**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 June 30, 2007





**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.)





**5728
      Bedford Street**


**Pasco,
      WA 99301**


(Address
      of principal executive offices, including zip code)





**(509)
      545-1800**


(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
      August 13, 2007, was 13,372,203.





Transitional
      Small Business Disclosure Format:  Yes o  No
x











**VIVID
      LEARNING SYSTEMS, INC.**


**JUNE
      30, 2007** **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 AnalysisOf
                  Financial Condition And Results Of Operations
              20Item
                  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 June 30, 2007, 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
            8-19


4




**VIVID
                  LEARNING SYSTEMS, INC. CONSOLIDATED BALANCE
                  SHEETS**30-Jun-07(Unaudited)
              
              30-Sep-06ASSETSCURRENT
                  ASSETSCash
              
              $
              181,923
              
              $
              166,645Accounts
                  and contracts receivable
              
              
              947,396
              
              
              700,115Accounts
                  and contracts receivable, Fluor Hanford
              
              
              21,636
              
              
              27,077Prepaid
                  expenses
              
              
              104,785
              
              
              119,110Other
                  current assets
              
              
              171,737
              
              
              219,795TOTAL
                  CURRENT ASSETS
              
              
              1,427,477
              
              
              1,232,742PROPERTY,
                  PLANT AND EQUIPMENTProperty
                  and equipment
              
              
              1,439,954
              
              
              1,318,651Less:
                  Accumulated depreciation and amortization
              
              
              (956,270
              )
              
              (862,828
              )TOTAL
                  PROPERTY, PLANT AND EQUIPMENT
              
              
              483,684
              
              
              455,823OTHER
                  ASSETSSoftware,
                  net of amortization
              
              
              1,362,669
              
              
              1,485,038Intangibles,
                  net of amortization
              
              
              292,614
              
              
              436,943Goodwill
              
              
              375,000
              
              
              375,000Long-term
                  contracts receivable
              
              
              125,382
              
              
              244,375Deferred
                  tax asset
              
              
              665,236
              
              
              505,867TOTAL
                  OTHER ASSETS
              
              
              2,820,901
              
              
              3,047,223TOTAL
                  ASSETS
              
              $
              4,732,062
              
              $
              4,735,788LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              266,387
              
              $
              94,049Payable
                  to related party
              
              
              -
              
              
              670,702Accrued
                  contract labor
              
              
              242,166
              
              
              160,300Other
                  current liabilities
              
              
              64,111
              
              
              63,136Unearned
                  revenue
              
              
              122,808
              
              
              20,355Notes
                  payable, related parties
              
              
              75,000
              
              
              111,853Current
                  portion of long-term liabilities
              
              
              79,823
              
              
              25,795TOTAL
                  CURRENT LIABILITIES
              
              
              850,295
              
              
              1,146,190LONG-TERM
                  LIABILITIESLong-term
                  debt
              
              
              196,108
              
              
              162,579Related
                  party payable
              
              
              275,000
              
              
              422,325Other
                  long-term liabilities
              
              
              125,880
              
              
              122,096TOTAL
                  LONG-TERM LIABILITIES
              
              
              596,988
              
              
              707,000TOTAL
                  LIABILITIES
              
              
              1,447,283
              
              
              1,853,190COMMITMENTS
                  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, 13,372,203 and 12,030,674shares
                  issued and outstanding, respectively
              
              
              1,337
              
              
              1,203Additional
                  paid-in capital
              
              
              4,384,475
              
              
              3,673,311Accumulated
                  deficit
              
              
              (1,101,033
              )
              
              (791,916
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              3,284,779
              
              
              2,882,598TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              4,732,062
              
              $
              4,735,788


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




5


**VIVID
                  LEARNING SYSTEMS, INC.****CONSOLIDATED
                  STATEMENTS OF OPERATIONS**Three
                  Months Ended
              
              Nine
                  Months EndedJune
                  30, 2007
              
              June
                  30, 2006
              
              June
                  30, 2007
              
              June
                  30, 2006(Unaudited)
              
              (Unaudited)
              
              (Unaudited)
              
              (Unaudited)REVENUESTraining
                  subscriptions
              
              $
              502,829
              
              $
              439,258
              
              $
              1,883,818
              
              $
              1,478,163Training
                  subscriptions, Fluor Hanford
              
              
              144,938
              
              
              140,505
              
              
              425,478
              
              
              424,498Custom
                  products and services
              
              
              719,093
              
              
              352,833
              
              
              1,684,241
              
              
              858,121Custom
                  products and services, Fluor Hanford
              
              
              133,334
              
              
              57,422
              
              
              415,305
              
              
              167,9701,500,194
              
              
              990,018
              
              
              4,408,842
              
              
              2,928,752COST
                  OF REVENUESTraining
                  subscriptions
              
              
              184,369
              
              
              147,244
              
              
              506,875
              
              
              433,267Custom
                  products and services
              
              
              445,691
              
              
              179,437
              
              
              1,240,280
              
              
              527,993630,060
              
              
              326,681
              
              
              1,747,155
              
              
              961,260GROSS
                  PROFIT
              
              
              870,134
              
              
              663,337
              
              
              2,661,687
              
              
              1,967,492EXPENSESMarketing
                  and related labor expenses
              
              
              376,865
              
              
              290,250
              
              
              1,121,770
              
              
              822,852Bad
                  debt expense
              
              
              1,231
              
              
              7,834
              
              
              11,908
              
              
              12,111Reseller
                  commissions
              
              
              57,554
              
              
              59,161
              
              
              247,808
              
              
              214,098Depreciation
                  and amortization
              
              
              134,429
              
              
              17,246
              
              
              242,330
              
              
              46,312Wages
                  and contract labor
              
              
              258,619
              
              
              145,550
              
              
              665,818
              
              
              476,078Other
                  operating expenses
              
              
              228,999
              
              
              196,773
              
              
              803,814
              
              
              618,089TOTAL
                  OPERATING EXPENSES
              
              
              1,057,697
              
              
              716,814
              
              
              3,093,448
              
              
              2,189,540LOSS
                  FROM OPERATIONS
              
              
              (187,563
              )
              
              (53,477
              )
              
              (431,761
              )
              
              (222,048
              )OTHER
                  INCOME (EXPENSE)Gain
                  on sale of equipment and intangible assets
              
              
              -
              
              
              106
              
              
              901
              
              
              30,382Interest
                  income
              
              
              342
              
              
              444
              
              
              1,008
              
              
              1,615Interest
                  expense
              
              
              (10,438
              )
              
              (24,617
              )
              
              (38,634
              )
              
              (62,872
              )TOTAL
                  OTHER INCOME (EXPENSE)
              
              
              (10,096
              )
              
              (24,067
              )
              
              (36,725
              )
              
              (30,875
              )LOSS
                  BEFORE INCOME TAXES
              
              
              (197,659
              )
              
              (77,544
              )
              
              (468,486
              )
              
              (252,923
              )INCOME
                  TAX BENEFIT
              
              
              67,288
              
              
              26,365
              
              
              159,369
              
              
              85,993NET
                  LOSS
              
              $
              (130,371
              )
              $
              (51,179
              )
              $
              (309,117
              )
              $
              (166,930
              )BASIC
                  AND DILUTED NET LOSS PER SHARE
              
              $
              (0.01
              )
              $
              -
              
              $
              (0.02
              )
              $
              (0.01
              )BASIC
                  AND DILUTEDWEIGHTED
                  AVERAGE NUMBER OF SHARES
              
              
              13,372,203
              
              
              11,997,299
              
              
              13,224,779
              
              
              11,280,521


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




6




**VIVID
                  LEARNING SYSTEMS, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**Nine
                  Months EndedJune
                  30,
              
              June
                  30,2007
              
              2006(Unaudited)
              
              (Unaudited)CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (309,117
              )
              $
              (166,930
              )Adjustments
                  to reconcile net income (loss)to
                  net cash provided by operating activities:Depreciation
                  and amortization
              
              
              242,330
              
              
              46,312Amortization
                  of capitalized software
              
              
              206,172
              
              
              204,963Bad
                  debt expenses
              
              
              11,908
              
              
              12,111Gain
                  on sale of assets
              
              
              -
              
              
              (30,276
              )Changes
                  in deferred tax assets and liabilities
              
              
              (159,369
              )
              
              (85,778
              )Common
                  stock and options issued for services
              
              
              40,565
              
              
              20,000Changes
                  in assets and liabilities:Accounts
                  and contracts receivable
              
              
              (30,285
              )
              
              389,750Prepaid
                  expenses
              
              
              39,914
              
              
              19,102Other
                  current assets
              
              
              52,639
              
              
              216,999Accounts
                  payable
              
              
              145,148
              
              
              (9,106
              )Accrued
                  payroll and related expenses
              
              
              (85,551
              )
              
              (147,197
              )Long-term
                  receivable contracts
              
              
              118,993
              
              
              84,162Other
                  current liabilities
              
              
              (2,792
              )
              
              (180,248
              )Unearned
                  revenue
              
              
              102,453
              
              
              -Net
                  cash provided by operating activities
              
              
              373,008
              
              
              373,864CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of property, equipment and intangible assets
              
              
              (44,651
              )
              
              (14,336
              )Acquisition
                  of software
              
              
              (95,302
              )
              
              (71,800
              )Net
                  cash used by investing activities
              
              
              (139,953
              )
              
              (86,136
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from stock issuances
              
              
              -
              
              
              8,343Stock
                  options exercised for common stock
              
              
              31
              
              
              -Payments
                  on notes payable, related party
              
              
              (147,368
              )
              
              (220,297
              )Payments
                  on line of credit
              
              
              -
              
              
              (74,721
              )Payments
                  on long-term debt
              
              
              (36,779
              )
              
              (8,282
              )Payments
                  on other long-term liabilities
              
              
              (33,661
              )
              
              -Net
                  cash provided (used) by financing activities
              
              
              (217,777
              )
              
              (294,957
              )Net
                  increase (decrease) in cash
              
              
              15,278
              
              
              (7,229
              )Cash
                  at beginning of period
              
              
              166,645
              
              
              16,622Cash
                  at end of period
              
              $
              181,923
              
              $
              9,393SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid
              
              $
              38,634
              
              $
              62,872Income
                  taxes paid
              
              $
              -
              
              $
              -NON-CASH
                  TRANSACTIONS:Common
                  stock and options issued for services
              
              $
              -
              
              $
              20,000Common
                  stock issued for related party debt
              
              $
              670,702
              
              $
              1,092,448Note
                  receivable from sale of equipment and intangible assets
              
              $
              -
              
              $
              45,000Acquisition
                  of fixed assets via capital leases
              
              $
              45,014
              
              $
              46,483Leasehold
                  improvements financed
              
              $
              -
              
              $
              100,000
  The
        accompanying condensed notes are an integral part of these financial
        statements.
  7


**VIVID
        LEARNING SYSTEMS, INC.**
 **CONDENSED
        NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **JUNE
        30, 2007**




**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 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”). An additional 1,987,996 shares 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. Vivid Delaware and its subsidiaries have a year
      end of September 30.





Effective
      October 1, 2006, the Company entered into an asset purchase agreement with
      its
      parent, Nuvotec USA, Inc. for the purchase of the assets and line of business
      of
      its Engineering and Technical Services (“ETS”) business unit. In satisfaction of
      the purchase price, Vivid Learning Systems, Inc. assumed all outstanding
      liabilities of ETS and recorded an inter-company related party liability. (See
      Note 10.)





Nuvotec
  USA, Inc. (Nuvotec) prior to June 13, 2007 held approximately eighty-three percent
  (83%) of the Company. On June 13, 2007 Nuvotec closed on an acquisition transaction
  wherein one of the conditions to closing was that the shares of the Company
  were to be distributed on a pro-rata basis to the Nuvotec shareholders according
  to the Agreement and Plan of Distribution. The shares in the capital stock of
  the Company held by Nuvotec were distributed to approximately 300 individuals.
  The effective date of the transaction, June 13, 2007, resulted in the change
  of control of the Company. No individual who received the distribution from
  Nuvotec was given a controlling interest in the Company. There was no consideration
  as this was a Nuvotec shareholder tax-free distribution.





**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. These unaudited interim financial statements
      should be read in conjunction with the audited financial statements for the
      period ended September 30, 2006. 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
      nine months ended June 30, 2007 are not necessarily indicative of the results
      that may be expected for the fiscal year ending September 30, 2007. For further
      information, refer to the Company’s consolidated audited financial statements at
      September 30, 2006 and footnotes thereto.




8


**VIVID
        LEARNING SYSTEMS, INC.**
 **CONDENSED
        NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **JUNE
        30, 2007**




**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.





**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 and ImageWorks Media Group, Inc.




**Earnings
      Per Share**




The
      Company has adopted Statement of Financial Accounting Standards No. 128, which
      provides for calculation of "basic" and "diluted" earnings per share. Basic
      earnings per share for Vivid includes no dilution and is computed by dividing
      net income (loss) available to common shareholders by the weighted average
      common shares outstanding for the period.





**Guarantees
      and Line of Credit**




In
      November 2002, the Financial Accounting Standards Board issued FASB
      Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
      Guarantees, including Indirect Guarantees of Indebtedness of Others”
(hereinafter “FIN 45” or the “Interpretation”. FIN 45 expands the disclosure
      requirements to be made by a guarantor in its interim and annual financial
      statements about its obligations under certain guarantees that it has issued.
      The Interpretation also clarifies that a guarantor is required to recognize,
      at
      the inception of a guarantee, a liability for the fair value of the obligation
      undertaken in issuing the guarantee. Certain guarantees, including (i) an
      original lessee’s guarantee of the lease payments when the lessee remains
      secondarily liable in conjunction with being relieved from being the primary
      obligor and (ii) a parent’s guarantee of a subsidiary’s debt to a third party,
      and a subsidiary’s guarantee of debt owed to a third party by either its parent
      or another subsidiary of that parent, are excluded from the provisions related
      to liability recognition. These guarantees, however, are subject to the
      disclosure requirements of the Interpretation. The Company has adopted the
      disclosure requirements of FIN 45. Although there is a line of credit in place
      at September 30, 2006 which was executed by Nuvotec, Vivid’s major shareholder,
      the Company, as a subsidiary guaranteeing this debt which is owed to a third
      party, in fact has a guarantee which is excluded from the disclosure
      requirements of the Interpretation, and is not required to be recognized as
      a
      liability for the guarantee. The guarantee was released effective June 13,
      2007
      upon the distribution of the major shareholder’s controlling interest in the
      Company.




9


**VIVID
        LEARNING SYSTEMS, INC.**
 **CONDENSED
        NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **JUNE
        30, 2007**




**Management
      Services Provided by Nuvotec**




In
      Vivid’s consolidated statements of income, “Other Operating Expenses” contains
      amounts that represent allocations of central overhead expenses, including
      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. The
      majority of the allocated expenses represent labor related costs applied to
      the
      Vivid operation. All identifiable direct costs of administration are booked
      directly to the Vivid operation. Detailed time charges are accounted for daily
      by all personnel, including Nuvotec central administrative personnel with time
      charged to Vivid tasks.





**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 former majority shareholder, Nuvotec USA, Inc.





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.




**Reclassifications**




Certain
      prior year amounts in the accompanying financial statements have been
      reclassified to conform to the fiscal 2007 presentation. The reclassifications
      have no effect on net assets, net revenues, or net earnings.





**Reseller
      Commissions and Royalty Expenses**




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 of
      between five and fifty percent of net revenue depending upon their annual sales
      levels and other criteria, which is 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.




10


**VIVID
        LEARNING SYSTEMS, INC.**
 **CONDENSED
        NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **JUNE
        30, 2007**




Expenses
      paid to resellers are recorded as a reduction of 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 the resellers’ 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.





Royalty
      payments are recorded as an expense if the ownership of the training content
      does not reside with the Company.





**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 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 lesson
      content by lesson content basis. Net realizable value of each course is
      determined by comparing the unamortized cost of each developed software course
      and the remaining available market (quantified by dollars) for that content
      in
      the industry in which Vivid is selling the content. This unamortized software
      development cost is then aggregated by course and a grand total is compared
      to
      the total remaining available aggregate market for the content to determine
      if a
      write-down is required.





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





June
                30, 2007
            
            September
                30, 2006Software
                development costs
            
            $
            3,551,259
            
            $
            3,467,456Accumulated
                amortization
            
            
            (2,188,590
            )
            
            (1,982,418
            )$
            1,362,669
            
            $
            1,485,038





11


**VIVID
        LEARNING SYSTEMS, INC.**
 **CONDENSED
        NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **JUNE
        30, 2007**




The
      amount of software costs written down to net realizable value was zero during
      the nine months ended June 30, 2007 and 2006, 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 custom products and services contracts are contracted 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. 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 June 30, 2007, 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. Internet
      transactions are recorded as training subscriptions, with training delivered
      via
      the hosted web sites of Vivid. Revenue is recorded when the training is
      delivered, when evidence of a persuasive arrangement exists, and when collection
      is reasonably assured.





The
      Company does not offer warranties or returns.





**NOTE
      3 - RELATED PARTY TRANSACTIONS**





At
      June
      30, 2007 and September 30, 2006, the current related party payables consisted
      of
      $75,000 and $782,555, respectively, of borrowing from Nuvotec USA, Inc. and
      current amounts due to the former owners of ImageWorks. The long-term related
      party payable consists of borrowing from Nuvotec of $0 and $72,325. The amounts
      due to the former owners of ImageWorks were $275,000 and $350,000, respectively.




12




The
      former majority stockholder of the Company had been providing financial
      resources for the Company which were recorded as an inter-company payable as
      draws were made. The boards of directors of the Company and the former majority
      owner approved exchanges of a portion of the inter-company payables for equity
      in the form of common stock of Vivid. During the nine months ended June 30,
      2007, the Company converted $670,702 in related party short-term debt due to
      Nuvotec, USA, Inc., into 1,341,404 shares of common stock, which shares were
      part of the distribution of Nuvotec USA, Inc. shares effective June 13,
      2007.





**NOTE
      4 - STOCKHOLDERS’ EQUITY**





**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
      June
      30, 2007 and September 30, 2006, no preferred stock has been issued by the
      Company





**NOTE
      5 - STOCK-BASED COMPENSATION**




During
      the year ended September 30, 2006, 36,666 options vested which had been issued
      in 2004, and had a fair value of $5,830. During the nine month period ending
      June 30, 2007, 305,939 options vested which had been issued in 2004, and had
      a
      fair value of $40,565.





Options
      issued in 2004 and 2005 were originally valued at approximately $0.16 per option
      using the Black-Scholes Option Price Calculation. During the period ended June
      30, 2007 225,250 of these options vested and had a fair value of $36,040. The
      following assumptions were made in estimating the fair value: risk-free interest
      is 3%, volatility is 0.3 and expected life is 3 years.





During
      the year ended September 30, 2006, additional options totaling 153,606 were
      issued of which 65,939 vested and had a fair value of $32,777. During the period
      ended June 30, 2007 10,939 of these options vested and had a fair value of
      $4,525. 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 4.75%; volatility is 1.0136; expected life is 3 to 5 years; dividend yield
      is
      $0.





The
      value
      of the unvested options at June 30, 2007 was $70,296.





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
            
            
            570,940
            
            $
            0.33
            
            
            1,745,685Total
            
            
            570,940
            
            
            
            
            
            1,745,685





13


**VIVID
        LEARNING SYSTEMS, INC.**
 **CONDENSED
        NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **JUNE
        30, 2007**


Number
                of Shares
            
            Weighted
                Average Exercise PriceOutstanding
                at October 1, 2005
            
            
            504,334
            
            $
            0.25Granted
            
            
            153,606
            
            
            0.54Exercised
            
            
            (33,375
            )
            
            0.25Expired
                or terminated
            
            
            (53,625
            )
            
            0.25Outstanding
                at September 30, 2006
            
            
            570,940
            
            $
            0.33Options
                exercisable at September 30, 2006
            
            
            365,189
            
            $
            0.31Outstanding
                at October 1, 2006
            
            
            570,940
            
            $
            0.33Granted
            
            
            58,500
            
            
            -Exercised
            
            
            125
            
            
            0.25Expired
                or terminated
            
            
            26,667
            
            
            -Outstanding
                at June 30, 2007
            
            
            602,648
            
            $
            0.33Options
                exercisable at June 30, 2007
            
            
            396,897
            
            $
            0.31




**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 nine months ended June 30, 2007 and 2006,
      services provided to these contractors aggregated $1,764,988 and
      $698,071, **** representing
      40% and 24% of total revenue, respectively. At June 30, 2007 and 2006, amounts
      due from these contractors are included in accounts receivable in the amounts
      of
      $183,118 and $54,635, respectively.





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


Nine
                  Months EndingJune
                  30,2007
              
              2006Revenues—Fluor
                Hanford
              
              $
              840,783
              
              $
              592,395Accounts
                  Receivable
                Fluor
                  Hanford
              
              
              21,636
              
              
              20,646




**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 nine months ending June 30, 2007 and 2006, the
      Company incurred $116,607 and $53,616 in royalty obligations, respectively,
      which are recorded in marketing expense. At June 30, 2007 and 2006, there were
      no incurred royalty obligations to be accrued and recorded in other current
      liabilities on the balance sheet.





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





The
      Company has two operating segments at June 30, 2007: training subscriptions
      and
      custom products and services.





Separate
      management of each segment is required because each business unit is subject
      to
      different marketing, production, and technology strategies. Training
      subscriptions derives revenues from the sale of computer-based safety training
      products and services throughout the United States. The custom products and
      services segment derives its revenues from custom products and services designed
      specifically for the end user.





Segment
      information (after inter-company eliminations) for the nine months ended


June
      30,
      2007 and 2006 is as follows:


June
                  30,
              
              June
                  30,2007
              
              2006Revenues:Training
                  subscriptions
              
              $
              2,309,296
              
              $
              1,902,661Custom
                  products and services
              
              
              2,099,546
              
              
              1,026,091**Total
                  Revenues**
              
              $
              4,408,842
              
              $
              2,928,752Income
                  (loss) before income taxes:Training
                  subscriptions
              
              
              1,596,249
              
              $
              1,264,431Custom
                  products and services
              
              
              849,073
              
              
              488,892Corporate
              
              
              (2,913,808
              )
              
              (2,006,246
              )**Income
                  (loss) before income taxes**
              
              $
              (468,486
              )
              $
              (252,923
              )




14


**VIVID
          LEARNING SYSTEMS, INC.**
 **CONDENSED
          NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **JUNE
          30, 2007**
 June
                    30,
                
                June
                    30,2007
                
                2006Identifiable
                    assets:Training
                    subscriptions
                
                $
                1,362,669
                
                $
                1,521,141Custom
                    products and services
                
                
                324,518
                
                
                256,516Corporate
                
                
                3,044,875
                
                
                2,873,381**Total
                    Identifiable Assets**
                
                $
                4,732,062
                
                $
                4,651,038Depreciation
                    and amortization:Training
                    subscriptions
                
                $
                206,172
                
                $
                204,963Custom
                    products and services
                
                
                10,193
                
                
                9,206Corporate
                
                
                232,137
                
                
                37,106**Total
                    Depreciation****and
                    Amortization**
                
                $
                448,502
                
                $
                251,275





**NOTE
      9 - INCOME TAXES**





During
      the nine months ended June 30, 2007, the Company realized a loss before income
      taxes of $468,486. As a result, the Company has recognized $159,369 of federal
      income tax benefit, calculated at a rate of approximately 34%, and an increase
      in its deferred tax asset for this same amount. The Company’s deferred tax asset
      at June 30, 2007 principally consists of the prospective income tax benefit
      (at
      34%) of net operating losses in 2005, 2006, and 2007 to date.





**NOTE
      10 - ACQUISTION AND PROFORMA**





Effective
      October 1, 2006, Vivid Learning Systems, Inc. entered into an asset purchase
      agreement with its parent, Nuvotec USA, Inc. (“seller”). Pursuant to the
      agreement, the Company purchased from the seller the assets of the Engineering
      and Technical Services (“ETS”) business line of the seller. In satisfaction of
      the purchase price, Vivid Learning Systems, Inc. assumed all outstanding
      liabilities of ETS and recorded an inter-company related party liability of
      $85,970. The fair market values of the assets acquired and liabilities assumed
      were as follows:




Accounts
                  Receivable
              
              $
              211,555Other
                  Current Assets
              
              
              30,170Net
                  Property and Equipment
              
              
              42,619Total
                  Assets Acquired
              
              
              284,344Accounts
                  Payable
              
              
              (27,190
              )Other
                  Current Liabilities
              
              
              (171,184
              )Total
                  Liabilities Assumed
              
              
              (198,374
              )Net
                  assets acquired in excess of liabilities
              
              $
              85,970
 15
 **VIVID
          LEARNING SYSTEMS, INC.**
 **CONDENSED
          NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **JUNE
          30, 2007**





The
      following proforma unaudited financial statements reflect the combination of
      Vivid with ETS for the periods presented. The proforma financial statements
      reflect the result of the satisfaction of the purchase agreement between Vivid
      and ETS, a division of Nuvotec.





The
      proforma financial statements have been prepared utilizing the historical
      financial statements of Vivid and ETS. These proforma financial statements
      should be read in conjunction with the historical financial statements and
      notes
      thereto of Vivid Learning Systems.





The
      proforma financial statement of operations assumes that the combination occurred
      at the beginning of the periods presented in the statements. There were no
      inter-company eliminations necessary between Vivid and ETS at
      consolidation.


The
      proforma financial statements do not purport to be indicative of the financial
      positions and results of operations, which actually would have been obtained
      if
      the combination had occurred on the dates indicated, or the results, which
      may
      be obtained in the future.




16


**VIVID
        LEARNING SYSTEMS, INC.**
 **JUNE
        30, 2006**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS - PROFORMA**


Vivid
                
                ETSLearning
                
                
                
                
                
                PROFORMASystems,
                    Inc.
                
                
                
                
                
                CONSOLIDATEDFor
                    the Three Months EndedJune
                    30,
                
                June
                    30,
                
                
                
                June
                    30,2006
                
                2006
                
                
                
                2006(unaudited)
                
                (unaudited)
                
                Eliminations
                
                (unaudited)**REVENUES**Training
                    subscriptions
                
                $
                439,258
                
                
                
                
                $
                
                
                $
                439,258Training
                    subscriptions, Fluor Hanford
                
                
                140,505
                
                
                
                
                
                
                
                
                140,505Custom
                    products and services
                
                
                352,833
                
                
                542,216
                
                
                
                
                
                895,049Custom
                    products and services, Fluor Hanford
                
                
                57,422
                
                
                142,188
                
                
                
                
                
                199,610990,018
                
                
                684,404
                
                
                -
                
                
                1,674,422**COST
                    OF REVENUES**Training
                    subscriptions
                
                
                147,244
                
                
                
                
                
                
                
                
                147,244Custom
                    products and services
                
                
                179,437
                
                
                492,085
                
                
                
                
                
                671,522326,681
                
                
                492,085
                
                
                -
                
                
                818,766**GROSS
                    PROFIT**
                
                
                663,337
                
                
                192,319
                
                
                -
                
                
                855,656**EXPENSES**Marketing
                    and related labor expenses
                
                
                290,250
                
                
                3,141
                
                
                
                
                
                293,391Bad
                    debt expense
                
                
                7,834
                
                
                4,092
                
                
                
                
                
                11,926Reseller
                    commissions
                
                
                59,161
                
                
                -
                
                
                
                
                
                59,161Depreciation
                    and amortization
                
                
                17,246
                
                
                12,838
                
                
                
                
                
                30,084Wages
                    and contract labor
                
                
                145,550
                
                
                52,736
                
                
                
                
                
                198,286Other
                    operating expenses
                
                
                196,773
                
                
                74,335
                
                
                
                
                
                271,108716,814
                
                
                147,142
                
                
                -
                
                
                863,956**INCOME
                    <LOSS> FROM OPERATIONS**
                
                
                (53,477
                )
                
                45,177
                
                
                -
                
                
                (8,300
                )**OTHER
                    INCOME (EXPENSE)**Gain
                    on sale of equipment and intangible assets
                
                
                106
                
                
                -
                
                
                
                
                
                106Interest
                    income
                
                
                444
                
                
                -
                
                
                
                
                
                444Interest
                    expense
                
                
                (24,617
                )
                
                (3,071
                )
                
                
                
                
                (27,688
                )(24,067
                )
                
                (3,071
                )
                
                -
                
                
                (27,138
                )**INCOME
                    <LOSS> BEFORE INCOME TAXES**
                
                
                (77,544
                )
                
                42,106
                
                
                -
                
                
                (35,438
                )**INCOME
                    TAX BENEFIT <EXPENSE>**
                
                
                26,365
                
                
                (14,316
                )
                
                
                
                
                12,049**NET
                    INCOME <LOSS>**
                
                $
                (51,179
                )
                $
                27,790
                
                $
                -
                
                $
                (23,389
                )NET
                    LOSS PER COMMON SHARE,BASIC
                    AND DILUTED
                
                
                
                
                
                
                
                
                
                
                $
                -WEIGHTED
                    AVERAGE NUMBER OFCOMMON
                    STOCK SHARESOUTSTANDING,
                    BASIC AND DILUTED
                
                
                
                
                
                
                
                
                
                
                
                11,997,299


17




**VIVID
        LEARNING SYSTEMS, INC**
 **JUNE
        30, 2006**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS - PROFORMA**


Vivid
              
              ETSLearning
              
              
              
              
              
              PROFORMASystems,
                  Inc.
              
              
              
              
              
              CONSOLIDATEDFor
                  the Nine Months EndedJune
                  30,
              
              June
                  30,
              
              
              
              June
                  30,2006
              
              2006
              
              Eliminations
              
              2006(unaudited)
              
              (unaudited)
              
              
              
              (unaudited)**REVENUES**Training
                  subscriptions
              
              $
              1,478,163
              
              $
              
              
              $
              
              
              $
              1,478,163Training
                  subscriptions, Fluor Hanford
              
              
              424,498
              
              
              
              
              
              
              
              
              424,498Custom
                  products and services
              
              
              858,121
              
              
              1,185,904
              
              
              
              
              
              2,044,025Custom
                  products and services, Fluor Hanford
              
              
              167,970
              
              
              918,180
              
              
              
              
              
              1,086,1502,928,752
              
              
              2,104,084
              
              
              -
              
              
              5,032,836**COST
                  OF REVENUES**Training
                  subscriptions
              
              
              433,267
              
              
              -
              
              
              
              
              
              433,267Custom
                  products and services
              
              
              527,993
              
              
              1,538,376
              
              
              
              
              
              2,066,369961,260
              
              
              1,538,376
              
              
              -
              
              
              2,499,636**GROSS
                  PROFIT**
              
              
              1,967,492
              
              
              565,708
              
              
              -
              
              
              2,533,200**EXPENSES**Marketing
                  and related labor expenses
              
              
              822,852
              
              
              145,741
              
              
              
              
              
              968,593Bad
                  debt expense
              
              
              12,111
              
              
              4,191
              
              
              
              
              
              16,302Reseller
                  commissions
              
              
              214,098
              
              
              -
              
              
              
              
              
              214,098Depreciation
                  and amortization
              
              
              46,312
              
              
              18,855
              
              
              
              
              
              65,167Wages
                  and contract labor
              
              
              476,078
              
              
              149,738
              
              
              
              
              
              625,816Other
                  operating expenses
              
              
              618,089
              
              
              205,502
              
              
              
              
              
              823,5912,189,540
              
              
              524,027
              
              
              -
              
              
              2,713,567**INCOME
                  <LOSS> FROM OPERATIONS**
              
              
              (222,048
              )
              
              41,681
              
              
              -
              
              
              (180,367
              )**OTHER
                  INCOME (EXPENSE)**Gain
                  on sale of equipment and intangible assets
              
              
              30,382
              
              
              1,157
              
              
              
              
              
              31,539Interest
                  income
              
              
              1,615
              
              
              -
              
              
              
              
              
              1,615Interest
                  expense
              
              
              (62,872
              )
              
              (9,791
              )
              
              
              
              
              (72,663
              )(30,875
              )
              
              (8,634
              )
              
              -
              
              
              (39,509
              )**INCOME
                  <LOSS> BEFORE INCOME TAXES**
              
              
              (252,923
              )
              
              33,047
              
              
              -
              
              
              (219,876
              )**INCOME
                  TAX BENEFIT <EXPENSE>**
              
              
              85,993
              
              
              (11,236
              )
              
              
              
              
              74,757**NET
                  INCOME <LOSS>**
              
              $
              (166,930
              )
              $
              21,811
              
              $
              -
              
              $
              (145,119
              )NET
                  LOSS PER COMMON SHARE,BASIC
                  AND DILUTED
              
              
              
              
              
              
              
              
              
              
              $
              (0.01
              )WEIGHTED
                  AVERAGE NUMBER OFCOMMON
                  STOCK SHARESOUTSTANDING,
                  BASIC AND DILUTED
              
              
              
              
              
              
              
              
              
              
              
              11,280,521




18


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





**Results
      of Operations:**





**RESULTS
      OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2007 COMPARED WITH THREE MONTHS
      ENDED JUNE 30, 2006**





**Revenues**




Overall
      revenues increased 52% to $1,500,194 in the third quarter of fiscal year 2007
      from $990,018 in the third quarter of fiscal year 2006. The increase was in
      part
      due to the acquisition of the parent’s Engineering and Technical Services
      (“ETS”) business line, which provides software modeling, laboratory information
      management services, and temporary staff augmentation services which are
      included in our Custom Products and Services business segment.





Training
      subscription revenues increased by 12% to $647,767 in the third quarter of
      fiscal year 2007 from $579,763 in the third quarter of fiscal year 2006 due
      to
      the addition of new subscription customers and consistency year over year in
      subscription renewals.





Custom
      products and services revenues increased overall by 108% to $852,427 in the
      third quarter of fiscal year 2007 from $410,255 in the third quarter of fiscal
      year 2006. The large increase is attributable to newly acquired software
      modeling, laboratory information systems, and staff augmentation custom work
      from customers within the commercial and federal sectors during the third
      quarter of fiscal year 2007. The revenues generated from this newly acquired
      capability and customer base totaled $358,260 in the third quarter of fiscal
      year 2007. Non-ETS Custom Products and Services revenues increased 20% to
      $494,167 in the third quarter of the current fiscal year compared to $410,255
      in
      the third quarter of the previous fiscal year. The increase was mainly due
      to
      completion of the sales cycle in generating new custom projects consistent
      with
      the historical seasonality of this business segment.




**Operating
      Expenses**





**Cost
      of Revenues:**




Overall,
      cost of revenues increased by 93% to $630,060 in the third quarter of fiscal
      year 2007 from $326,681 in the third quarter of fiscal year 2006. The increase
      is due to higher costs incurred in labor and technical assistance expense
      categories resulting from the newly acquired capability in modeling, staff
      augmentation, and laboratory information systems custom work. The gross profit
      margin achieved on total revenues decreased to 58% from 67% in comparing the
      third quarter of fiscal year 2007 to the third quarter of fiscal year 2006.
      The
      decrease is attributable to lower margins realized on the newly acquired
      capability of staff augmentation services, which gross profit margin is
      typically 10% or less due to the nature of technical services work performed
      at
      the customer’s site utilizing their site resources, compared to higher gross
      profit margins realized on the other elements of custom products and services,
      including the newly acquired capabilities in software modeling and laboratory
      information systems services.




19




Training
      subscription cost of revenues increased by 25% to $184,369 in the third quarter
      of fiscal year 2007 from $147,244 in the third quarter of fiscal year 2006.
      This
      increase is directly related to the increase in revenues within this business
      segment during the two comparable three month reporting periods ending 6/30/07
      and 6/30/06.





Custom
      products and services cost of revenues increased by 148% to $445,691 in the
      third quarter of fiscal year 2007 from $179,437 in the third quarter of fiscal
      year 2006. The increase is due to the direct costs associated with significantly
      higher revenues in this business segment resulting from the newly acquired
      capabilities in software modeling, laboratory information management systems
      services, and staff augmentation services.





**Marketing
      and Related Labor Expenses:**




Marketing
      and related labor expenses increased by 30% to $376,865 in the third quarter
      of
      fiscal year 2007 from $290,250 in the third quarter of fiscal year 2006. The
      reason for the increase is due to an increasing internal marketing investment
      in
      proposal activities pertaining to portal development, and new business
      development contract opportunities within the government and commercial
      sectors.





**Reseller
      Commissions:**




Reseller
      commissions decreased by 3% to $57,554 in the third quarter of fiscal year
      2007
      from $59,161 in the third quarter of fiscal year 2006. The slight decrease
      is
      attributable directly to an increase in training subscription revenues generated
      from internal sales resources during the fiscal quarter.





**Depreciation
      and Amortization:**




Depreciation
      and amortization increased to $134,429 in the third quarter of fiscal year
      2007
      compared to $17,246 in the third quarter of fiscal year 2006. The increase
      is
      attributable to a reassessment resulting in a reduction in the estimated lives
      of certain intangible assets, depreciation related to the addition of
      infrastructure fixed assets, and newly acquired modeling and laboratory
      information systems fixed assets.





**General
      and Administrative Expenses:**




General
      and Administrative expenses increased by 40% to $488,849 in the third quarter
      of
      fiscal year 2007 from $350,157 in the third quarter of fiscal year 2006. Labor
      related expenses increased by 78% to $258,619 during the fiscal quarter from
      $145,550 in the same fiscal quarter of one year ago. The increase is
      attributable to management and staff acquired with the ETS business line.
      Non-labor related administrative expenses increased by 13% to $230,230 during
      the fiscal quarter from $204,607 in the same fiscal quarter of one year ago.
      The
      increase is primarily attributable to transition costs related to assimilation
      of the new ETS business line and the absorption of infrastructure costs related
      to the sale of the parent company.





**Loss
      from Operations:**




Loss
      from
      Operations increased by $134,086 to $187,563 in the third quarter of fiscal
      year
      2007 from $53,477 in the third quarter of fiscal year 2006. The increase is
      due
      principally to increases in operating expenses incurred during the quarter
      ending June 30, 2007 as compared to the quarter ending June 30, 2006, partially
      offset by increases in gross profit margins in the comparison of the two
      reporting periods.





20




**Other
      Income (Expense):**




The
      decrease in Other Expenses is attributable to the decrease in interest expense
      in the third quarter of the current fiscal year resulting from the elimination
      of inter-company operating line of credit debt partially offset by increased
      term borrowings and equipment financings. Interest expense on debt was $10,438
      in the quarter ended June 30, 2007 compared to $24,617 in the quarter ended
      June
      30, 2006.




**Net
      Loss**




The
      operation sustained a net loss of $130,371 in the third quarter of fiscal year
      2007 compared to a net loss of $51,179 in the third quarter of fiscal year
      2006.
      The increase in net loss of $79,192 is due to increasing operating expenses
      incurred during the third fiscal quarter in the current year compared to the
      same period in the previous year partially offset by increasing gross profit
      margins and income tax benefits in the comparison of the two fiscal quarters.




**Seasonality
      and Other Factors Affecting Quarterly Results**




Custom
      products and services revenues within the government sector may fluctuate
      beginning in the second quarter of each fiscal year based upon the timing of
      passing of a new federal budget. We expect quarterly fluctuations in operating
      results due to 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**




As
      of
      June 30, 2007 the Company had cash of $181,923 compared to $9,393 as of June
      30,
      2006.





Cash
      flows provided by operating activities amounted to $134,140 in the third quarter
      of fiscal year 2007 compared to cash flows used in operating activities of
      $16,143 in the third quarter of fiscal year 2006. The main reason for the
      increase in cash flows provided by operations is attributable to increases
      in
      depreciation and amortization in the current fiscal year’s quarter as compared
      to the previous fiscal year’s quarter.





Cash
      flows used in investing activities amounted to $38,572 in the third quarter
      of
      fiscal year 2007 compared to $36,918 in the third quarter of fiscal year 2006.
      The slight increase is attributable to increased expenditures related to the
      acquisition of property and equipment, partially offset by a reduction in
      expenditures for internal software development.





Cash
      flows provided by financing activities amounted to $40,291 in the third quarter
      of fiscal year 2007 compared to $8,178 in the third quarter of fiscal year
      2006.
      The increase is attributable to the reduction of payment requirements for line
      of credit and notes payable related party indebtedness.




21




**RESULTS
      OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2007 COMPARED WITH SIX MONTHS ENDED
      JUNE 30, 2006**





**Revenues**




Overall
      revenues increased 51% to $4,408,842 in the nine months year to date of fiscal
      year 2007 from $2,928,752 in the nine months year to date of fiscal year 2006.
      The increase was mainly due to the acquisition of the Engineering and Technical
      Services (“ETS”) business line, which provides software modeling, laboratory
      information management services, and temporary staff augmentation services
      included within our Custom Products and Services business segment.





Training
      subscription revenues increased by 21% to $2,309,296 in the nine months year
      to
      date of fiscal year 2007 from $1,902,661 in the nine months year to date of
      fiscal year 2006 due to new subscription based sales and consistency in the
      rate
      of year over year subscription renewals.





Custom
      products and services revenues increased overall by 105% to $2,099,546 in the
      nine months year to date of fiscal year 2007 from $1,026,091 in the nine months
      year to date of fiscal year 2006. The large increase is attributable to newly
      acquired software modeling, laboratory information systems, and staff
      augmentation custom work from customers within the commercial and federal
      sectors during the nine months year to date of fiscal year 2007. The revenues
      generated from this newly acquired capability and customer base totaled
      $1,066,830 in the nine months year to date of fiscal year 2007. Non-ETS Custom
      Products and Services revenues increased 1% to $1,032,716 in the nine months
      year to date of the current fiscal year compared to $1,026,091 in the nine
      months year to date of the previous fiscal year. The slight increase was mainly
      due to new custom projects consistent with the historical seasonality of this
      business segment.





**Operating
      Expenses**





**Cost
      of Revenues:**




Overall,
      cost of revenues for the current nine months year to date increased by 82%
      to
      $1,747,155 from $961,260 for the same period one year ago. The increase is
      due
      to labor and technical assistance expense categories resulting from the newly
      acquired capability in modeling, staff augmentation, and laboratory information
      systems custom work. The gross profit margin achieved on total revenues
      decreased to 60% from 67% in comparing the nine months year to date of fiscal
      year 2007 to the nine months year to date of fiscal year 2006. The decrease
      is
      attributable to lower margins realized on the newly acquired capability of
      staff
      augmentation services, which gross profit margin is typically 10% or less due
      to
      the nature of technical services work performed at the customer’s site utilizing
      their site resources, compared to higher gross profit margins realized on the
      other elements of custom products and services, including the newly acquired
      capabilities in software modeling and laboratory information systems services.





Training
      subscription cost of revenues increased by 17% to $506,875 in the nine months
      year to date of fiscal year 2007 from $433,267 in the nine months ended June
      30,
      2006. This increase is directly related to the increase in revenues within
      this
      business segment during the two comparable year to date reporting periods ending
      6/30/07 and 6/30/06.





Custom
      products and services cost of revenues increased by 135% to $1,240,280 in the
      nine months year to date of fiscal year 2007 from $527,993 in the nine months
      ended June 30, 2006. The increase is due to the direct costs associated with
      significantly higher revenues in this business segment resulting from the newly
      acquired capabilities in software modeling, laboratory information management
      systems services, and staff augmentation services.





22




**Marketing
      and Related Labor Expenses:**




Marketing
      and related labor expenses increased by 36% to $1,121,770 in the nine months
      year to date of fiscal year 2007 from $822,852 in the nine months year to date
      of fiscal year 2006. The increase is due to an increasing internal marketing
      investment in proposal activities pertaining to portal development, and new
      business development contract opportunities within the government and commercial
      sectors.





**Reseller
      Commissions:**




Reseller
      commissions increased by 16% to $247,808 in the nine months year to date of
      fiscal year 2007 from $214,098 in the nine months year to date of fiscal year
      2006. The year to date increase in the comparison of the two fiscal years is
      attributable directly to an increase in training subscription revenues generated
      from sales resources external to the Company.





**Depreciation
      and Amortization:**




Depreciation
      and amortization increased to $242,330 in the nine months to date of fiscal
      year
      2007 from $46,312 in the comparable period of fiscal year 2006. The increase
      is
      attributable to a reassessment resulting in a reduction in the estimated lives
      of certain intangible assets, depreciation related to the addition of
      infrastructure fixed assets, and newly acquired modeling and laboratory
      information systems fixed assets.





**General
      and Administrative Expenses:**




General
      and Administrative expenses increased by 34% to $1,481,540 in the nine months
      year to date of fiscal year 2007 from $1,106,278 in the nine months year to
      date
      of fiscal year 2006. Labor related expenses increased by 40% to $665,818 during
      the nine months to date of fiscal year 2007 from $476,078 in the same year
      to
      date period of one year ago. The increase is attributable to management and
      staff acquired with the ETS business line. Non-labor related administrative
      expenses increased by 35% to $815,722 during the nine months to date of fiscal
      year 2007 from $630,200 in the same year to date period of one year ago. The
      increase is primarily attributable to transition costs related to assimilation
      of the new ETS business line and the absorption of infrastructure costs
      pertaining to the sale of the parent company.





**Loss
      from Operations:**




Loss
      from
      Operations increased by $209,713 to $431,761 in the nine months year to date
      of
      fiscal year 2007 from $222,048 in the nine months year to date of fiscal year
      2006. The increase is due principally to increases in marketing, reseller,
      and
      infrastructure expenses from an expanding operation, and increases in
      depreciation and amortization expenses.





**Other
      Income (Expense):**




The
      decrease in fiscal year to date Other Income is attributable to the recognition
      of a one time gain on the sale of equipment and intangible assets of $30,276
      in
      the first quarter of fiscal year 2006. This was partially offset by a decrease
      in interest expense in the nine months year to date of fiscal year 2007 compared
      to the same year to date period of one year ago resulting from the elimination
      of inter-company operating line of credit debt partially offset by increased
      term borrowings and equipment financings. Interest expense on debt was $38,634
      in nine months year to date of fiscal year 2007 compared to $62,872 in the
      same
      year to date period of one year ago.





23




**Net
      Loss:**




The
      operation sustained a net loss of $309,117 in the nine months year to date
      of
      fiscal year 2007 compared to a net loss of $166,930 in the nine months year
      to
      date of fiscal year 2006. The increase in net loss of $142,187 is due to
      increasing operating expenses from an expanded operation incurred during the
      nine months year to date of fiscal year 2007 compared to the same period in
      the
      previous year, partially offset by increasing gross profit margins and income
      tax benefits in the comparison of the two fiscal year reporting periods. The
      principal reasons for the increases in operating expenses are related to the
      assimilation and transition costs pertaining to the newly acquired ETS business
      line, and the absorption of infrastructure costs related to the sale of the
      parent company. The infrastructure costs of the operation are currently under
      review.





**Liquidity
      and Capital Resources**




As
      of
      June 30, 2007, the Company had cash and cash equivalents of $181,923 as compared
      to $9,393 as of June 30, 2006. On October 20, 2006 the Company converted
      $670,702 in related party short-term debt due to the major shareholder into
      1,341,404 shares of common stock.





Cash
      flows provided by operating activities amounted to $373,008 in the nine months
      year to date of fiscal year 2007 compared to $373,864 in the nine months year
      to
      date of fiscal year 2006. The main reason for the slight decrease in cash flows
      provided by operations is attributable to an increase in the net loss offset
      mainly by increases in depreciation and amortization expenses in the current
      fiscal year’s comparable period as compared to the nine months year to date in
      the previous fiscal year.





Cash
      flows used in investing activities amounted to $139,953 in the nine months
      year
      to date of fiscal year 2007 compared to $86,136 in the nine months year to
      date
      of fiscal year 2006. The increase is attributable to increased expenditures
      related to the acquisition of property and equipment and cost expenditures
      for
      software development.





Cash
      flows used by financing activities amounted to $217,777 in the nine months
      year
      to date of fiscal year 2007 compared to $294,957 in the nine months year to
      date
      of fiscal year 2006. The decrease is attributable to the elimination of payment
      requirements for line of credit indebtedness and a reduction in related party
      note payments.





**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
      June 30, 2007. 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:
                August 13, 2007
            Vivid
                Learning Systems, Inc.By:
            /s/
              Sandra I. MullerSandra
                I. MullerChief
                Executive Officer




26