**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 December 31, 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**
            **42-1623500**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            (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
      February 13, 2008 was 13,372,165.





Transitional
      Small Business Disclosure Format:  Yes o  No
x









**VIVID
      LEARNING SYSTEMS, INC.**


**DECEMBER
      31, 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 Analysis Of Financial Condition And Results Of
                  Operations
              17Item
                  3
              Controls
                  and Procedures
              20**PART
                  II****OTHER
                  INFORMATION**Item
                  6
              Exhibits
              21




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 December 31, 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**





**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**
 
 December
                  31,
              
              September
                  30,2007
              
              2007(unaudited)**ASSETS**CURRENT
                  ASSETSCash
              
              $
              143,467
              
              $
              80,331Accounts
                  and contracts receivable
              
              
              859,967
              
              
              1,157,418Accounts
                  and contracts receivable, Fluor Hanford
              
              
              5,276
              
              
              28,822Prepaid
                  expenses
              
              
              160,000
              
              
              120,073Other
                  current assets
              
              
              359,751
              
              
              186,534TOTAL
                  CURRENT ASSETS
              
              
              1,528,461
              
              
              1,573,178PROPERTY,
                  PLANT AND EQUIPMENTProperty
                  and equipment
              
              
              1,530,481
              
              
              1,518,082Less:
                  Accumulated depreciation
              
              
              (1,177,250
              )
              
              (1,152,471
              )TOTAL
                  PROPERTY, PLANT AND EQUIPMENT
              
              
              353,231
              
              
              365,611OTHER
                  ASSETSSoftware,
                  net of amortization
              
              
              1,280,695
              
              
              1,328,424Goodwill
              
              
              375,000
              
              
              375,000Long-term
                  contracts receivable
              
              
              44,973
              
              
              85,202Deferred
                  tax asset
              
              
              771,337
              
              
              838,433TOTAL
                  OTHER ASSETS
              
              
              2,472,005
              
              
              2,627,059**TOTAL
                  ASSETS**
              
              $
              4,353,697
              
              $
              4,565,848**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              174,204
              
              $
              295,376Line
                  of credit payable
              
              
              -
              
              
              57,072Accrued
                  contract labor
              
              
              128,782
              
              
              221,374Other
                  current liabilities
              
              
              98,475
              
              
              114,667Unearned
                  revenue
              
              
              75,952
              
              
              118,654Notes
                  payable, related parties
              
              
              350,000
              
              
              350,000Current
                  portion of long-term liabilities
              
              
              109,119
              
              
              106,638TOTAL
                  CURRENT LIABILITIES
              
              
              936,532
              
              
              1,263,781LONG-TERM
                  LIABILITIESLong-term
                  debt
              
              
              169,202
              
              
              182,786Other
                  long-term liabilities
              
              
              163,573
              
              
              170,954TOTAL
                  LONG-TERM LIABILITIES
              
              
              332,775
              
              
              353,740TOTAL
                  LIABILITIES
              
              
              1,269,307
              
              
              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
              
              
              4,390,218
              
              
              4,384,475Accumulated
                  deficit
              
              
              (1,307,165
              )
              
              (1,437,485
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              3,084,390
              
              
              2,948,327**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              4,353,697
              
              $
              4,565,848The
                  accompanying condensed notes are an integral part of these interim
                  consolidated financial statements.


5




**VIVID
                  LEARNING SYSTEMS, INC.****CONSOLIDATED
                  STATEMENTS OF INCOME**
 
 Three
                  Months
              
              Three
                  MonthsEnded
              
              EndedDecember
                  31, 2007
              
              December
                  31, 2006(unaudited)
              
              (unaudited)REVENUESTraining
                  subscriptions
              
              $
              751,508
              
              $
              700,205Training
                  subscriptions, Fluor Hanford
              
              
              138,332
              
              
              138,316Custom
                  products and services
              
              
              397,487
              
              
              497,802Custom
                  products and services, Fluor Hanford
              
              
              17,057
              
              
              148,9301,304,384
              
              
              1,485,253COST
                  OF REVENUESTraining
                  subscriptions
              
              
              252,429
              
              
              178,542Custom
                  products and services
              
              
              295,449
              
              
              387,534547,878
              
              
              566,076GROSS
                  PROFIT
              
              
              756,506
              
              
              919,177EXPENSESMarketing
                  and related labor expenses
              
              
              265,023
              
              
              349,757Bad
                  debt expense
              
              
              2,038
              
              
              1,540Reseller
                  commissions
              
              
              44,502
              
              
              97,251Depreciation
                  and amortization
              
              
              24,780
              
              
              54,805Wages
                  and contract labor
              
              
              114,981
              
              
              196,336Other
                  operating expenses
              
              
              102,284
              
              
              278,724TOTAL
                  OPERATING EXPENSES
              
              
              553,608
              
              
              978,413INCOME
                  (LOSS) FROM OPERATIONS
              
              
              202,898
              
              
              (59,236
              )OTHER
                  INCOME (EXPENSE)Gain
                  on sale of equipment and intangible assets
              
              
              -
              
              
              900Interest
                  income
              
              
              807
              
              
              282Interest
                  expense
              
              
              (6,289
              )
              
              (13,515
              )TOTAL
                  OTHER INCOME (EXPENSE)
              
              
              (5,482
              )
              
              (12,333
              )INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              197,416
              
              
              (71,569
              )INCOME
                  TAX BENEFIT (EXPENSE)
              
              
              (67,096
              )
              
              23,162NET
                  INCOME (LOSS)
              
              $
              130,320
              
              $
              (48,407
              )BASIC
                  NET INCOME (LOSS) PER COMMON SHARE
              
              $
              0.01
              
              $
              nilDILUTED
                  NET INCOME (LOSS) PER COMMON SHARE
              
              $
              0.01
              
              $
              nilWEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING:BASIC
              
              
              13,372,165
              
              
              12,701,376DILUTED
              
              
              13,372,165
              
              
              12,701,376
 
 The
                  accompanying condensed notes are an integral part of these interim
                  consolidated financial statements.




6




**VIVID
                  LEARNING SYSTEMS, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**
  Three
                    Months
                
                Three
                    MonthsEnded
                
                EndedDecember
                    31, 2007
                
                December
                    31, 2006(unaudited)
                
                (unaudited)**CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    income (loss)
                
                $
                130,320
                
                $
                (48,407
                )Adjustments
                    to reconcile net income (loss)to
                    net cash provided by operating activities:Depreciation
                    and amortization
                
                
                24,780
                
                
                54,805Amortization
                    of capitalized software
                
                
                68,424
                
                
                62,771Bad
                    debt expense
                
                
                2,038
                
                
                1,540Options
                    issued for compensation
                
                
                5,743
                
                
                3,445Changes
                    in assets and liabilities:Accounts
                    and contracts receivable
                
                
                318,959
                
                
                63,939Prepaid
                    expenses
                
                
                (39,927
                )
                
                (22,351
                )Other
                    current assets
                
                
                (173,217
                )
                
                51,134Deferred
                    tax asset
                
                
                67,096
                
                
                (23,162
                )Accounts
                    payable
                
                
                (121,172
                )
                
                41,217Accrued
                    contract labor and related expenses
                
                
                (92,592
                )
                
                (62,681
                )Long-term
                    receivable contracts
                
                
                40,229
                
                
                38,778Other
                    current liabilities
                
                
                (16,192
                )
                
                2,817Unearned
                    revenue
                
                
                (42,702
                )
                
                9,991Net
                    cash provided by operating activities
                
                
                171,787
                
                
                173,836**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Acquisition
                    of property, equipment and intangible assets
                
                
                (12,399
                )
                
                (11,613
                )Acquisition
                    of software
                
                
                (20,695
                )
                
                (22,922
                )Net
                    cash used by investing activities
                
                
                (33,094
                )
                
                (34,535
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**Stock
                    options exercised for common stock
                
                
                -
                
                
                31Payments
                    on notes payable, related party
                
                
                -
                
                
                (149,493
                )Payments
                    on line of credit payable
                
                
                (57,072
                )
                
                -Payments
                    on long-term debt
                
                
                (12,744
                )
                
                (1,265
                )Payments
                    on long-term liabilities
                
                
                (5,741
                )
                
                (3,250
                )Net
                    cash provided (used) by financing activities
                
                
                (75,557
                )
                
                (153,977
                )Net
                    increase (decrease) in cash
                
                
                63,136
                
                
                (14,676
                )Cash
                    at beginning of period
                
                
                80,331
                
                
                166,645Cash
                    at end of period
                
                $
                143,467
                
                $
                151,969SUPPLEMENTAL
                    CASH FLOW INFORMATION:Interest
                    paid
                
                $
                (6,289
                )
                $
                13,515Income
                    taxes paid
                
                $
                -
                
                $
                -NON-CASH
                    TRANSACTIONS:Common
                    stock issued for related party debt
                
                $
                -
                
                $
                670,702Acquisition
                    of fixed assets via capital lease
                
                $
                -
                
                $
                53,399Options
                    issued as compensation
                
                $
                5,743
                
                $
                3,445
  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**
 **December
        31, 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 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 (“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 three months ended December 31,
      2007 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**
 **December
        31, 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 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.




9


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2007**


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.




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.




10




**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 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 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:





11


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2007**


December
                31, 2007
            
            September
                30,
              2007Software
                development costs
            
            $
            3,607,888
            
            $
            3,587,193Accumulated
                amortization
            
            
            (2,327,193
            )
            
            (2,258,769
            )$
            1,280,695
            
            $
            1,328,424





The
      amount of software costs written down to net realizable value was zero during
      the three months ended December 31, 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 December 31, 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 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.





12




**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2007**





**NOTE
      3 - RELATED PARTY TRANSACTIONS**





At
      December 31, 2007 and September 30, 2007, the current related party payables
      consisted of $350,000 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
      December 31, 2007 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 three month period ending
      December 31, 2007, 25,125 options vested which had been issued in 2004 and
      had a
      fair value of $4,020.





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
      December 31, 2007, 250,375 of these options vested and had a fair value of
      $40,060. 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. 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.





The
      value
      of the unvested options at December 31, 2007 was $51,035.





The
      following is a summary of stock option activity:




13




**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2007**


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
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Expired
                or terminated
            
            
            -
            
            
            -Outstanding
                at December 31, 2007
            
            
            515,898
            
            $
            0.34Options
                exercisable at December 31, 2007
            
            
            329,750
            
            $
            0.33




**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 three months ended December 31, 2007 and 2006,
      services provided to these contractors aggregated $213,084 and
      $566,602, **** representing
      16% and 38% of total revenue, respectively At December 31, 2007 and 2006,
      amounts due from these contractors are included in accounts receivable in the
      amounts of $44,349 and $142,413, 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:




14




**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**December
      31, 2007**







Three
                  Months EndingDecember
                  31,2007
              
              2006Revenues—FluorHanford
              
              $
              155,389
              
              $
              287,246Accounts
                  ReceivableFluor
                  Hanford
              
              
              5,276
              
              
              25,450Revenues—CH2M
                  Hill Hanford
              
              
              3,489
              
              
              154,425Accounts
                  Receivable—CH2M Hill Hanford
              
              $
              500
              
              $
              25,719




**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 three months ending December 31, 2007 and 2006,
      the Company incurred $10,490 and $14,402 in royalty obligations, respectively,
      which are recorded in marketing expense. At December 31, 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 December 31, 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 three months ended December
      31, 2007 and 2006 is as follows:





15


**VIVID
        LEARNING SYSTEMS, INC.**
 **NOTES
        TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2007**




December
                31,
            
            
            December
                31,2007
            
            
            2006Revenues:Training
                subscriptions
            
            $
            889,840
            
            $
            838,521Custom
                products and services
            
            
            414,544
            
            
            646,732Total
                Revenues
            
            $
            1,304,384
            
            $
            1,485,253Income
                (loss) before income taxes:Training
                subscriptions
            
            
            637,411
            
            $
            659,979Custom
                products and services
            
            
            119,095
            
            
            259,198Corporate
            
            
            (559,090
            )
            
            (990,746
            )Income
                (loss) before income taxes
            
            $
            197,416
            
            $
            (71,569
            )





December
                31,
            
            
            December
                31,2007
            
            
            2006Identifiable
                assets:Training
                subscriptions
            
            $
            1,280,695
            
            $
            1,445,189Custom
                products and services
            
            
            322,347
            
            
            232,047Corporate
            
            
            2,750,655
            
            
            3,239,330****Total
                Identifiable Assets
            
            $
            4,353,697
            
            $
            4,916,566Depreciation
                and amortization:Training
                subscriptions
            
            $
            68,424
            
            $
            62,771Custom
                products and services
            
            
            7,538
            
            
            3,359Corporate
            
            
            17,242
            
            
            51,446Total
                Depreciation
              and
                Amortization
            
            $
            93,204
            
            $
            117,576




**NOTE
      9 - INCOME TAXES**





During
      the three months ended December 31, 2007, the Company realized a profit before
      income taxes of $197,416. As a result, the Company has recognized $67,096 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 December 31, 2007 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 DECEMBER 31, 2007 COMPARED WITH THREE MONTHS
      ENDED DECEMBER 31, 2006**





**Revenues**


Overall
      revenues decreased 12% to $1,304,384 in the first quarter of fiscal year 2008
      from $1,485,253 in the first 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 $175,002, or 15%, in the comparison of the fiscal
      quarters ending December 31, 2007 and December 31, 2006.





Training
      subscription revenues increased by 6% to $889,840 in the first quarter of fiscal
      year 2008 from $838,521 in the first 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 36% to $414,544 in the
      first
      quarter of fiscal year 2008 from $646,732 in the first quarter of fiscal year
      2007. The large decrease is attributable to the phase-out of ETS commercial
      and
      federal contracts during the first quarter of fiscal year 2008. Non-ETS Custom
      Products and Services revenues increased 43% and $123,683 in the first quarter
      of the current fiscal year compared to the first quarter of the previous fiscal
      year. The increase was mainly due to completion of the sales cycle from
      increased custom project revenues generated within this business
      segment.




**Operating
      Expenses**





**Cost
      of Revenues:**


Overall,
      cost of revenues decreased by 3% to $547,878 in the first quarter of fiscal
      year
      2008 from $566,076 in the first quarter of fiscal year 2007. The slight 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 quarter ending December
      31, 2007 compared to the quarter ending December 31, 2006. The gross profit
      margin achieved on total revenues decreased to 58% from 62% in comparing the
      first quarter of fiscal year 2008 to the first 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 first quarter of fiscal year 2008 compared to fiscal
      year 2007. The effect of the classification of indirect costs was to reduce
      the
      gross profit margin from 65% to 58% in the first quarter of fiscal year
      2008.





Training
      subscription cost of revenues increased by 41% to $252,429 in the first quarter
      of fiscal year 2008 from $178,542 in the first 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 December 31, 2007 compared to the quarter ending December
      31, 2006.




17





Custom
      products and services cost of revenues decreased by 24% to $295,449 in the
      first
      quarter of fiscal year 2008 from $387,534 in the first quarter of fiscal year
      2007. The decrease is due to overall lower revenue volumes in the Custom
      Products and Services business segment partially offset by increases from
      indirect cost classifications incurred in the production process.





The
      effect of the difference in indirect cost classification was to increase cost
      of
      revenues by $92,925 in the first quarter of fiscal year 2008 compared to the
      first quarter of fiscal year 2007.





**Marketing
      and Related Labor Expenses:**


Marketing
      and related labor expenses decreased by 24% to $265,023 in the first quarter
      of
      fiscal year 2008 from $349,757 in the first 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 decreased by 54% to $44,502 in the first quarter of fiscal year
      2008
      from $97,251 in the first quarter of fiscal year 2007. The 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 decreased to $24,780 in the first quarter of fiscal year 2008
      compared to $54,805 in the first 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 54% to $217,265 in the first quarter
      of
      fiscal year 2008 from $475,060 in the first quarter of fiscal year 2007. Labor
      related expenses decreased by 41% to $114,981 during the fiscal quarter from
      $196,336 in the same fiscal quarter of one year ago. The decrease is
      attributable to labor efficiencies achieved in the reduction of non-essential
      administrative staff. Non-labor related administrative expenses decreased by
      63%
      to $102,284 during the fiscal quarter from $278,724 in the same fiscal quarter
      of one year ago. The decrease is primarily attributable to efficiencies achieved
      via infrastructure detailed cost management and changes in the classification
      of
      certain indirect expenses.





**Income
      (Loss) from Operations:**


Income
      from Operations increased by $262,134 to $202,898 in the first quarter of fiscal
      year 2008 from ($59,236) in the first quarter of fiscal year 2007. The increase
      is due principally to decreases in operating expenses incurred during the
      quarter ending December 31, 2007 as compared to the quarter ending December
      31,
      2006, partially offset by a decrease in the gross profit margin in the
      comparison of the two reporting periods.




18





**Other
      Income (Expense):**


The
      decrease in Other Expenses is attributable to the decrease in interest expense
      in the first 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 $6,289 in the quarter ended
      December 31, 2007 compared to $13,315 in the quarter ended December 31,
      2006.




**Net
      Income**


The
      operation generated Net Income of $130,320 in the first quarter of fiscal year
      2008 compared to a Net Loss of $48,407 in the first quarter of fiscal year
      2007.
      The increase in Net Income of $178,727 is primarily due to the higher training
      subscription revenues and phasing out of low margin ETS revenues, and decreasing
      operating expenses during the first fiscal quarter in the current year compared
      to the same period in the previous year.




**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
      December 31, 2007 the Company had cash of $143,467 compared to $151,969 as
      of
      December 31, 2006. The Company’s current ratio is 1.63 as of December 31, 2007
      compared to 1.24 at the audit date of September 30, 2007.





Cash
      flows provided by operating activities amounted to $171,787 in the first quarter
      of fiscal year 2008 compared to cash flows provided by operating activities
      of
      $173,836 in the first quarter of fiscal year 2007. The slight decrease is
      attributable to an overall reduction in current liabilities.





Cash
      flows used in investing activities amounted to $33,094 in the first quarter
      of
      fiscal year 2008 compared to $34,535 in the first quarter of fiscal year 2007.
      The slight decrease is attributable to increased expenditures related to the
      acquisition of property and equipment, offset by a reduction in expenditures
      for
      internal software development.





Cash
      flows used in financing activities amounted to $75,557 in the first quarter
      of
      fiscal year 2008 compared to $153,977 in the first quarter of fiscal year 2007.
      The decrease is attributable to the reduction of payment requirements for the
      line of credit and notes payable related party indebtedness.




19





**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
      December 31, 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.




20





**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






21




**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:
                February 13, 2008
            Vivid
                Learning Systems, Inc.By:
            /s/ Matthew J. HammerMatthew
                J. HammerChief
                Executive Officer