**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, 2005





**OR**





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


**SECURITIES
      EXCHANGE ACT OF 1934**


For
      the
      Transition Period from ___________ to ___________





**Commission
      File Number: 333-116255**





**VIVID
      LEARNING SYSTEMS, INC.**


(Exact
      name of Registrant as specified in its charter)





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





**723
      The Parkway**


**Richland,
      Washington 99352**


(Address
      of principal executive offices, including zip code)





**(509)
      943-5319**


(Registrant's
      telephone number, including area code)








Check
      whether the Registrant (1) has filed all reports required to be filed by Section
      13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
      months, and (2) has been subject to such filing requirements for the past 90
      days. Yes [X] No [ ]





The
      number of shares of the Registrant's common stock issued and outstanding at
      December 31, 2005, was 11,997,299.





Transitional
      Small Business Disclosure Format:  Yes
      [ ]  No
      [X]












**VIVID
      LEARNING SYSTEMS, INC.**


**DECEMBER
      31, 2005** **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
            19Item
                3.
            Controls
                and Procedures
            22





**PART
      II**


**OTHER
      INFORMATION**





Item
                6.
            Exhibits
            23







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, 2005, 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
            
            
            8-18






4





**VIVID
                LEARNING SYSTEMS, INC.****CONSOLIDATED
                BALANCE SHEETS**December
                31,
            
            September
                30,2005
            
            2005(unaudited)**ASSETS**CURRENT
                ASSETSCash
            
            $
            106,003
            
            $
            16,622Accounts
                and contracts receivable
            
            
            1,019,769
            
            
            1,028,197Accounts
                and contracts receivable, Fluor Hanford
            
            
            40,156
            
            
            81,272Prepaid
                expenses
            
            
            118,798
            
            
            105,867Other
                current assets
            
            
            192,189
            
            
            374,059TOTAL
                CURRENT ASSETS
            
            
            1,476,915
            
            
            1,606,017PROPERTY,
                PLANT AND EQUIPMENTProperty
                and equipment
            
            
            1,150,304
            
            
            1,223,847Less:
                Accumulated depreciation
            
            
            (833,015
            )
            
            (892,570
            )TOTAL
                PROPERTY, PLANT AND EQUIPMENT
            
            
            317,289
            
            
            331,277OTHER
                ASSETSSoftware,
                net of amortization
            
            
            1,606,169
            
            
            1,654,305Intangibles,
                net of amortization
            
            
            536,943
            
            
            537,943Goodwill
            
            
            375,000
            
            
            375,000Long-term
                contracts receivable
            
            
            364,249
            
            
            368,542Deferred
                tax asset
            
            
            437,220
            
            
            460,081TOTAL
                OTHER ASSETS
            
            
            3,319,581
            
            
            3,395,871**TOTAL
                ASSETS**
            
            $
            5,113,785
            
            $
            5,333,165**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIESAccounts
                payable
            
            $
            151,336
            
            $
            129,539Payable
                to related party
            
            
            983,123
            
            
            1,000,000Accrued
                contract labor
            
            
            171,917
            
            
            243,879Other
                current liabilities
            
            
            141,095
            
            
            183,035Unearned
                revenue
            
            
            26,036
            
            
            44,376Notes
                payable, related parties
            
            
            75,000
            
            
            75,000Current
                portion of long-term liabilities
            
            
            36,000
            
            
            36,000TOTAL
                CURRENT LIABILITIES
            
            
            1,584,507
            
            
            1,711,829LONG-TERM
                LIABILITIESRelated
                party notes payable
            
            
            524,682
            
            
            1,753,145TOTAL
                LONG-TERM LIABILITIES
            
            
            524,682
            
            
            1,753,145TOTAL
                LIABILITIES
            
            
            2,109,189
            
            
            3,464,974COMMITMENTS
                AND CONTINGENCIES
            
            
            —
            
            
            —STOCKHOLDERS'
                EQUITYPreferred
                stock, $0.0001 par value;5,000,000
                shares authorized, no shares issued and outstanding
            
            
            —
            
            
            —Common
                stock, $0.0001 par value;200,000,000
                shares authorized, 11,997,299 and 10,197,996shares
                issued and outstanding, respectively
            
            
            1,200
            
            
            1,025Additional
                paid-in capital
            
            
            3,604,334
            
            
            2,512,061Accumulated
                deficit
            
            
            (600,938
            )
            
            (644,895
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            3,004,596
            
            
            1,868,191**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            5,113,785
            
            **$**
            5,333,165






5


**VIVID
                  LEARNING SYSTEMS, INC.****CONSOLIDATED
                  STATEMENTS OF INCOME**Three
                  Months
              
              Three
                  MonthsEnded
              
              EndedDecember
                  31, 2005
              
              December
                  31, 2004(unaudited)
              
              (unaudited)REVENUESTraining
                  subscriptions
              
              $
              610,607
              
              $
              631,812Training
                  subscriptions, Fluor Hanford
              
              
              143,489
              
              
              147,338Custom
                  products and services
              
              
              256,223
              
              
              339,674Custom
                  products and services, Fluor Hanford
              
              
              41,499
              
              
              8,8641,051,818
              
              
              1,127,688COST
                  OF REVENUESTraining
                  subscriptions
              
              
              79,116
              
              
              82,472Custom
                  products and services
              
              
              229,646
              
              
              316,716308,762
              
              
              399,188GROSS
                  PROFIT
              
              
              743,056
              
              
              728,500EXPENSESMarketing
                  and related labor expenses
              
              
              250,409
              
              
              237,244Bad
                  debt expense
              
              
              563
              
              
              —Reseller
                  commissions
              
              
              36,509
              
              
              109,182Depreciation
                  and amortization
              
              
              14,300
              
              
              19,338Wages
                  and contract labor
              
              
              149,560
              
              
              212,667Other
                  operating expenses
              
              
              237,778
              
              
              280,390TOTAL
                  OPERATING EXPENSES
              
              
              689,119
              
              
              858,821INCOME
                  (LOSS) FROM OPERATIONS
              
              
              53,937
              
              
              (130,321
              )OTHER
                  INCOME (EXPENSE)Gain
                  on sale of equipment and intangible assets
              
              
              30,276
              
              
              —Interest
                  income
              
              
              —
              
              
              270Interest
                  expense
              
              
              (17,611
              )
              
              (11,597
              )TOTAL
                  OTHER INCOME (EXPENSE)
              
              
              12,665
              
              
              (11,327
              )INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              66,602
              
              
              (141,648
              )INCOME
                  TAX BENEFIT (EXPENSE)
              
              
              (22,645
              )
              
              48,160NET
                  INCOME (LOSS)
              
              $
              43,957
              
              $
              (93,488
              )BASIC
                  NET INCOME (LOSS) PER COMMON SHARE
              
              $
              nil
              
              $
              (0.01
              )DILUTED
                  NET INCOME (LOSS) PER COMMON SHARE
              
              $
              nil
              
              $
              (0.01
              )WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING:BASIC
              
              
              10,816,213
              
              
              10,197,996DILUTED
              
              
              10,868,182
              
              
              10,197,996






6


**VIVID
                  LEARNING SYSTEMS, INC.****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**Three
                  Months
              
              Three
                  MonthsEnded
              
              EndedDecember
                  31, 2005
              
              December
                  31, 2004(unaudited)
              
              (unaudited)**CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  income (loss)
              
              $
              43,957
              
              $
              (93,488
              )Adjustments
                  to reconcile net income (loss)to
                  net cash provided by operating activities:Depreciation
                  and amortization
              
              
              14,300
              
              
              19,338Amortization
                  of capitalized software
              
              
              70,382
              
              
              72,805Bad
                  debt expense
              
              
              563
              
              
              —Stock
                  and options issued for services
              
              
              —
              
              
              20,910Gain
                  on sale of equipment and intangible assets
              
              
              (30,276
              )
              
              **—**Changes
                  in assets and liabilities:Accounts
                  and contracts receivable
              
              
              49,544
              
              
              586,634Prepaid
                  expenses
              
              
              (22,931
              )
              
              (28,145
              )Other
                  current assets
              
              
              181,870
              
              
              (48,820
              )Deferred
                  tax asset
              
              
              22,861
              
              
              —Accounts
                  payable
              
              
              21,797
              
              
              62,851Accrued
                  payroll and related expenses
              
              
              (71,962
              )
              
              (13,647
              )Related
                  party payables, net
              
              
              —
              
              
              (61,547
              )Long-term
                  receivable contracts
              
              
              49,293
              
              
              (477,291
              )Other
                  current liabilities
              
              
              (41,940
              )
              
              21,478Unearned
                  revenue
              
              
              (18,340
              )
              
              —Net
                  cash provided by operating activities
              
              
              269,118
              
              
              61,078**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Acquisition
                  of property, equipment and intangible assets
              
              
              (4,037
              )
              
              (18,727
              )Acquisition
                  of software
              
              
              (22,246
              )
              
              (70,373
              )Net
                  cash used by investing activities
              
              
              (26,283
              )
              
              (89,100
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Payments
                  on notes payable, related party
              
              
              (153,454
              )
              
              —Proceeds
                  from related party financing transactions including line of
                  credit
              
              
              —
              
              
              65,071Net
                  cash provided (used) by financing activities
              
              
              (153,454
              )
              
              65,071Net
                  increase (decrease) in cash
              
              
              89,381
              
              
              37,049Cash
                  at beginning of period
              
              
              16,622
              
              
              49,451Cash
                  at end of period
              
              $
              106,003
              
              $
              86,500SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid
              
              $
              17,611
              
              $
              11,597Income
                  taxes paid
              
              $
              —
              
              $
              —NON-CASH
                  TRANSACTIONS:Stock
                  and options issued for services
              
              $
              —
              
              $
              20,910Common
                  stock issued for related party debt
              
              $
              1,092,448
              
              $
              —Note
                  receivable for sale of equipment and intangible assets
              
              $
              45,000
              
              $
              —






7


**VIVID
        LEARNING SYSTEMS, INC.**
 **CONDENSED
        NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
        31, 2005**
  **NOTE
          1** - **BUSINESS
          ORGANIZATION**
 
 Nature
          of Operations
 Vivid
          Learning Systems, Inc. (hereinafter “Vivid Washington”) was incorporated in 1995
          in the State of Washington under the name of Applied Tec *Knowledge* y,
          and
          was shortly thereafter renamed Vivid Concepts, Inc. Prior to December 23,
          2003,
          Vivid Washington was a wholly owned subsidiary of Nuvotec, Inc., a technology
          commercialization corporation based in Washington State. On December 23,
          2003,
          Nuvotec, Inc., exchanged all of its 7,000,000 common stock shares in Vivid
          Washington for 8,100,000 shares of common stock with a par value of $0.0001
          in a
          newly formed Delaware corporation also named Vivid Learning Systems, Inc.
          The
          Delaware company (“Company” or “Vivid Delaware”) serves as the holding company
          and parent and sole shareholder of the operating entity (“Vivid Washington”).
          The common stock of the Delaware company was held 100% by Nuvotec, Inc.,
          until
          an additional 1,987,996 of the Company’s common stock was issued in a private
          placement to approximately seventy individual shareholders at September
          30,
          2004. The stock held by Nuvotec, Inc. has since been transferred to the
          parent
          company Nuvotec USA, Inc., a Washington corporation. An additional 140,000
          shares of Company common stock was issued related to personnel matters.
          Also,
          1,749,303 shares of Company common stock was issued to Nuvotec USA as a
          result
          of a conversion of debt. Vivid Washington develops and provides computer-based
          training products and services, which are marketed nationally. The
          reorganization caused no change in the accounting in the financial statements
          of
          Vivid Washington as Vivid Washington continues to be the operating company
          and
          the financial information provided is the historical financial information
          of
          Vivid Washington. Vivid Delaware and its subsidiaries have a year end of
          September 30.
 
 Basis
          of Presentation
 The
          accompanying unaudited consolidated financial statements have been prepared
          in
          accordance with generally accepted accounting principles for interim financial
          information and the instructions to Form 10-QSB and Rule 10-01 of Regulation
          S-X. Accordingly, they do not include all of the information and footnotes
          required by accounting principles generally accepted in the United States
          for
          complete financial statements. In the opinion of management, all adjustments
          (consisting of normal recurring adjustments) considered necessary for a
          fair
          presentation of interim results have been included. Operating results for
          the
          three months ended December 31, 2005 are not necessarily indicative of
          the
          results that may be expected for the fiscal year ending September 30, 2006.
          For
          further information, refer to the Company’s consolidated audited financial
          statements and footnotes thereto.
 
 Certain
          prior year amounts may have been reclassified to conform to the current
          period’s
          presentation.
  8
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
  **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,
          Inc., 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 available to common shareholders by the weighted average number
          of
          common shares outstanding for the period. Diluted earnings per share reflect
          the
          potential dilution of securities that could share in the earnings of an
          entity. **** There
          are
          138,584 common stock equivalents outstanding at December 31, 2005. The
          Company
          uses the treasury method of calculating diluted earnings per share. Under
          this
          method, there are 51,969 dilutive shares outstanding. See Note 5.
 
 Management
          Services Provided by Nuvotec
 In
          Vivid’s consolidated statements of income, “other operating expenses” contains
          amounts that represent allocations from Nuvotec of legal and contracts,
          finance
          (including accounting and reporting, receivables and collection activities,
          payables and cash management, budgeting, etc.), executive and administrative
          expenses that are applied to the Vivid operation. Most of the allocated
          expenses
          represent labor related costs.
 
 Provision
          for Taxes
 The
          current tax provision represents the federal income tax which the Company
          would
          have incurred on a separate, stand-alone basis. The Company receives the
          benefit
          of losses resulting from the federal income tax returns filed on a consolidated
          basis by its majority shareholder, Nuvotec USA, Inc. The consolidated tax
          returns are filed on a calendar year basis.
 
 Income
          taxes are provided based upon the liability method of accounting pursuant
          to
          Statement of Financial Accounting Standards No. 109, “Accounting for Income
          Taxes.” Under this approach, deferred income taxes are recorded to reflect the
          tax consequences in future years of differences between the tax basis of
          assets
          and liabilities and their financial reporting amounts at each year end.
          A
          valuation allowance is recorded against deferred tax assets if management
          does
          not believe the Company has met the “more likely than not” standard imposed by
          Statement of Financial Accounting Standard No. 109 to allow recognition
          of such
          an asset.
  9
 **VIVID
          LEARNING SYSTEMS, INC.**
 **CONDENSED
          NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
          31, 2005**
  
 Recent
          Accounting Pronouncements
 In
          May
          2005, the Financial Accounting Standards Board issued Statement of Financial
          Accounting Standards (“SFAS No. 154”), “Accounting Changes and Error
          Corrections,” which replaces Accounting Principles Board Opinion No. 20,
“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim
          Financial Statements -- An Amendment of APB Opinion No. 28”. SFAS No. 154
          provides guidance on accounting for and reporting changes in accounting
          principle and error corrections. SFAS No. 154 requires that changes in
          accounting principle be applied retrospectively to prior period financial
          statements and is effective for fiscal years beginning after December 15,
          2005.
          The Company does not expect SFAS No. 154 to have a material impact on our
          consolidated financial position, results of operations, or cash
          flows.
 
 In
          March
          2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
          No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations.”
FIN 47 clarifies that the term “conditional asset retirement obligation,” which
          as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers
          to a legal obligation to perform an asset retirement activity in which
          the
          timing and (or) method of settlement are conditional on a future event
          that may
          or may not be within the control of the entity. The entity must record
          a
          liability for a “conditional” asset retirement obligation if the fair value of
          the obligation can be reasonably estimated. FIN 47 also clarifies when
          an entity
          would have sufficient information to reasonably estimate the fair value
          of an
          asset retirement obligation. FIN 47 is effective no later than the end
          of fiscal
          years ending after December 15, 2005. Management believes the adoption
          of this
          statement will not have an immediate material impact on the financial statements
          of the Company.
 
 Reseller
          Commissions
 Reseller
          commissions are recorded as an expense if the cumulative affirmative impact
          of indicators of gross revenue reporting, as outlined in EITF
          99-19, Indicators 7-14, are met by the Company in the
          transaction. **** The
          Company pays each of the channel partners a commission, or a referral fee,
          recorded as a selling expense, strictly on a success basis as a result
          of
          selling the Company’s products and services to third party customers. The
          Company has contractual arrangements with each of these partners that range
          from
          one to two years. The Company pays these partners a referral fee, or a
          commission, of between five and fifty percent of net revenue depending
          upon
          their annual sales levels and other criteria.
 
 None
          of
          these U.S.-based contracts is exclusive, or restricts the Company from
          selling
          directly or through other channel partners into any markets. The Company
          does
          have one contract in place with a European reseller that is country-specific,
          exclusive, and has a duration of two years. Such expenses paid to resellers
          are
          recorded as a reduction to the underlying selling price if the cumulative
          affirmative impact of indicators of net revenue reporting, as outlined
          in EITF
          99-19, Indicators 15-17 are present in the transaction. The Company does
          not
          provide any consideration to end-users other than negotiated price discounts
          for
          subscriptions based on the size of the contract. Contract size is defined
          by the
          number of employees (seats), number of lessons and length of the
          contract.
  10
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
 The
          Company renewed effective July 1, 2004 for two additional years, a material
          reseller agreement with Element K of Rochester, New York.
 
 Software
          Development Costs
 Costs
          incurred for the internal development of software products and enhancements,
          after technological feasibility has been established for the related product,
          are capitalized and stated at the lower of cost or net realizable value.
          Amortization is provided based on the greater of the amount computed using
          (a)
          the ratio that current gross revenues for a product bears to the total
          of
          current and anticipated future gross revenues for that product, or (b)
          the
          straight-line method over the remaining estimated economic life of the
          product,
          not to exceed five years.
 
 Production
          costs incurred subsequent to the establishment of technological feasibility
          are
          capitalized. Also capitalized are the component costs incurred associated
          with
          the development of product templates in accordance with Statement of Financial
          Accounting Standards No. 86, which consist primarily of labor related costs.
          As
          revenue generation commences on specific training content, additional costs
          incurred are classified as maintenance expense, or customer marketing expense,
          in the period they are incurred. Hours expended via time sheets, and costs
          incurred by production personnel on lesson content development on a per
          lesson
          basis are maintained so that cost efficiency in software content development
          can
          be analyzed on a lesson content by lesson content basis. Net realizable
          value is
          determined by comparing the unamortized cost of each developed software
          lesson
          content and the remaining available market (quantified by dollars) for
          that
          content in the industry in which Vivid is selling the content. The unamortized
          software development cost is then aggregated by lesson content and a grand
          total
          is compared to the total remaining available aggregate market for the content
          to
          determine if a write-down is required. The Company’s amortization method assumes
          that sales of the Company’s existing software products will continue for at
          least the ensuing five years. For the three months ended December 31, 2005
          and
          2004, $70,382 and $72,805 of amortization expense were recorded, respectively.
 
 Software
          development costs consist of the following at the dates shown:
  December
                    31
                  2005,
                
                September
                    30,
                  2005Software
                    development costs
                
                $
                3,389,860
                
                $
                $3,367,614Accumulated
                    amortization
                
                
                (1,783,691
                )
                
                (1,713,309
                )$
                1,606,169
                
                $
                $1,654,305
 
 11
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
 In
          November 2003, the Company purchased software and related materials from
          FoodSafety.com, Inc. for $230,000, which is included in software on the
          balance
          sheet.
 
 The
          amount of software costs written down to net realizable value was zero
          during
          the three months ended December 31, 2005 and 2004, respectively.
 
 Use
          of
          Estimates
 The
          process of preparing financial statements in conformity with accounting
          principles generally accepted in the United States of America requires
          the use
          of estimates and assumptions regarding certain types of assets, liabilities,
          revenues, and expenses. Such estimates primarily relate to unsettled
          transactions and events as of the date of the financial statements. Accordingly,
          upon settlement, actual results may differ from estimated amounts.
 
 Revenue
          and Cost Recognition
 The
          Company’s revenues are recognized at the time of shipment of products or
          performance of the contracted services. The Company sells its products
          and
          services both directly, using in-house sales employees, and indirectly,
          using
          channel sales partners. Channel sales partners are classified as independent
          resellers, value-added resellers, industry consultants and industry
          associations. Cost of goods is primarily made up of labor costs associated
          with
          software development and training.
 
 The
          Company’s sales contracts are primarily on a fixed unit rate basis, with
          underlying hourly billing rates negotiated with the customer. The contract
          revenues are earned as hours are expended and reimbursable costs are
          incurred.
 
 Training
          revenues are recognized at the time of shipment of products or performance
          of
          contracted services. Products are shipped FOB shipping point and title
          passes
          upon shipment. Training contracts may contain elements of both custom contract
          work (contracted services) and subscription arrangements (delivery of training
          products). Training subscription revenues are recorded when collection
          of the
          subscription is highly probable and no significant Company obligations
          remain
          after the product has been delivered. The Company defers revenue recognition
          on
          training contracts related to payments received during the current period
          for
          the portion of the subscription contract that extends into future periods.
          At
          December 31, 2005 and September 30, 2005, no subscription contracts were
          paid in
          advance. In accordance with EITF 01-14, the Company’s reimbursable costs are
          recorded as gross revenue, with the actual costs recorded as a direct
          cost.
 
 The
          Company’s internet sales are less than 0.5% of total revenue. Such internet
          transactions are recorded as training subscriptions and training is delivered
          via the hosted web sites of Vivid. The revenue is recorded when the training
          is
          delivered, when evidence of a persuasive arrangement exists, and when collection
          is reasonably assured.
 
 The
          Company does not offer warranties or returns.
  12
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
 Royalty
          expenses
 Reseller
          commissions or royalty payments are recorded as an expense if the Company
          bears
          the primary responsibility for the fulfillment of the underlying customer’s
          order and for the acceptance by the customer of the training services sold.
          Such
          costs paid to resellers are recorded as a reduction to the underlying selling
          price if the reseller is the primary obligor to the customer in the
          transaction.
 
 **NOTE
          3 - RELATED PARTY TRANSACTIONS**
 
 The
          Company was awarded a three-year contract renewal with a minimum value
          of
          $1,622,609 with Fluor Hanford, Inc., a Nuvotec, Inc. shareholder, for the
          period
          from October 1, 2005 to September 30, 2008. The Company provides computer-based
          training monthly for the employees of Fluor Hanford, Inc. and its contractors.
          The accounts receivable due from Fluor Hanford at December 31, 2005 and
          September 30, 2005, was $40,156 and $81,272 respectively. Revenue from
          Fluor
          Hanford for the three months ended December 31, 2005 and 2004 was $184,988
          and
          $156,202, respectively.
 
 At
          December 31, 2005 and September 30, 2005 the recorded current related party
          payable consisted of $983,123 and $1,000,000, respectively, of borrowing
          from
          Nuvotec USA, Inc.’s line of credit and current amounts due to the former owners
          of ImageWorks of $75,000 in cash or stock. The long-term related party
          payable
          at December 31, 2005 and September 30, 2005, consists of borrowing from
          Nuvotec
          of $99,682 and $1,364,145, respectively, and amounts due to the former
          owners of
          ImageWorks of $425,000 and $389,000 respectively.
 
 The
          total
          amount payable by Vivid on Nuvotec’s line of credit at December 31, 2005 and
          September 30, 2005 was $983,123 and $1,000,000, respectively. The portion
          of
          drawing on the line of credit attributed to Nuvotec as of December 31,
          2005 and
          September 30, 2005 was $16,877 and $0, respectively, leaving $0 available
          for
          use by either company at December 31, 2005.
 
 **NOTE
          4 - STOCKHOLDERS’ EQUITY**
 
 Common
          Stock
 During
          the three months ended December 31, 2005, the Company converted $1,092,448
          in
          related party long-term debt due to Nuvotec, USA, Inc., into 1,749,303
          shares of
          common stock.
 
 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, 2005 and September 30, 2005, no preferred stock has been issued
          by
          the Company.
  13
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
 **NOTE
          5 - STOCK-BASED COMPENSATION**
 
 During
          2004, the Company issued to executives a total of 866,334 common stock
          options,
          exercisable at $0.25 per share for four years and vesting at a rate of
          25% per
          year. No expense was recorded at September 30, 2004 because none of the
          options
          were vested and the benefit period began October 1, 2004.
 
 During
          the year ended September 30, 2005, 318,792 options vested which had been
          issued
          in 2004, and have a fair value of $25,503.
 
 During
          the year ended September 30, 2005, additional options totaling 87,500 were
          issued of which 21,875 have vested and have a fair value of $3,937. Also
          during
          the year ended September 30, 2005, 50,000 options were exercised and 399,500
          options originally issued in 2004 expired or were terminated.
 
 The
          fair
          value of each option granted is estimated on the grant date using the
          Black-Scholes Option Price Calculation. The following assumptions were
          made in
          estimating the fair value: risk-free interest is 4%, volatility is 0.3,
          and
          expected life is 3 to 4 years.
 
 The
          following is a summary of stock option activity:
 
 **Equity
                    compensation**
                  **plans
                    not approved**
                  **by
                    shareholders**
                
                Number
                    of shares
                  to
                    be issued upon
                  exercise
                    of
                  outstanding
                    options
                
                Weighted-average
                  exercise
                    price of
                  outstanding
                    options
                
                Number
                    of shares
                  remaining
                    available
                  for
                    future issuance
                  under
                    equity
                  compensation
                    plans2003
                    Stock Option Plan
                
                527,584
                
                $
                    0.27
                
                1,822,416Total
                
                527,584
                
                
                
                1,822,416
 
 WeightedNumber
                    of
                
                Average
                    ExerciseShares
                
                PriceOutstanding
                    at October 1, 2004
                
                
                866,334
                
                $
                0.24Granted
                
                
                87,500
                
                
                0.25Exercised
                
                
                (50,000
                )
                
                0.10Expired
                    or terminated
                
                
                (399,500
                )
                
                0.25Outstanding
                    at September 30, 2005
                
                
                504,334
                
                $
                0.25Options
                    exercisable at September 30, 2005
                
                
                138,584
                
                $
                0.25Outstanding
                    at October 1, 2005
                
                
                504,334
                
                $
                0.25Granted
                
                
                45,000
                
                
                0.50Exercised
                
                
                —Expired
                    or terminated
                
                
                (21,750
                )
                
                0.25Outstanding
                    at December 31, 2005
                
                
                527,584
                
                $
                0.27Options
                    exercisable at December 31, 2005
                
                
                138,584
                
                $
                0.25
 
 14
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
 **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, 2005 and 2004, services
          provided to these contractors aggregated $268,890 and $157,517, **** representing
          26% and 14% of total revenue, respectively. At December 31, 2005 and 2004,
          amounts due from these contractors are included in accounts receivable
          in the
          amounts of $123,556 and $11,680, respectively.
 
 The
          Company’s concentration risks for customer accounts receivable and revenues
          greater than 10% of the total account balances for the respective periods
          are as
          follows:
 
 Three
                    Months
                  Ending
                    December31,
                    2005
                
                Three
                    Months
                  Ending
                    December 31, 2004Revenues—Fluor
                  Hanford
                $184,988
                
                $156,202Revenues—1stEnergy
                  Redding,
                    PA
                $108,900
                
                $108,900Revenues—Element
                    K
                  Rochester,
                    NY
                $57,116
                
                $116,245Accounts
                    Receivable
                  Fluor
                    Hanford
                $40,156
                
                $1,051Accounts
                    Receivable
                  1stEnergy
                $108,900
                
                $108,900Accounts
                    Receivable
                  Element
                    K
                $39,901
                
                $15,620
  **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, 2005 and
          2004,
          the Company incurred $8,050 and $8,315 in royalty obligations, respectively,
          which are recorded in marketing expense. At December 31, 2005 and September
          30,
          2005, the Company accrued $11,720 and $11,720, respectively, in royalty
          obligations which are recorded in other current liabilities on the balance
          sheet.
  15
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
 **NOTE
          8 -** **SEGMENT
          INFORMATION**
 
 The
          Company adopted Statement of Financial Accounting Standards No. 131,
          "Disclosures about Segments of an Enterprise and Related Information,"
          (hereinafter “SFAS No. 131”) **** during
          the year ended September 30, 2002. SFAS No. 131 established standards for
          reporting information about operating segments in annual financial statements
          and requires selected information about operating segments in interim financial
          reports issued to stockholders. It also established standards for related
          disclosures about products and services and geographic areas. Operating
          segments
          are defined as components of an enterprise about which separate financial
          information is available, evaluated regularly by the chief operating decision
          makers, or a decision making group, in deciding how to allocate resources
          and in
          assessing performance. The Company has three operating segments at December
          31,
          2005 and 2004: corporate training subscriptions; custom products and services;
          ImageWorks-related revenues.
 
 Segment
          information (after inter-company eliminations) for the three months ended
          December 31, 2005 and 2004 are as follows:
 
 December
                    31,
                
                December
                    31,2005
                
                2004Revenues:Training
                    subscriptions
                
                $
                754,096
                
                $
                779,150Custom
                    products and services
                
                
                119,841
                
                
                68,291ImageWorks
                
                
                177,881
                
                
                280,247Total
                    revenues
                
                $
                1,051,818
                
                $
                1,127,688Income
                    (loss) before taxes:Training
                    subscriptions
                
                $
                674,980
                
                $
                581,742Custom
                    products and services
                
                
                (19,400
                )
                
                (152,396
                )ImageWorks
                
                
                87,484
                
                
                184,218Corporate
                
                
                (706,738
                )
                
                (755,212
                )Total
                    income (loss) before taxes
                
                $
                36,326
                
                $
                (141,648
                )Identifiable
                    assets:Training
                    subscriptions
                
                $
                —
                
                $
                —Custom
                    products and services
                
                
                —
                
                
                —ImageWorks
                
                
                180,532
                
                
                205,932Corporate
                
                
                4,955,898
                
                
                5,214,785Total
                    identifiable assets
                
                $
                5,136,430
                
                $
                5,420,717Depreciation
                    and amortization:Training
                    subscriptions
                
                $
                70,382
                
                $
                72,805Custom
                    products and services
                
                
                —
                
                
                —ImageWorks
                
                
                3,002
                
                
                6,249Corporate
                
                
                11,298
                
                
                13,089Total
                    depreciation and amortization
                
                $
                84,682
                
                $
                92,143
  16
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
 Separate
          management of each segment is required because each business unit is subject
          to
          different marketing, production, and technology strategies.
 
 Training
          subscriptions, the first reportable segment, derives revenues from the
          sale of
          computer-based safety training products and services throughout the United
          States. Custom products and services which is the second reportable segment,
          derives its revenue from custom products and services designed specifically
          for
          the end user. ImageWorks, the third segment, derives its revenues from
          custom
          media products and services.
 
 **NOTE
          9 -**  **SALE
          OF PROTRAIN ASSETS**
 
 Effective
          October 1, 2005, the assets of Protrain, a division of the Company, including
          computers, equipment and a customer list were sold to a former employee
          for a
          $45,000 note payable to the Company over three years commencing January
          1, 2006
          with payments of $1,349 monthly including interest at 5% per annum. The
          Company
          recognized a gain on this transaction of $30,276.
 
 **NOTE
          10** - **CONVERSION
          OF RELATED PARTY DEBT**
 
 During
          the three months ended December 31, 2005, the Company converted $1,092,448
          in
          related party long-term debt due to Nuvotec, USA, Inc., into 1,749,303
          shares of
          common stock.
  17
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONDENSED
            NOTES TO THE CONSOLIDATED FINANCIALS STATEMENTS**
 **December
            31, 2005**
 
 **NOTE
          11 - INCOME TAXES**
 
 During
          the three months ended December 31, 2005, the Company generated $66,602
          of
          income before income taxes. As a result, the Company has recognized $22,645
          of
          federal income tax expense, calculated at a rate of approximately 34%,
          and a
          reduction in its deferred tax asset for this same amount.
  18
 
 **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, 2005 COMPARED WITH THREE
          MONTHS
          ENDED DECEMBER 31, 2004**
 
 **Revenues:**
 
 Overall
          revenues decreased 7% to $1,051,818 in the first quarter of fiscal year
          2006
          from $1,127,688 in the first quarter of fiscal year 2005. The decrease
          was
          mainly due to the reduction in revenues attributable to subsidiary, ImageWorks
          Media Group, Inc. (“ImageWorks”) of $102,366 during the first quarter of fiscal
          2006.
 
 Training
          subscription revenues decreased by 3% to $754,096 in the first quarter
          of fiscal
          year 2006 from $779,150 in the first quarter of fiscal year 2005 because
          of a
          slight decrease in subscription based customer renewals in the comparison
          of the
          two quarters.
 
 Custom
          products and services revenues decreased overall by 15% to $297,722 in
          the first
          quarter of fiscal year 2006 from $348,538 in the first quarter of fiscal
          year
          2005. The decrease is mainly attributable to a reduction of subsidiary
          ImageWorks revenues. However, custom products and services revenues increased
          during the first quarter of fiscal year 2006 if the revenues from ImageWorks
          are
          excluded, because of an increase in custom revenue earned from contracted
          federal custom work on the Hanford Site in Richland, WA from the Department
          of
          Energy and their subcontractors.
 
 **Operating
          Expenses**
 
 Cost
          of
          Revenues:
 
 Overall,
          cost of revenues decreased by 23% to $308,762 in the first quarter of fiscal
          year 2006 from $399,188 in the first quarter of fiscal year 2005. The decrease
          is due to a lower proportionate share of lower margin custom products and
          services revenues as compared to training subscription revenues in comparing
          the
          first quarter of fiscal 2006 to the first quarter of fiscal year 2005.
          Much of
          the proportionate decrease in custom products and services revenue in the
          first
          quarter of fiscal year 2006 is attributable to the subsidiary,
          ImageWorks.
 
 Training
          subscription cost of revenues decreased by 4% to $79,116 in the first quarter
          of
          fiscal year 2006 from $82,472 in the first quarter of fiscal year 2005.
          This
          slight decrease is due to decreased training subscription revenues in comparing
          the two quarters. The decreased expenses associated with cost of training
          subscription revenues translated into an increase in the gross profit margin
          to
          90% of training subscription revenues from 89% in comparing the first quarter
          of
          fiscal year 2006 compared to the first quarter of fiscal year 2005.
  19
 
 Custom
          products and services cost of revenues decreased by 27% to $229,646 in
          the first
          quarter of fiscal year 2006 from $316,716 in the first quarter of fiscal
          year
          2005. The decrease is mainly due to the reduction in costs of revenue
          attributable to lower revenues generated by the ImageWorks operation during
          the
          first quarter of fiscal year 2006. Also, expense reductions were realized
          due to
          staff reductions made in production personnel and technical assistance
          support
          for custom projects in the first quarter of fiscal year 2006.
 
 Marketing/Reseller
          Commissions:
 
 Marketing
          and reseller commission expenses decreased by 17% to $286,918 in the first
          quarter of fiscal year 2006 from $346,426 in the first quarter of fiscal
          year
          2005. The decrease is mainly attributable to a 67% reduction in commissions
          paid
          to resellers to $36,509 in the first quarter of fiscal year 2006 from $109,182
          in the first quarter of fiscal year 2005. The reduction in commissions
          paid to
          resellers is the result of an increase in the proportion of direct sales
          to
          total sales in the first quarter of fiscal year 2006.
 
 Depreciation
          and Amortization:
 
 Depreciation
          and amortization decreased by 26% to $14,300 in the first quarter of fiscal
          year
          2006 from $19,338 in the first quarter of fiscal year 2005 due to an increase
          in
          fully depreciated assets in comparing the two quarters.
 
 General
          and Administrative Expenses:
 
 General
          and Administrative expenses decreased by 21% to $387,338 in the first quarter
          of
          fiscal year 2006 from $493,057 in the first quarter of fiscal year 2005.
          The
          significant expense categories of decrease in comparing the first quarters
          of
          fiscal year 2006 to 2005 are labor and allocation of central overhead expenses.
          The labor decrease ($149,560 in the first quarter of fiscal year 2006 compared
          to $212,667 in the first quarter of fiscal year 2005) is due to management
          and
          staff reductions that were effective October 1, 2005 to downsize the
          infrastructure of the Company to be aligned with revenues. The decrease
          in
          central overhead allocation of expenses ($21,000 in the first quarter of
          fiscal
          year 2006 compared to $62,000 in the first quarter of fiscal year 2005)
          is
          related to a decrease in the requirement for external executive management
          oversight.
 
 **Income
          from Operations**
 
 Income
          from Operations increased by $184,158 to $53,937 in the first quarter of
          fiscal
          year 2006 from ($130,321) in the first quarter of fiscal year 2005. Principally,
          the increase is due to decreases in cost of revenues, reseller commissions
          and
          administrative expenses in the comparison of the two quarters.
 
 **Other
          Income (Expense)**
 
 The
          main
          increase in other income is attributable to the gain of $30,276 realized
          in the
          sale of Protrain assets, partially offset by an increase attributable to
          interest expense on debt in the first quarter of fiscal year 2006 compared
          to
          2005. Interest expense on debt was $17,611 in the quarter ended December
          31,
          2005 compared to $11,597 in the quarter ended December 31, 2004.
  20
  **Net
          Income (Loss)**
 
 The
          operation generated net income of $43,957, or 4% of revenues, in the first
          quarter of fiscal year 2006 compared to a loss of ($93,488) in the first
          quarter
          of fiscal year 2005. The increase in net income of $137,445 is due mainly
          to
          reductions in infrastructure expenses to align more directly with
          revenues.
 
 **Seasonality
          and Other Factors Affecting Quarterly Results**
 
 The
          revenues of the Company may fluctuate during the holiday season of the
          year.
          Training subscription revenues are typically higher in December because
          many
          subscription renewals occur at the end of each calendar year. We expect
          quarterly fluctuations in operating results as a result of many factors
          including acquisitions and roll-out of new product offerings. The operating
          results for any quarter are not necessarily indicative of the results for
          any
          future period.
 
 **Liquidity
          and Capital Resources**
 
 Historically,
          the Company has financed its cash flow requirements through the management
          of
          its line of credit and cash generated from operations. As of December 31,
          2005,
          the Company had cash and cash equivalents of $106,003 as compared to $16,622
          as
          of September 30, 2005.
 
 Cash
          flows provided by operating activities amounted to $269,118 in the first
          three
          months of fiscal year 2006 compared to $61,078 in the same period of fiscal
          year
          2005. The main reason for the increase is attributable to the net income
          during
          the three month period of $43,957, and a reduction in other current assets
          pertaining to the realization of related party receivables of $181,870
          as part
          of the net conversion of related party transactions into additional paid
          in
          capital in the first quarter of fiscal year 2006.
 
 Cash
          flows used in investing activities decreased by $62,817 to $26,283 in the
          first
          quarter of fiscal year 2006 from $89,100 in the first quarter of fiscal
          year
          2005. The decrease is attributable to lower expenditures related to the
          acquisition of software and internally developed software.
 
 Cash
          flows and non-cash transactions provided by financing activities increased
          by
          $873,923 to $938,994 in the first quarter of fiscal year 2006 compared
          to
          $65,071 in the first quarter of fiscal year 2005. The increase is attributable
          to the conversion of related party transactions into additional paid in
          capital
          partially offset by payments on notes payable, related parties.
 
 The
          Company believes that equity/debt financing together with cash generated
          by
          operations are required to achieve market objectives in terms of timeliness
          into
          the market and market share. If cash generated from operations is insufficient
          to satisfy our liquidity requirements and the Company is unable to raise
          needed
          equity/debt funds on acceptable terms or at all the Company may not be
          able to
          develop or enhance its products, take advantage of future opportunities,
          or
          respond to competitive pressures. A material shortage of capital may require
          the
          Company to take steps such as reducing its level of operations, disposing
          of
          selected assets, or seeking an acquisition partner. ****
  21
 
 **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, 2005. 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.
  22
  **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
   23
   **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 14, 2006
                Vivid
                    Learning Systems, Inc.By:/s/ Christopher L. BrittonChristopher
                    L. BrittonChief
                    Executive Officer