**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, 2008





**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**
            ****
            **42-1623500**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (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 14, 2008 was 13,372,165.





Transitional
      Small Business Disclosure Format:  Yes
o  No
x





**VIVID
      LEARNING SYSTEMS, INC.**


**JUNE
      30, 2008** **QUARTERLY REPORT ON FORM 10-QSB**





**TABLE
      OF CONTENTS**





PAGESpecial
                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
            17Item
                3
            Controls
                and Procedures
            23**PART
                II****OTHER
                INFORMATION**Item
                6
            Exhibits
            24


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, 2008, 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**





**ITEM
                1**
            **FINANCIAL
                STATEMENTS**
            **PAGE**Consolidated
                Balance Sheets
            5Consolidated
                Statements of Income
            6Consolidated
                Statements of Cash Flows
            7Notes
                to Financial Statements
            8-16


4


**VIVID
      LEARNING SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS**





June 30,
            
            September 30,2008
            
            2007(unaudited)**ASSETS**CURRENT
                ASSETSCash
            
            $
            216,089
            
            $
            80,331Accounts
                and contracts receivable
            
            
            873,796
            
            
            1,157,418Accounts
                and contracts receivable, Fluor Hanford
            
            
            7,288
            
            
            28,822Prepaid
                expenses
            
            
            185,634
            
            
            120,073Other
                current assets
            
            
            156,709
            
            
            186,534TOTAL
                CURRENT ASSETS
            
            
            1,439,516
            
            
            1,573,178PROPERTY,
                PLANT AND EQUIPMENTProperty
                and equipment
            
            
            1,565,659
            
            
            1,518,082Less:
                Accumulated depreciation
            
            
            (1,221,589
            )
            
            (1,152,471
            )TOTAL
                PROPERTY, PLANT AND EQUIPMENT
            
            
            344,070
            
            
            365,611OTHER
                ASSETSSoftware,
                net of amortization
            
            
            1,205,085
            
            
            1,328,424Goodwill
            
            
            375,000
            
            
            375,000Long-term
                contracts receivable
            
            
            -
            
            
            85,202Deferred
                tax asset
            
            
            722,136
            
            
            838,433TOTAL
                OTHER ASSETS
            
            
            2,302,221
            
            
            2,627,059**TOTAL
                ASSETS**
            
            $
            4,085,807
            
            $
            4,565,848**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIESAccounts
                payable
            
            $
            134,329
            
            $
            295,376Line
                of credit payable
            
            
            -
            
            
            57,072Accrued
                contract labor
            
            
            107,176
            
            
            221,374Other
                current liabilities
            
            
            44,929
            
            
            114,667Unearned
                revenue
            
            
            49,471
            
            
            118,654Notes
                payable, related parties
            
            
            175,000
            
            
            350,000Current
                portion of long-term liabilities
            
            
            113,198
            
            
            106,638TOTAL
                CURRENT LIABILITIES
            
            
            624,103
            
            
            1,263,781LONG-TERM
                LIABILITIESLong-term
                debt
            
            
            141,376
            
            
            182,786Other
                long-term liabilities
            
            
            132,517
            
            
            170,954TOTAL
                LONG-TERM LIABILITIES
            
            
            273,893
            
            
            353,740TOTAL
                LIABILITIES
            
            
            897,996
            
            
            1,617,521COMMITMENTS
                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, 13,372,165 and 13,372,203shares
                issued and outstanding, respectively
            
            
            1,337
            
            
            1,337Additional
                paid-in capital
            
            
            4,398,206
            
            
            4,384,475Accumulated
                deficit
            
            
            (1,211,732
            )
            
            (1,437,485
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            3,187,811
            
            
            2,948,327**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            4,085,807
            
            **$**
            4,565,848





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


5


**VIVID
      LEARNING SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





Three Months Ended
            
            Nine Months EndedJune 30, 2008
            
            June 30, 2007
            
            June 30, 2008
            
            June 30, 2007(Unaudited)
            
            (Unaudited)
            
            (Unaudited)
            
            (Unaudited)REVENUESTraining
                subscriptions
            
            $
            574,232
            
            $
            502,829
            
            $
            2,099,242
            
            $
            1,883,818Training
                subscriptions, Fluor Hanford
            
            
            138,907
            
            
            144,938
            
            
            415,291
            
            
            425,478Custom
                products and services
            
            
            540,564
            
            
            719,093
            
            
            1,339,593
            
            
            1,684,241Custom
                products and services, Fluor Hanford
            
            
            21,798
            
            
            133,334
            
            
            58,427
            
            
            415,3051,275,501
            
            
            1,500,194
            
            
            3,912,553
            
            
            4,408,842COST
                OF REVENUESTraining
                subscriptions
            
            
            223,229
            
            
            184,369
            
            
            709,085
            
            
            506,875Custom
                products and services
            
            
            343,617
            
            
            445,691
            
            
            955,318
            
            
            1,240,280566,846
            
            
            630,060
            
            
            1,664,403
            
            
            1,747,155GROSS
                PROFIT
            
            
            708,655
            
            
            870,134
            
            
            2,248,150
            
            
            2,661,687EXPENSESMarketing
                and related labor expenses
            
            
            366,154
            
            
            376,865
            
            
            989,292
            
            
            1,121,770Bad
                debt expense
            
            
            685
            
            
            1,231
            
            
            2,724
            
            
            11,908Reseller
                commissions
            
            
            76,821
            
            
            57,554
            
            
            261,906
            
            
            247,808Depreciation
                and amortization
            
            
            25,037
            
            
            134,429
            
            
            74,227
            
            
            242,330Wages
                and contract labor
            
            
            89,680
            
            
            258,619
            
            
            304,950
            
            
            665,818Other
                operating expenses
            
            
            86,877
            
            
            228,999
            
            
            250,097
            
            
            803,814TOTAL
                OPERATING EXPENSES
            
            
            645,254
            
            
            1,057,697
            
            
            1,883,196
            
            
            3,093,448INCOME
                (LOSS) FROM OPERATIONS
            
            
            63,401
            
            
            (187,563
            )
            
            364,954
            
            
            (431,761
            )OTHER
                INCOME (EXPENSE)Gain
                on sale of equipment and intangible assets
            
            
            175
            
            
            -
            
            
            275
            
            
            901Interest
                income
            
            
            1,236
            
            
            342
            
            
            3,391
            
            
            1,008Interest
                expense
            
            
            (9,596
            )
            
            (10,438
            )
            
            (26,570
            )
            
            (38,634
            )TOTAL
                OTHER INCOME (EXPENSE)
            
            
            (8,185
            )
            
            (10,096
            )
            
            (22,904
            )
            
            (36,725
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            55,216
            
            
            (197,659
            )
            
            342,050
            
            
            (468,486
            )INCOME
                TAX BENEFIT (EXPENSE)
            
            
            (18,564
            )
            
            67,288
            
            
            (116,297
            )
            
            159,369NET
                INCOME (LOSS)
            
            $
            36,652
            
            $
            (130,371
            )
            $
            225,753
            
            $
            (309,117
            )BASIC
                AND DILUTED NET INCOME (LOSS) PER SHARE
            
            $
            -
            
            $
            (0.01
            )
            $
            0.02
            
            $
            (0.02
            )BASIC
                AND DILUTEDWEIGHTED
                AVERAGE NUMBER OF SHARES
            
            
            13,372,165
            
            
            13,372,203
            
            
            13,372,165
            
            
            13,224,779





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


6


**VIVID
      LEARNING SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Nine Months
            
            Nine MonthsEnded
            
            EndedJune 30, 2008
            
            June 30, 2007(unaudited)
            
            (unaudited)**CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income (loss)
            
            $
            225,753
            
            $
            (309,117
            )Adjustments
                to reconcile net income (loss)to
                net cash provided by operating activities:Depreciation
                and amortization
            
            
            74,227
            
            
            242,330Amortization
                of capitalized software
            
            
            200,570
            
            
            206,172Bad
                debt expense
            
            
            2,724
            
            
            11,908Options
                issued for compensation
            
            
            13,732
            
            
            40,565Changes
                in assets and liabilities:Accounts
                and contracts receivable
            
            
            305,156
            
            
            (30,285
            )Prepaid
                expenses
            
            
            (65,561
            )
            
            39,914Other
                current assets
            
            
            29,825
            
            
            52,639Deferred
                tax asset
            
            
            116,297
            
            
            (159,369
            )Accounts
                payable
            
            
            (161,047
            )
            
            145,148Accrued
                contract labor and related expenses
            
            
            (114,198
            )
            
            (85,551
            )Long-term
                receivable contracts
            
            
            85,202
            
            
            118,993Other
                current liabilities
            
            
            (69,738
            )
            
            (2,792
            )Unearned
                revenue
            
            
            (69,183
            )
            
            102,453Net
                cash provided by operating activities
            
            
            573,759
            
            
            373,008**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Acquisition
                of property, equipment and intangible assets
            
            
            (55,411
            )
            
            (44,651
            )Acquisition
                of software
            
            
            (77,231
            )
            
            (95,302
            )Net
                cash used by investing activities
            
            
            (132,642
            )
            
            (139,953
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Stock
                options exercised for common stock
            
            
            -
            
            
            31Payments
                on notes payable, related party
            
            
            (175,000
            )
            
            (147,368
            )Payments
                on line of credit payable
            
            
            (57,072
            )
            
            -Payments
                on long-term debt
            
            
            (38,798
            )
            
            (36,779
            )Payments
                on long-term liabilities
            
            
            (34,489
            )
            
            (33,661
            )Net
                cash provided (used) by financing activities
            
            
            (305,359
            )
            
            (217,777
            )Net
                increase (decrease) in cash
            
            
            135,758
            
            
            15,278Cash
                at beginning of period
            
            
            80,331
            
            
            166,645Cash
                at end of period
            
            $
            216,089
            
            $
            181,923SUPPLEMENTAL
                CASH FLOW INFORMATION:Interest
                paid
            
            $
            26,570
            
            $
            38,634Income
                taxes paid
            
            $
            -
            
            $
            -NON-CASH
                TRANSACTIONS:Common
                stock issued for related party debt
            
            $
            -
            
            $
            670,702Acquisition
                of fixed assets via capital lease
            
            $
            -
            
            $
            45,014Options
                issued as compensation
            
            $
            13,732
            
            $
            40,565


The
        accompanying condensed notes are an integral part of these interim consolidated
        financial statements.   7


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**


**NOTE
      1** – **BUSINESS
      ORGANIZATION**





Nature
      of Operations


Vivid
      Learning Systems, Inc. (hereinafter “Vivid Washington”) was incorporated in 1995
      in the State of Washington under the name of Applied Tec *knowledge* y,
      Inc.
      and then later known as 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 (the “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, Vivid
      Washington and ImageWorks Digital Media, Inc., have a year end of September
      30.





Effective
      October 1, 2006, the Company entered into an asset purchase agreement with
      its
      then parent, Nuvotec USA, Inc. (“Nuvotec”) 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, the Company assumed all outstanding
      liabilities of ETS and recorded an inter-company related party liability.





Nuvotec
      prior to June 13, 2007 held approximately 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. Due to rounding, 38 shares that had been held by Nuvotec were
      retired as treasury shares. The shares in common stock of the Company 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, 2007. 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, 2008 are not necessarily indicative of the results
      that may be expected for the fiscal year ending September 30, 2008. For further
      information, refer to the Company’s consolidated audited financial statements at
      September 30, 2007 and footnotes thereto.





8


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**




**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.





Recent
      Pronouncements


In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for
      using fair value to measure assets and liabilities. The standard expands
      required disclosures about the extent to which companies measure assets and
      liabilities at fair value, the information used to measure fair value, and
      the
      effect of fair value measurements on earnings. SFAS 157 is effective for fiscal
      years beginning after November 15, 2007. The Company has not yet determined
      the
      effect SFAS 157 will have on 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.





9


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**


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 was a line of credit in place
      at September 30, 2006, which was executed by Nuvotec, the Company’s major
      shareholder, the Company, as a subsidiary guaranteeing this debt which is owed
      to a third party, in fact had 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.





Management
      Services Provided by Nuvotec


In
      Vivid
      Delaware’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
      Washington operation. The majority of the allocated expenses represent labor
      related costs applied to the Vivid Washington operation. All identifiable direct
      costs of administration are booked directly to the Vivid Washington operation.
      Detailed time charges are accounted for daily by all personnel, including
      Nuvotec central administrative personnel with time charged to Company tasks.
      As
      of April 1, 2007, all corporate personnel had been transferred to Vivid
      Washington and there were no further allocations as noted above.





Provision
      for Taxes


The
      current tax provision represents the federal income tax which the Company would
      have incurred on a separate, stand-alone basis. Through June 13, 2007, the
      Company received the benefit of losses resulting from the federal income tax
      returns filed on a consolidated basis by its former majority shareholder,
      Nuvotec.





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.




10


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**




Reclassifications


Certain
      prior year amounts in the accompanying financial statements have been
      reclassified to conform to the fiscal year 2008 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.




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.





11


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**




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 Washington 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, 2008
            
            September 30,
              2007Software
                development costs
            
            $
            3,664,424
            
            $
            3,587,193Accumulated
                amortization
            
            
            (2,459,339
            )
            
            (2,258,769
            )$
            1,205,085
            
            $
            1,328,424





The
      amount of software costs written down to net realizable value was zero during
      the nine months ended June 30, 2008 and June 30, 2007, 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, 2008 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.





12


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**




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 Washington. 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, 2008 and September 30, 2007, the current related party payables consisted
      of
      $175,000 and $350,000, respectively, of current amounts due to the former owners
      of ImageWorks.





**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, 2008 and September 30, 2007, no preferred stock has been issued by the
      Company.





**NOTE
      5 – STOCK-BASED COMPENSATION**




During
      the year ended September 30, 2007, 225,250 options vested which had been issued
      in 2004, and had a fair value of $36,040. During the nine month period ending
      June 30, 2008, 34,564 options vested which had been issued in 2004 and had
      a
      fair value of $5,743.





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, 2008, a total of 259,814 of these options had vested and had a fair value
      of
      $41,570. The following assumptions were made in estimating the fair value:
      risk-free interest is 3%; volatility is 0.3; and, expected life is three 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 year
      ended September 30, 2007, 10,939 of these options vested and had a fair value
      of
      $4,525. During the period ended June 30, 2008, a total of 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 three to five years; and,
      dividend yield is $0.





13


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**




During
      the year ended September 30, 2007, additional options totaling 89,500 were
      issued and had a fair value of $19,730. During the period ended June 30, 2008,
      a
      total of 19,500 of these options vested and had a fair value of
      $3,464.





The
      value
      of the unvested options at June 30, 2008 was $45,949.





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
            
            
            515,898
            
            $
            0.34
            
            
            1,800,602Total
            
            
            515,898
            
            
            
            
            
            1,800,602





Number of
              Shares
            
            Weighted
              Average Exercise
              PriceOutstanding
                at October 1, 2006
            
            
            570,940
            
            $
            0.33Granted
            
            
            89,500
            
            
            0.29Exercised
            
            
            (125
            )
            
            0.25Expired
                or terminated
            
            
            (144,417
            )
            
            0.25Outstanding
                at September 30, 2007
            
            
            515,898
            
            $
            0.34Options
                exercisable at September 30, 2007
            
            
            304,265
            
            $
            0.33Outstanding
                at October 1, 2007
            
            
            515,898
            
            $
            0.34Granted
            
            
            69,740
            
            
            0.23Exercised
            
            
            -
            
            
            -Expired
                or terminated
            
            
            (2,000
            )
            
            0.29Outstanding
                at June 30, 2008
            
            
            583,638
            
            $
            0.33Options
                exercisable at June 30, 2008
            
            
            374,795
            
            $
            0.31





14


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**




**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, 2008 and June 30,
      2007, services provided to these contractors aggregated $778,092 and
      $1,764,988, **** representing
      20% and 40% of total revenue, respectively. At June 30, 2008 and June 30, 2007,
      amounts due from these contractors are included in accounts receivable in the
      amounts of $105,308 and $183,118, 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 30,2008
              
              2007Revenues—Fluor
                Hanford
              
              $
              473,717
              
              $
              840,783Accounts
                  Receivable
                Fluor
                  Hanford
              
              $
              7,288
              
              $
              21,636




**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, 2008 and June 30,
      2007, the Company incurred $97,145 and $116,607 in royalty obligations,
      respectively, which are recorded in marketing expense. At June 30, 2008 and
      June
      30, 2007, 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, 2008: 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.





15


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **June
        30, 2008**




Segment
      information (after inter-company eliminations) for the nine months ended June
      30,
      2008 and 2007 is as follows:


June 30,
              
              June 30,2008
              
              2007Revenues:Training
                  subscriptions
              
              $
              2,514,533
              
              $
              2,309,296Custom
                  products and services
              
              
              1,398,020
              
              
              2,099,546**Total
                  Revenues**
              
              $
              3,912,553
              
              $$
              4,408,842Income
                  (loss) before income taxes:Training
                  subscriptions
              
              
              1,805,440
              
              
              1,596,249Custom
                  products and services
              
              
              442,702
              
              
              849,073Corporate
              
              
              (1,906,092
              )
              
              (2,913,808
              )**Income
                  (loss) before income taxes**
              
              $
              342,050
              
              $$
              (468,486
              )
 June 30,
                
                June 30,2008
                
                2007Identifiable
                    assets:Training
                    subscriptions
                
                $
                1,205,085
                
                $
                1,362,669Custom
                    products and services
                
                
                457,058
                
                
                324,518Corporate
                
                
                2,423,664
                
                
                3,044,875**Total
                    Identifiable Assets**
                
                $
                4,085,807
                
                $
                4,732,062Depreciation
                    and amortization:Training
                    subscriptions
                
                $
                200,570
                
                $
                206,172Custom
                    products and services
                
                
                22,994
                
                
                10,193Corporate
                
                
                51,233
                
                
                232,137**Total
                    Depreciation****and
                    Amortization**
                
                $
                274,797
                
                $
                448,502




**NOTE
      9 – INCOME TAXES**





During
      the nine months ended June 30, 2008, the Company realized a profit before income
      taxes of $342,050. As a result, the Company has recognized $116,297 of federal
      income tax expense, calculated at a rate of approximately 34%, and a decrease
      in
      its deferred tax asset for this same amount. The Company’s deferred tax asset at
      June 30, 2008, principally consists of the prospective income tax benefit (at
      34%) of net operating losses in 2005, 2006, and 2007.


16





**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, 2008 COMPARED WITH THREE MONTHS
      ENDED JUNE 30, 2007**





**Revenues**


Overall
      revenues decreased 15% to $1,275,501 in the third quarter of fiscal year 2008
      from $1,500,194 in the third quarter of fiscal year 2007. The decrease was
      due
      to the phase-out of Engineering and Technical Services (“ETS”) contracts.
      Non-ETS revenues increased by $133,567, or 12%, in the comparison of the fiscal
      quarters ending June 30, 2008 and June 30, 2007.





Training
      subscription revenues increased by 10% to $713,139 in the third quarter of
      fiscal year 2008 from $647,767 in the third quarter of fiscal year 2007 due
      to
      the addition of new subscription customers and consistency year over year in
      subscription renewals.





Custom
      products and services revenues decreased overall by 34% to $562,362 within
      the
      third quarter of fiscal year 2008 from $852,427 within the third quarter of
      fiscal year 2007. The large decrease is attributable to the phase-out of ETS
      commercial and federal contracts during the third quarter of fiscal year 2008.
      Non-ETS Custom Products and Services revenues increased 14% and $68,195 in
      the
      third quarter of the current fiscal year compared to the third quarter of the
      previous fiscal year. The increase was mainly from the timely completion of
      increased custom projects and related revenues generated within this business
      segment.




**Operating
      Expenses**





**Cost
      of Revenues:**


Overall,
      Cost of Revenues decreased to $566,846 in the third quarter of fiscal year
      2008
      from $630,060 in the third quarter of fiscal year 2007. The decrease is due
      to
      overall lower revenue volumes in the Custom Products and Services business
      segment due to the phase-out of ETS contracts partially offset by an increase
      in
      the classifications for indirect costs incurred in the production process in
      the
      quarter ending June 30, 2008 compared to the quarter ending June 30, 2007.
      The
      gross profit margin achieved on total revenues decreased to 56% from 58% in
      comparing the third quarter of fiscal year 2008 to the third quarter of fiscal
      year 2007. The small decrease is attributable to overall lower margins realized
      on revenues due to increases in the classifications for indirect costs incurred
      in the production process in the third quarter of fiscal year 2008 compared
      to
      fiscal year 2007. The effect of the classification of indirect costs was a
      reduction of the gross profit margin from 62% to 56% in the third quarter of
      fiscal year 2008.





Training
      subscription cost of revenues increased by 21% to $223,229 in the third quarter
      of fiscal year 2008 from $184,369 in the third quarter of fiscal year 2007.
      This
      increase is directly related to the increase in revenues and classifications
      for
      indirect costs incurred in the production process within this business segment
      in the quarter ending June 30, 2008 compared to the quarter ending June 30,
      2007.





17




Custom
      products and services cost of revenues decreased by 23% to $343,617 in the
      third
      quarter of fiscal year 2008 from $445,691 in the third quarter of fiscal year
      2007. The decrease is due to overall lower revenue volumes in the Custom
      Products and Services business segment due to the phase-out of low margin ETS
      federal custom contracts partially offset by increases from indirect cost
      classifications incurred in the production process.





The
      effect of the difference in indirect cost classification was an increase in
      cost
      of revenues by $75,815 in the third quarter of fiscal year 2008 compared to
      the
      third quarter of fiscal year 2007.





**Marketing
      and Related Labor Expenses:**


Marketing
      and related labor expenses decreased by 3% to $366,154 in the third quarter
      of
      fiscal year 2008 from $376,865 in the third quarter of fiscal year 2007. The
      reason for the decrease is due to marketing labor efficiencies achieved within
      the government sector.





**Reseller
      Commissions:**


Reseller
      commissions increased by 33% to $76,821 in the third quarter of fiscal year
      2008
      from $57,554 in the third quarter of fiscal year 2007. The increase is
      attributable directly to the timing of training subscription revenues generated
      from external sales resources during the fiscal quarter as compared to the
      same
      quarter in the previous fiscal year.





**Depreciation
      and Amortization:**


Depreciation
      and Amortization decreased to $25,037 in the third quarter of fiscal year 2008
      compared to $134,429 in the third quarter of fiscal year 2007. The decrease
      is
      attributable to an increase in fully depreciated fixed assets and fully
      amortized intangible assets in the comparison of the two fiscal
      quarters.





**General
      and Administrative Expenses:**


General
      and Administrative expenses decreased by 64% to $177,242 in the third quarter
      of
      fiscal year 2008 from $488,849 in the third quarter of fiscal year 2007. Labor
      related expenses decreased by 65% to $89,680 during the fiscal quarter from
      $258,619 in the same fiscal quarter of one year ago. The decrease is
      attributable to labor efficiencies achieved in the reduction of outsourced
      and
      non-essential administrative staff. Non-labor related administrative expenses
      decreased by 62% to $87,562 during the fiscal quarter from $230,230 in the
      same
      fiscal quarter of one year ago. The decrease is primarily attributable to
      efficiencies achieved via infrastructure cost management at the detail level
      and
      changes in the classification of certain indirect expenses.





**Income
      (Loss) from Operations:**


Income
      from Operations increased by $250,964 to $63,401 in the third quarter of fiscal
      year 2008 from ($187,563) in the third quarter of fiscal year 2007. The increase
      is due principally to decreases in operating expenses incurred during the
      quarter ending June 30, 2008, as compared to the quarter ending June 30, 2007,
      partially offset by a decrease in the overall gross profit margin in the
      comparison of the two reporting periods.





18




**Other
      Income (Expense):**


The
      decrease in Other Expenses is attributable to a slight decrease in interest
      expense in the third quarter of the current fiscal year resulting from the
      reduction of operating line of credit debt partially offset by increased term
      borrowings and equipment financings. Interest expense on debt was $9,596 in
      the
      quarter ended June 30, 2008 compared to $10,438 in the quarter ended June 30,
      2007.




**Net
      Income**


The
      operation generated Net Income of $36,652 in the third quarter of fiscal year
      2008 compared to a net loss of $130,371 in the third quarter of fiscal year
      2007. The increase in net income of $167,023 is primarily due to higher training
      subscription and custom products and services core revenues and phasing out
      of
      low margin ETS revenues, and decreasing general and administration expenses
      during the third fiscal quarter in the current year compared to the same period
      in the previous year.




**Seasonality
      and Other Factors Affecting Quarterly Results**


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, 2008, the Company had cash of $216,089 compared to $80,331 as of June
      30, 2007. The Company’s current ratio is 2.31 as of June 30, 2008, compared to
      1.24 at the audit date of September 30, 2007.





Cash
      flows provided by operating activities amounted to $87,690 in the third quarter
      of fiscal year 2008 compared to cash flows provided by operating activities
      of
      $91,165 in the third quarter of fiscal year 2007. The slight decrease is
      attributable to an overall reduction in net increases and decreases within
      current assets and current liabilities.





Cash
      flows used in investing activities amounted to $54,689 in the third quarter
      of
      fiscal year 2008 compared to $38,572 in the third quarter of fiscal year 2007.
      The increase is attributable to increased expenditures for property and
      equipment.





Cash
      flows used in financing activities amounted to $126,856 in the third quarter
      of
      fiscal year 2008 compared to cash flows provided by financing activities of
      $83,274 in the third quarter of fiscal year 2007. The increase in cash flows
      used in financing activities is attributable to the increase of payment
      requirements for notes payable related party indebtedness and by increased
      debt
      service payments for the line of credit and long-term liabilities.





19





**RESULTS
      OF OPERATIONS – NINE MONTHS ENDED JUNE 30, 2008 COMPARED WITH NINE MONTHS
      ENDED JUNE 30, 2007**





**Revenues:**


Overall
      revenues decreased 11% to $3,912,553 in the nine months year to date of fiscal
      year 2008 from $4,408,842 in the nine months year to date of fiscal year 2007.
      The decrease was mainly due to the phase-out of Engineering and Technical
      Services (“ETS”) contracts. Non-ETS revenues increased by $570,541 or 17%, in
      the comparison of the fiscal quarters ending June 30, 2008 and June 30, 2007.





Training
      subscription revenues increased by 9% to $2,514,533 in the nine months year
      to
      date of fiscal year 2008 from $2,309,296 in the nine months year to date of
      fiscal year 2007 due to new subscription based sales and consistency in the
      rate
      of retention year over year for subscription renewals.





Custom
      products and services revenues decreased overall by 33% to $1,398,020 in the
      nine months year to date of fiscal year 2008 from $2,099,546 in the nine months
      year to date of fiscal year 2007. The large decrease is attributable to the
      phase-out of low margin ETS contract revenues. Non-ETS Custom Products and
      Services revenues increased 35% and $365,304 in the nine months year to date
      of
      fiscal year 2008 compared to the same period in fiscal year 2007. The increase
      was mainly due to the efficient and timely completion of increased custom
      project activity and related revenues generated within this business segment.
      Additional factors contributing to the increase of revenues within this segment
      include consistency of sales efforts and cross-selling due to the integration
      of
      sales efforts across the Company.




**Operating
      Expenses**





**Cost
      of Revenues:**


Overall,
      cost of revenues for the current nine months year to date decreased by 5% to
      $1,664,403 from $1,747,555 for the same period one year ago. The decrease is
      due
      to overall lower revenue volumes in the Custom Products and Services business
      segment partially offset by an increase in the classifications for indirect
      costs incurred in the production process in the nine months ending June 30,
      2008, compared to the nine months ending June 30, 2007. The gross profit margin
      achieved on total revenues decreased to 57% from 60% in comparing the year
      to
      date nine month period of fiscal year 2008 to the year to date nine month period
      of fiscal year 2007. The small decrease is attributable to overall lower margins
      realized on revenues due to increases in the classifications for indirect costs
      incurred in the production process in the nine months ending June 30, 2008
      compared to fiscal year 2007. The effect of the classification of indirect
      costs
      was a reduction of the gross profit margin from 65% to 57% in the nine months
      ending June 30, 2008.





Training
      subscription cost of revenues increased by 40% to $709,085 in the nine months
      year to date of fiscal year 2008 from $506,875 in the nine months ended June
      30,
      2007. This increase is directly related to the increase in revenues within
      this
      business segment and classifications for indirect costs incurred in the
      production process in the nine months ending June 30, 2008, compared to the
      nine
      months ending June 30, 2007.





20




Custom
      products and services cost of revenues decreased by 23% to $955,318 in the
      nine
      months year to date of fiscal year 2008 from $1,240,280 in the nine months
      ended
      June 30, 2007. The decrease is due to overall lower revenue volumes in the
      Custom Products and Services business segment due to the phase-out of low margin
      ETS contracts partially offset by increases from indirect cost classifications
      incurred in the production process.





The
      effect of the difference in indirect cost classification was an increase in
      cost
      of revenues by $276,177 in the nine months ending June 30, 2008, compared to
      the
      same period of fiscal year 2007.





**Marketing
      and Related Labor Expenses:**


Marketing
      and related labor expenses decreased by 12% to $989,292 in the nine months
      year
      to date of fiscal year 2008 from $1,121,770 in the nine months year to date
      of
      fiscal year 2007. The reason for the decrease is due to marketing labor
      efficiencies achieved within the government sector and overall reductions in
      travel, royalties, and trade shows expense categories.





**Reseller
      Commissions:**


Reseller
      commissions increased by 6% to $261,906 in the nine months year to date of
      fiscal year 2008 from $247,808 in the nine months year to date of fiscal year
      2007. The year to date increase in the comparison of the two fiscal years is
      attributable directly to a slight increase in training subscription revenues
      generated from sales resources external to the Company.





**Depreciation
      and Amortization:**


Depreciation
      and Amortization decreased to $74,227 in the nine months to date of fiscal
      year
      2008 from $242,330 in the comparable period of fiscal year 2007. The decrease
      is
      attributable to an increase in fully depreciated fixed assets and fully
      amortized intangible assets in the comparison of the fiscal year to date periods
      ending June 30 th .





**General
      and Administrative Expenses:**


General
      and Administrative expenses decreased by 62% to $557,771 in the nine months
      year
      to date of fiscal year 2008 from $1,481,540 in the nine months year to date
      of
      fiscal year 2007. Labor related expenses decreased by 54% to $304,950 during
      the
      nine months to date of fiscal year 2008 from $665,818 in the same year to date
      period of one year ago. The decrease is attributable to labor efficiencies
      achieved in the reduction of non-essential administrative staff and non-billable
      technical staff. Non-labor related administrative expenses decreased by 69%
      to
      $252,821 during the nine months to date of fiscal year 2008 from $815,722 in
      the
      same year to date period of one year ago. The decrease is primarily attributable
      to efficiencies achieved via infrastructure cost management at the detail level
      and changes in the classification of certain indirect expenses.





**Income
      (Loss) from Operations:**


Income
      from Operations increased by $796,715 to $364,954 in the nine months year to
      date of fiscal year 2008 from $(431,761) in the nine months year to date of
      fiscal year 2007. The increase is due principally to decreases across the board
      in operating expenses incurred during the nine months ending June 30, 2008,
      as
      compared to the nine months ending June 30, 2007, partially offset by a decrease
      in the gross profit margin in the comparison of the two reporting periods.





21




**Other
      Income (Expense):**


The
      decrease in Other Expenses is attributable to the decrease in interest expense
      in the nine months ending of the current fiscal year resulting from the
      reduction of operating line of credit debt partially offset by increased term
      borrowings and equipment financings. Interest expense on debt was $26,570 in
      the
      quarter ended June 30, 2008, compared to $38,634 in the quarter ended June
      30,
      2007.





**Net
      Income:**


The
      operation generated Net Income of $225,753 in the nine months ending June 30
      of
      fiscal year 2008 compared to a Net Loss of $309,117 in the nine months ending
      June 30 of fiscal year 2007. The increase in net income of $534,870, or 14%
      of
      revenues, is primarily due to higher training subscription and custom products
      and services core revenues and the phasing out of low margin ETS revenues,
      and
      decreasing operating expenses in all categories during the nine months ending
      June 30 in the current fiscal year compared to the same period in the previous
      fiscal year.





**Liquidity
      and Capital Resources**


As
      of
      June 30, 2008, the Company had cash and cash equivalents of $216,089 as compared
      to $80,331 at the audit date of September 30, 2007.





Cash
      flows provided by operating activities amounted to $573,759 in the nine months
      year to date of fiscal year 2008 compared to $373,008 in the nine months year
      to
      date of fiscal year 2007. The main reasons for the increase in cash flows
      provided by operations is attributable to generated net income, reductions
      in
      receivable accounts and contracts, partially offset by reductions in liability
      accounts.





Cash
      flows used in investing activities amounted to $132,138 in the nine months
      year
      to date of fiscal year 2008 compared to $139,953 in the nine months year to
      date
      of fiscal year 2007. The decrease is attributable to increased expenditures
      for
      property and equipment offset by decreased expenditures for internal software
      development.





Cash
      flows used by financing activities amounted to $305,863 in the nine months
      year
      to date of fiscal year 2008 compared to $217,777 in the nine months year to
      date
      of fiscal year 2007. The increase is attributable to increased in payments
      on
      notes payable, related parties and increases in debt service payments for short
      and long-term debt and long-term liabilities.


22


**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, 2008. 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.
   23
   **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






24




**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 14, 2008
            Vivid
              Learning Systems, Inc.By:
            /s/
                Matthew J. HammerMatthew
                J. HammerChief
                Executive Officer




25