fluor
              Hanford
            
            $
            394,541
            
            $
            348,497Accounts
                Receivable
              Fluor
                Hanford
            
            $
            29,192
            
            $
            5,522








**NOTE
      7 - COMMITMENTS AND CONTINGENCIES**





Commitments


The
      Company is obligated, under separate agreements, to make royalty payments based
      on varying percentages (8% to 25%) of cash collections from the sale of specific
      software applications. For the six months ending March 31, 2006 and 2005, the
      Company incurred $23,475 and $12,882 in royalty obligations, respectively,
      which
      are recorded in marketing expense. At March 31, 2006 and September 30, 2005,
      the
      Company accrued $0 and $11,720, respectively, in royalty obligations which
      are
      recorded in other current liabilities on the balance sheet.


15


**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**





**NOTE
      8 -** **SEGMENT
      INFORMATION**





The
      Company adopted Statement of Financial Accounting Standards No. 131,
      "Disclosures about Segments of an Enterprise and Related Information,"
      (hereinafter “SFAS No. 131”) **** during
      the year ended September 30, 2002. SFAS No. 131 established standards for
      reporting information about operating segments in annual financial statements
      and requires selected information about operating segments in interim financial
      reports issued to stockholders. It also established standards for related
      disclosures about products and services and geographic areas. Operating segments
      are defined as components of an enterprise about which separate financial
      information is available, evaluated regularly by the chief operating decision
      makers, or a decision making group, in deciding how to allocate resources and
      in
      assessing performance. The Company has two operating segments at March 31,
      2006
      and 2005: corporate training subscriptions and custom products and
      services.





Segment
      information (after inter-company eliminations) for the six months ended March
      31, 2006 and 2005 are as follows:





March
                31,
              2006
            
            March
                31,
              2005Revenues:Training
                subscriptions
            
            $
            1,322,898
            
            $
            1,444,010Custom
                products and services
            
            
            615,837
            
            
            694,226Total
                revenues
            
            $
            1,938,735
            
            $
            2,138,236Income
                (loss) before taxes:Training
                subscriptions
            
            $
            1,165,954
            
            $
            1,272,405Custom
                products and services
            
            
            138,204
            
            
            91,459Corporate
            
            
            (1,479,535
            )
            
            (1,725,232
            )Total
                income (loss) before taxes
            
            $
            (175,377
            )
            $
            (361,368
            )Identifiable
                assets:Training
                subscriptions
            
            $
            –
            
            $
            –Custom
                products and services
            
            
            211,630
            
            
            155,803Corporate
            
            
            4,551,472
            
            
            5,430,633Total
                identifiable assets
            
            $
            4,763,102
            
            $
            5,586,436Depreciation
                and amortization:Training
                subscriptions
            
            $
            138,631
            
            $
            147,289Custom
                products and services
            
            
            6,105
            
            
            10,152Corporate
            
            
            22,961
            
            
            26,959Total
                depreciation and amortization
            
            $
            167,697
            
            $
            184,400








16


**VIVID
      LEARNING SYSTEMS, INC.**


**CONDENSED
      NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**


**March
      31, 2006**





Separate
      management of each segment is required because each business unit is subject
      to
      different marketing, production, and technology strategies.





Training
      subscriptions, the first reportable segment, derives revenues from the sale
      of
      computer-based safety training products and services throughout the United
      States. Custom products and services which is the second reportable segment,
      derives its revenue from custom products and services designed specifically
      for
      the end user.





**NOTE
      9 -**  **SALE
      OF PROTRAIN ASSETS**





Effective
      October 1, 2005, the assets of Protrain, a division of the Company, including
      computers, equipment and a customer list were sold to a former employee for
      a
      $45,000 note payable to the Company over three years commencing January 1,
      2006
      with payments of $1,349 monthly including interest at 5% per annum. The Company
      recognized a gain on this transaction of $30,276.





**NOTE
      10** - **CONVERSION
      OF RELATED PARTY DEBT**





During
      the three months ended December 31, 2005, the Company converted $1,092,448
      in
      related party long-term debt due to Nuvotec, USA, Inc., into 1,749,303 shares
      of
      common stock.





**NOTE
      11 - INCOME TAXES**





During
      the six months ended March 31, 2006, the Company realized a loss before income
      taxes of $175,377. As a result, the Company has recognized $59,628 of federal
      income tax benefit, calculated at a rate of approximately 34%, and an increase
      in its deferred tax asset for this same amount.


17





**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





**Results
      of Operations:**





**RESULTS
      OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THREE MONTHS
      ENDED MARCH 31, 2005**





**Revenues:**





Overall
      revenues decreased 12% to $886,917 in the second quarter of fiscal year 2006
      from $1,010,548 in the second quarter of fiscal year 2005. The decrease was
      mainly due to the reduction in revenues attributable to training subscriptions
      of $96,058 during the second quarter of fiscal 2006.





Training
      subscription revenues decreased by 14% to $568,802 in the second quarter of
      fiscal year 2006 from $664,860 in the second quarter of fiscal year 2005 because
      of a modest decrease in subscription based customer sales in the comparison
      of
      the two quarters.





Custom
      products and services revenues decreased overall by 8% to $318,115 in the second
      quarter of fiscal year 2006 from $345,688 in the second quarter of fiscal year
      2005. The decrease is mainly attributable to a reduction of non-federal custom
      work revenues. Custom products and services revenues within the federal sector
      and subsidiary, ImageWorks, increased during the second quarter of fiscal year
      2006 by 13% to $260,916 from $230,679 in the second quarter of fiscal year
      2005
      because of an increase in custom revenue earned from contracted federal custom
      work on the Hanford Site in Richland, WA from the Department of Energy and
      their
      subcontractors and increased commercial custom work by ImageWorks.





**Operating
      Expenses**





Cost
      of
      Revenues:





Overall,
      cost of revenues decreased by 13% to $325,816 in the second quarter of fiscal
      year 2006 from $375,184 in the second quarter of fiscal year 2005. The decrease
      is due to lower revenues and higher margins achieved on custom products and
      services revenues in comparing the second quarter of fiscal 2006 to the second
      quarter of fiscal year 2005. Much of the proportionate decrease in the costs
      associated with custom products and services revenue in the second quarter
      of
      fiscal year 2006 is attributable to non-federal custom work. The gross profit
      margin achieved on total revenues was level at 63% in comparing the second
      quarter of fiscal year 2006 to the second quarter of fiscal year
      2005.





Training
      subscription cost of revenues decreased by 13% to $77,828 in the second quarter
      of fiscal year 2006 from $89,133 in the second quarter of fiscal year 2005.
      This
      decrease is due to a reduction in costs associated with decreased training
      subscription revenues in comparing the two quarters. The gross profit margin
      achieved on training subscription revenues was level at 86% in comparing the
      second quarter of fiscal year 2006 compared to the second quarter of fiscal
      year
      2005.


18


Custom
      products and services cost of revenues decreased by 13% to $247,988 in the
      second quarter of fiscal year 2006 from $286,051 in the second quarter of fiscal
      year 2005. The decrease is mainly due to the reduction in costs attributable
      to
      revenues generated by non-federal customers combined with slightly higher gross
      profit margins achieved by the ImageWorks operation during the second quarter
      of
      fiscal year 2006.





Marketing/Reseller
      Commissions:





Marketing
      and reseller commission expenses increased by 26% to $400,621 in the second
      quarter of fiscal year 2006 from $317,014 in the second quarter of fiscal year
      2005. The increase is mainly attributable to an 86% increase in commissions
      paid
      to resellers to $118,428 in the second quarter of fiscal year 2006 from $63,750
      in the second quarter of fiscal year 2005. The increase in commissions paid
      to
      resellers is the result of an increase in training subscription sales through
      reseller channels in the second quarter of fiscal year 2006. A secondary reason
      for the increase in marketing and reseller commission expenses is the increased
      internal investment made during second quarter of fiscal year 2006 in marketing
      related labor expenses.





Depreciation
      and Amortization:





Depreciation
      and amortization decreased by 17% to $14,766 in the second quarter of fiscal
      year 2006 from $17,773 in the second quarter of fiscal year 2005 due to an
      increase in fully depreciated assets in comparing the two quarters.





General
      and Administrative Expenses:





General
      and Administrative expenses decreased by 28% to $368,221 in the second quarter
      of fiscal year 2006 from $507,940 in the second quarter of fiscal year 2005.
      The
      significant expense categories of decrease in comparing the second quarters
      of
      fiscal year 2006 to 2005 are the costs of labor, professional fees, and
      licenses, The labor decrease ($180,970 in the second quarter of fiscal year
      2006
      compared to $227,880 in the second quarter of fiscal year 2005) is due to
      management and staff reductions to align the infrastructure of the Company
      with
      revenues. The decrease in professional fees ($36,421 in the second quarter
      of
      fiscal year 2006 compared to $71,903 in the second quarter of fiscal year 2005)
      is the result of the absence of non-recurring costs of outside counsel related
      to regulatory reporting incurred in the prior year. Licenses, fees and permits
      decrease ($825 in the second quarter of fiscal year 2006 compared to $32,332
      in
      the second quarter of fiscal year 2005) is attributable to lower franchise
      taxes/fees incurred.





**Income
      from Operations**





Income
      from Operations decreased by $15,144 to ($222,507) in the second quarter of
      fiscal year 2006 from ($207,363) in the second quarter of fiscal year 2005.
      Principally, the decrease is due to reductions in revenues partially offset
      by
      decreases in cost of revenues and administrative expenses in the comparison
      of
      the two quarters.


19


**Other
      Income (Expense)**





The
      main
      increase in other expenses is attributable to the increase in interest expense
      resulting from rising interest rates on outstanding debt in the second quarter
      of fiscal year 2006 compared to 2005. Interest expense on debt was $20,643
      in
      the quarter ended March 31, 2006 compared to $12,518 in the quarter ended March
      31, 2005.




**Net
      Income (Loss)**





The
      operation sustained a net loss of $159,706 in the second quarter of fiscal
      year
      2006 compared to a loss of $145,015 in the second quarter of fiscal year 2005.
      The increase in net loss of $14,691 is due mainly to reductions in revenues
      partially offset by decreases in cost of revenues and administrative expenses,
      and an increase in income tax benefits.





**Seasonality
      and Other Factors Affecting Quarterly Results**





The
      revenues of the Company may fluctuate during the holiday season of the year.
      Training subscription revenues are typically higher in December because many
      subscription renewals occur at the end of each calendar year. We expect
      quarterly fluctuations in operating results as a result of many factors
      including acquisitions and roll-out of new product offerings. The operating
      results for any quarter are not necessarily indicative of the results for any
      future period.





**Liquidity
      and Capital Resources**





Cash
      flows provided by operating activities amounted to $120,889 in the second
      quarter of fiscal year 2006 compared to $132,229 in the same period of fiscal
      year 2005. The main reason for the slight decrease is attributable to the
      reduction in accounts and contracts receivable offset by reductions in accounts
      payable, accrued payroll and related expenses, and other current liabilities.





Cash
      flows used in investing activities decreased $233,355 to $22,935 in the second
      quarter of fiscal year 2006 from $256,290 in the second quarter of fiscal year
      2005. The decrease is attributable to lower expenditures related to the
      acquisition of software and internally developed software.





Cash
      flows provided by financing activities decreased by $187,585 to ($149,681)
      in
      the second quarter of fiscal year 2006 compared to $37,904 in the second quarter
      of fiscal year 2005. The decrease is attributable to payments on notes payable,
      related parties, including the line of credit, partially offset by proceeds
      from
      long-term financing.


20





**RESULTS
      OF OPERATIONS - SIX MONTHS ENDED MARCH 31, 2006 COMPARED WITH SIX MONTHS ENDED
      MARCH 31, 2005**





**Revenues:**





Overall
      revenues decreased 9% to $1,938,735 in the six months year to date of fiscal
      year 2006 from $2,138,236 in the six months year to date of fiscal year 2005.
      The decrease was mainly due to a reduction in revenues attributable to training
      subscriptions of $121,112 and custom products revenues from our subsidiary,
      ImageWorks Media Group, Inc. (“ImageWorks”) of $82,680 during the six months
      year to date of fiscal 2006 as compared to the same period in fiscal
      2005.





Training
      subscription revenues decreased by 8% to $1,322,898 in the six months year
      to
      date of fiscal year 2006 from $1,444,010 in the six months year to date of
      fiscal year 2005 because of a decrease in new subscription based sales in the
      comparison of the year to date totals of the two fiscal years.





Custom
      products and services revenues decreased by 11% to $615,837 in the six months
      year to date of fiscal year 2006 from $694,226 in the six months year to date
      of
      fiscal year 2005. The decrease is mainly attributable to a year to date
      reduction in ImageWorks revenues. Overall ImageWorks revenues decreased 29%
      to
      $197,725 in the six months year to date of fiscal year 2006 from $280,405 in
      the
      six months year to date of fiscal year 2005. Custom products and services
      revenues within the federal sector increased by 105% to $110,548 in the six
      months year to date of fiscal year 2006 from $53,822 in the six months year
      to
      date of fiscal year 2005.





**Operating
      Expenses**





Cost
      of
      Revenues:





Overall,
      cost of revenues decreased by 18% to $634,578 in the six months year to date
      of
      fiscal year 2006 from $774,372 in the six months year to date of fiscal year
      2005. The decrease is directly related to an overall reduction in costs related
      to custom products and services revenues and an increase in the gross profit
      percentage realized by that business segment. The gross profit margin achieved
      on total revenues improved to 67% in comparing the six months year to date
      of
      fiscal year 2006 to 64% achieved in the six months year to date of fiscal year
      2005.





Training
      subscription cost of revenues decreased by 9% to $156,944 in the six months
      year
      to date of fiscal year 2006 from $171,605 in the six months ended March 31,
      2005. This decrease is directly related to costs associated with the reduction
      in training subscription revenues generated during the six months year to date
      of fiscal year 2006 compared to fiscal year 2005. The gross profit margin
      realized was identical at 88% in the comparison of the two reporting periods
      for
      this business segment.





Custom
      products and services cost of revenues decreased by 21% to $477,634 in the
      six
      months year to date of fiscal year 2006 from $602,767 in the six months ended
      March 31, 2005. The decrease is directly related to costs associated with the
      reduction in revenues generated by this business segment combined with an
      increase in operating efficiencies. The gross profit percentage realized from
      this business segment of 22% in the six months year to date of fiscal year
      2006
      compared to 13% in the six months year to date of fiscal year
      2005.


21


Marketing/Reseller
      Commissions:





Marketing
      and reseller commission expenses increased by 4% to $687,539 in the six months
      year to date of fiscal year 2006 from $663,440 in the six months year to date
      of
      fiscal year 2005. The increase is mainly attributable to increased labor related
      expenses offset by reductions in reseller commissions, consulting, travel and
      internal sales commissions. Increased labor related expenses ($325,565 in the
      six months year to date of fiscal year 2006 compared to $259,501 in the six
      months year to date of fiscal year 2005) are as a result of an increasing
      internal investment to more efficiently manage our various industry segments.





Depreciation
      and Amortization:





Depreciation
      and amortization decreased by 22% to $29,066 in the six months to date of fiscal
      year 2006 from $37,111 in the comparable period of fiscal year 2005 due to
      an
      increase in fully depreciated assets in comparing the two quarters.





General
      and Administrative Expenses:





General
      and Administrative expenses decreased by 24% to $756,122 in the six months
      year
      to date of fiscal year 2006 from $1,000,997 in the six months year to date
      of
      fiscal year 2005. The significant expense categories of decrease in comparing
      the six months year to date of fiscal year 2006 to 2005 are the costs of labor
      and an overall reduction in infrastructure general and administrative expenses.
      The labor decrease ($330,530 in the six month year to date of fiscal year 2006
      compared to $440,547 in the same period of fiscal year 2005) is due to
      management and staff reductions to align the infrastructure of the Company.
      The
      overall reduction in infrastructure general and administrative expenses
      ($425,592 in the six months year to date of fiscal year 2006 compared to
      $560,450 in the same period of fiscal year 2005) is the result of overhead
      efficiencies achieved.





**Income
      from Operations**





Income
      from Operations increased by $169,114 to ($168,570) in the six months year
      to
      date of fiscal year 2006 from ($337,684) in the six months year to date of
      fiscal year 2005. Principally, the increase is due to decreases in cost of
      revenues and the realization of cost efficiencies in administrative expenses
      in
      the comparison of the two six month year to date fiscal year reporting periods.





**Other
      Income (Expense)**





The
      main
      increase in other income is attributable to the gain of $30,276 realized in
      the
      sale of Protrain assets, partially offset by an increase attributable to
      interest expense resulting from rising interest rates on debt in the six months
      year to date of fiscal year 2006 compared to 2005. Interest expense on debt
      was
      $38,254 in the six months year to date of fiscal year 2006 compared to $24,115
      in the six months year to date of fiscal year 2005,


22




**Net
      Income (Loss)**





The
      operation sustained a net loss of $115,749 in the six months year to date of
      fiscal year 2006 compared to a net loss of $238,503 in the six months year
      to
      date of fiscal year 2005. The increase in net income of $122,754 is due mainly
      to reductions in infrastructure expenses to align more directly with revenues
      and the resulting federal income tax benefits.





**Liquidity
      and Capital Resources**





Historically,
      the Company has financed its cash flow requirements through the management
      of
      its line of credit and cash generated from operations. As of March 31, 2006,
      the
      Company had cash and cash equivalents of $54,276 as compared to $16,622 as
      of
      September 30, 2005.





Cash
      flows provided by operating activities amounted to $390,007 in the six months
      year to date of fiscal year 2006 compared to $193,307 in the same period of
      fiscal year 2005. The main reasons for the increase are attributable to an
      increase in net income generated by the operation of $122,754 and a decrease
      in
      other current assets of $467,799 partially offset by decreases in accrued
      payroll related expenses, related party payables, and other current liabilities
      of $327,392 in the comparison of the same period of the two fiscal years.





Cash
      flows used in investing activities decreased by $296,172 to $49,218 in the
      six
      months year to date of fiscal year 2006 from $345,390 in the same period of
      fiscal year 2005. The decrease is attributable to lower expenditures related
      to
      the acquisition of software and internally developed software.





Cash
      flows and non-cash transactions provided by financing activities increased
      by
      $856,911 to $980,796 in the six months year to date of fiscal year 2006 compared
      to $123,885 in the same period of fiscal year 2005. The increase is attributable
      to the conversion of related party debt into additional paid in capital,
      proceeds from long-term financing, and notes receivable for asset sales,
      partially offset by payments on notes payable, related parties, including the
      line of credit.





The
      Company believes that equity/debt financing together with cash generated by
      operations are required to achieve market objectives in terms of timeliness
      into
      the market and market share. If cash generated from operations is insufficient
      to satisfy our liquidity requirements and the Company is unable to raise needed
      equity/debt funds on acceptable terms or at all the Company may not be able
      to
      develop or enhance its products, take advantage of future opportunities, or
      respond to competitive pressures.


23


**ITEM
      3. CONTROLS AND PROCEDURES**





Our
      Chief
      Executive Officer and Chief Financial Officer evaluated the effectiveness of
      our
      disclosure controls and procedures (as defined in Rule 13a-14(c) under the
      Securities Exchange Act of 1934) as of the end of the three month period ended
      March 31, 2006. Based on this evaluation, our Chief Executive Officer and Chief
      Financial Officer have concluded that our controls and procedures are effective
      in providing reasonable assurance that the information required to be disclosed
      in this report is accurate and complete and has been recorded, processed,
      summarized and reported within the time period required for the filing of this
      report. Subsequent to the date of this evaluation, there have not been any
      significant changes in our internal controls or, to our knowledge, in other
      factors that could significantly affect our internal controls.


24


**PART
      II - OTHER INFORMATION**





**ITEM
      6.****EXHIBITS.**





(a)  Exhibits





The
      following exhibits are filed as a part of this report on Form 10-QSB:





**Exhibit
                No.**
            **Description**31.1
            Rule
                13(a)-14(a)/15(d)-14(a) Certification of Chief Executive
                Officer31.2
            Rule
                13(a)-14(a)/15(d)-14(a) Certification of Chief Financial
                Officer32.1
            Rule
                1350 Certification of Chief Executive Officer32.2
            Rule
                1350 Certification of Chief Financial
                Officer


25


**SIGNATURES**




Pursuant
      to the requirements of the Exchange Act, the registrant caused this report
      to be
      signed on its behalf by the undersigned, thereunto duly authorized.




Dated:
              May 12, 2006
            Vivid
                Learning Systems, Inc.By:
            /s/ Christopher
              L. BrittonChristopher
                L. Britton
              Chief
                Executive Officer