UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
quarterly period ended March 31, 2009





OR





 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF
      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)





Washington
                  (State
      or other jurisdiction of
                  incorporation
      or organization)
                91-1694268
                  (I.R.S.
      Employer Identification No.)





5728
Bedford Street


Pasco,
WA  99301


(Address
of principal executive offices, including zip code)





(509)
545-1800


(Registrant's
telephone number, including area code)





Indicate
by check mark 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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes x No  ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
 Yes o No o





Indicate
by check mark whether the Registrant is a large accelerated file, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.





Large
accelerated filer  ̈   Accelerated
filer  ̈   Non-accelerated
filer  ̈   Smaller
reporting company x





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes  ̈ No x





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:





Common
      Stock, no par value
              13,272,165(Class)
              Outstanding
      as of May 12, 2009









VIVID
LEARNING SYSTEMS, INC.


INDEX




PagePART
      I – FINANCIAL INFORMATIONItem
      1
                            Financial
      Statements
                            3Consolidated
      Balance Sheets as of March 31, 2009 (unaudited) and September 30,
      2008
                            4Consolidated
      Statements of Income for the three months and six months ended March 31,
      2009  and March 31, 2008 (unaudited)
                            5Consolidated
      Statements of Cash Flows for the six months ended March 31,
      2009  and March 31, 2008 (unaudited)
                            6Condensed
      Notes to Unaudited Consolidated Financial Statements
                            7Item
      2
                            Management’s
      Discussion And Analysis Of Financial Condition And Results Of
      Operations
                            17Item
      3
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            *Item
      4T
                            Controls
      and Procedures
                            22PART
      II – OTHER INFORMATIONItem
      1
                            Legal
      Proceedings
                            *Item
      1A
                            Risk
      Factors
                            *Item
      2
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            *Item
      3
                            Defaults
      Upon Senior Securities
                            *Item
      4
                            Submission
      of Matters to a Vote of Security Holders
                            *Item
      5
                            Other
      Information
                            *Item
      6
                            Exhibits
                            22SIGNATURES
                            22





*  No
information provided due to inapplicability of the item.


2





PART
I – FINANCIAL INFORMATION / ITEM 1 – FINANCIAL STATEMENTS




3




VIVID
LEARNING SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS





March
      31,
                            
                            
                            September
      30,2009
                            
                            
                            2008(unaudited)ASSETSCURRENT
      ASSETSCash
                            
                            $
                            689,340
                            
                            
                            $
                            132,391Accounts
      and contracts receivable
                            
                            
                            999,714
                            
                            
                            
                            972,151Accounts
      and contracts receivable, Fluor Hanford
                            
                            
                            8,700
                            
                            
                            
                            24,994Prepaid
      expenses
                            
                            
                            138,864
                            
                            
                            
                            185,793Other
      current assets
                            
                            
                            192,145
                            
                            
                            
                            138,214TOTAL
      CURRENT ASSETS
                            
                            
                            2,028,763
                            
                            
                            
                            1,453,543PROPERTY,
      PLANT AND EQUIPMENTProperty
      and equipment
                            
                            
                            1,716,354
                            
                            
                            
                            1,583,630Less:
      Accumulated depreciation
                            
                            
                            (1,309,191
                            )
                            
                            
                            (1,247,676
                            )TOTAL
      PROPERTY, PLANT AND EQUIPMENT
                            
                            
                            407,163
                            
                            
                            
                            335,954OTHER
      ASSETSSoftware,
      net of amortization
                            
                            
                            1,281,684
                            
                            
                            
                            1,229,722Goodwill
                            
                            
                            375,000
                            
                            
                            
                            375,000Long-term
      contracts receivable
                            
                            
                            -
                            
                            
                            
                            1,321Deferred
      tax asset
                            
                            
                            515,243
                            
                            
                            
                            665,596TOTAL
      OTHER ASSETS
                            
                            
                            2,171,927
                            
                            
                            
                            2,271,639TOTAL
      ASSETS
                            
                            $
                            4,607,853
                            
                            
                            $
                            4,061,136LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                            
                            $
                            110,149
                            
                            
                            $
                            120,807Line
      of credit payable
                            
                            
                            -
                            
                            
                            
                            -Accrued
      labor
                            
                            
                            194,484
                            
                            
                            
                            100,933Other
      current liabilities
                            
                            
                            79,664
                            
                            
                            
                            46,811Unearned
      revenue
                            
                            
                            93,274
                            
                            
                            
                            100,518Notes
      payable, related parties
                            
                            
                            -
                            
                            
                            
                            25,000Current
      portion of long-term liabilities
                            
                            
                            207,342
                            
                            
                            
                            108,341TOTAL
      CURRENT LIABILITIES
                            
                            
                            684,913
                            
                            
                            
                            502,410LONG-TERM
      LIABILITIESLong-term
      debt
                            
                            
                            234,051
                            
                            
                            
                            134,095Other
      long-term liabilities
                            
                            
                            91,052
                            
                            
                            
                            116,709TOTAL
      LONG-TERM LIABILITIES
                            
                            
                            325,103
                            
                            
                            
                            250,804TOTAL
      LIABILITIES
                            
                            
                            1,010,016
                            
                            
                            
                            753,214COMMITMENTS
      AND CONTINGENCIES
                            
                            
                            -
                            
                            
                            
                            -STOCKHOLDERS'
      EQUITYPreferred
      stock, $0.0001 par value; 5,000,000 shares authorized, no shares issued
      and outstanding
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, no par value and $0.0001, par value, respectively 200,000,000
      shares authorized, 13,272,165 and 13,372,203 shares issued and
      outstanding, respectively
                            
                            
                            1,327
                            
                            
                            
                            1,337Additional
      paid-in capital
                            
                            
                            4,406,637
                            
                            
                            
                            4,408,564Accumulated
      deficit
                            
                            
                            (810,127
                            )
                            
                            
                            (1,101,979
                            )TOTAL
      STOCKHOLDERS'  EQUITY
                            
                            
                            3,597,837
                            
                            
                            
                            3,307,922TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                            
                            $
                            4,607,853
                            
                            
                            $
                            4,061,136




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


4





VIVID LEARNING SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS





Three
      Months Ended
                                      
                                      
                                      
                                      
                                      
                                      Six
      Months EndedMarch
      31, 2009
                                      
                                      
                                      March
      31, 2008
                                      
                                      
                                      March
      31, 2009
                                      
                                      
                                      March
      31, 2008(Unaudited)
                                      
                                      
                                      (Unaudited)
                                      
                                      
                                      (Unaudited)
                                      
                                      
                                      (Unaudited)REVENUESTraining
      subscriptions
                                      
                                      $
                                      704,037
                                      
                                      
                                      $
                                      773,502
                                      
                                      
                                      $
                                      1,590,776
                                      
                                      
                                      $
                                      1,525,010Training
      subscriptions, Fluor Hanford
                                      
                                      
                                      141,039
                                      
                                      
                                      
                                      138,052
                                      
                                      
                                      
                                      280,748
                                      
                                      
                                      
                                      276,384Custom
      products and services
                                      
                                      
                                      622,113
                                      
                                      
                                      
                                      401,542
                                      
                                      
                                      
                                      1,282,903
                                      
                                      
                                      
                                      799,029Custom
      products and services, Fluor Hanford
                                      
                                      
                                      14,529
                                      
                                      
                                      
                                      19,572
                                      
                                      
                                      
                                      23,601
                                      
                                      
                                      
                                      36,6291,481,718
                                      
                                      
                                      
                                      1,332,668
                                      
                                      
                                      
                                      3,178,028
                                      
                                      
                                      
                                      2,637,052COST
      OF REVENUESTraining
      subscriptions
                                      
                                      
                                      237,671
                                      
                                      
                                      
                                      233,425
                                      
                                      
                                      
                                      448,308
                                      
                                      
                                      
                                      485,856Custom
      products and services
                                      
                                      
                                      349,235
                                      
                                      
                                      
                                      316,252
                                      
                                      
                                      
                                      780,449
                                      
                                      
                                      
                                      611,701586,906
                                      
                                      
                                      
                                      549,677
                                      
                                      
                                      
                                      1,228,757
                                      
                                      
                                      
                                      1,097,557GROSS
      PROFIT
                                      
                                      
                                      894,812
                                      
                                      
                                      
                                      782,991
                                      
                                      
                                      
                                      1,949,271
                                      
                                      
                                      
                                      1,539,495EXPENSESMarketing
      and related labor expenses
                                      
                                      
                                      322,035
                                      
                                      
                                      
                                      358,116
                                      
                                      
                                      
                                      641,876
                                      
                                      
                                      
                                      623,138Bad
      debt expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,038Reseller
      commissions
                                      
                                      
                                      159,870
                                      
                                      
                                      
                                      140,584
                                      
                                      
                                      
                                      281,500
                                      
                                      
                                      
                                      185,086Depreciation
      and amortization
                                      
                                      
                                      33,613
                                      
                                      
                                      
                                      24,410
                                      
                                      
                                      
                                      61,514
                                      
                                      
                                      
                                      49,190Wages
      and contract labor
                                      
                                      
                                      114,470
                                      
                                      
                                      
                                      100,291
                                      
                                      
                                      
                                      219,857
                                      
                                      
                                      
                                      215,271Other
      operating expenses
                                      
                                      
                                      145,154
                                      
                                      
                                      
                                      60,936
                                      
                                      
                                      
                                      279,648
                                      
                                      
                                      
                                      163,223TOTAL
      OPERATING EXPENSES
                                      
                                      
                                      775,142
                                      
                                      
                                      
                                      684,337
                                      
                                      
                                      
                                      1,484,395
                                      
                                      
                                      
                                      1,237,946INCOME
      FROM OPERATIONS
                                      
                                      
                                      119,670
                                      
                                      
                                      
                                      98,654
                                      
                                      
                                      
                                      464,876
                                      
                                      
                                      
                                      301,549OTHER
      INCOME (EXPENSE)Gain
      on sale of equipment and intangible assets
                                      
                                      
                                      -
                                      
                                      
                                      
                                      100
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      100Interest
      income
                                      
                                      
                                      75
                                      
                                      
                                      
                                      1,348
                                      
                                      
                                      
                                      361
                                      
                                      
                                      
                                      2,155Interest
      expense
                                      
                                      
                                      (14,244
                                      )
                                      
                                      
                                      (10,685
                                      )
                                      
                                      
                                      (23,032
                                      )
                                      
                                      
                                      (16,974
                                      )TOTAL
      OTHER INCOME (EXPENSE)
                                      
                                      
                                      (14,169
                                      )
                                      
                                      
                                      (9,237
                                      )
                                      
                                      
                                      (22,671
                                      )
                                      
                                      
                                      (14,719
                                      )INCOME
      BEFORE INCOME TAXES
                                      
                                      
                                      105,501
                                      
                                      
                                      
                                      89,417
                                      
                                      
                                      
                                      442,205
                                      
                                      
                                      
                                      286,830INCOME
      TAX EXPENSE
                                      
                                      
                                      35,875
                                      
                                      
                                      
                                      30,637
                                      
                                      
                                      
                                      150,353
                                      
                                      
                                      
                                      97,730NET
      INCOME
                                      
                                      $
                                      69,626
                                      
                                      
                                      $
                                      58,780
                                      
                                      
                                      $
                                      291,852
                                      
                                      
                                      $
                                      189,100BASIC
      AND DILUTED NET INCOME (LOSS) PER SHARE
                                      
                                      $
                                      0.01
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      0.02
                                      
                                      
                                      $
                                      0.01BASIC
      AND DILUTEDWEIGHTED
      AVERAGE NUMBER OF SHARES
                                      
                                      
                                      13,272,165
                                      
                                      
                                      
                                      13,372,165
                                      
                                      
                                      
                                      13,284,872
                                      
                                      
                                      
                                      13,372,165




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


5





VIVID LEARNING SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Six
      Months
                      
                      
                      Six
      MonthsEnded
                      
                      
                      EndedMarch
      31, 2009
                      
                      
                      March
      31, 2008(unaudited)
                      
                      
                      (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                      
                      $
                      291,852
                      
                      
                      $
                      189,100Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      61,514
                      
                      
                      
                      49,190Amortization
      of capitalized software
                      
                      
                      138,917
                      
                      
                      
                      135,220Bad
      debt expense
                      
                      
                      -
                      
                      
                      
                      2,038Options
      issued for compensation
                      
                      
                      23,064
                      
                      
                      
                      10,268Changes
      in assets and liabilities:Accounts
      and contracts receivable
                      
                      
                      (11,269
                      )
                      
                      
                      303,309Prepaid
      expenses
                      
                      
                      46,929
                      
                      
                      
                      (87,925
                      )Other
      current assets
                      
                      
                      (53,931
                      )
                      
                      
                      88,416Deferred
      tax asset
                      
                      
                      150,353
                      
                      
                      
                      97,732Accounts
      payable
                      
                      
                      (10,658
                      )
                      
                      
                      (136,892
                      )Accrued contract labor and
      related expenses
                      
                      
                      93,551
                      
                      
                      
                      (124,857
                      )Long-term
      receivable contracts
                      
                      
                      1,321
                      
                      
                      
                      85,202Other
      current liabilities
                      
                      
                      32,853
                      
                      
                      
                      (64,668
                      )Unearned
      revenue
                      
                      
                      (7,244
                      )
                      
                      
                      (60,064
                      )Net cash provided by operating
      activities
                      
                      
                      757,252
                      
                      
                      
                      486,069CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition of property,
      equipment and intangible assets
                      
                      
                      (132,724
                      )
                      
                      
                      (32,499
                      )Acquisition
      of software
                      
                      
                      (190,879
                      )
                      
                      
                      (44,950
                      )Net
      cash used by investing activities
                      
                      
                      (323,603
                      )
                      
                      
                      (77,449
                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable, related party
                      
                      
                      (25,000
                      )
                      
                      
                      (75,000
                      )Treasury
      stock
                      
                      
                      (25,000
                      )
                      
                      
                      -Payments
      on line of credit payable
                      
                      
                      -
                      
                      
                      
                      (57,072
                      )Proceeds
      from term loan
                      
                      
                      250,000
                      
                      
                      
                      -Payments
      on long-term debt
                      
                      
                      (46,757
                      )
                      
                      
                      (25,693
                      )Payments
      on long-term liabilities
                      
                      
                      (29,943
                      )
                      
                      
                      (21,242
                      )Net cash provided (used) by
      financing activities
                      
                      
                      123,300
                      
                      
                      
                      (179,007
                      )Net
      increase (decrease) in cash
                      
                      
                      556,949
                      
                      
                      
                      229,613Cash
      at beginning of period
                      
                      
                      132,391
                      
                      
                      
                      80,331Cash
      at end of period
                      
                      $
                      689,340
                      
                      
                      $
                      309,944SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid
                      
                      $
                      14,244
                      
                      
                      $
                      28,196Income
      taxes paid
                      
                      $
                      -
                      
                      
                      $
                      -NON-CASH
      TRANSACTIONS:Options
      issued as compensation
                      
                      $
                      23,064
                      
                      
                      $
                      10,268




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


6





VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





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 Tecknowledgey, 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 served 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.  Effective February 11, 2009 Vivid
Delaware was merged into Vivid Washington which became the parent and sole
shareholder of ImageWorks Media Group, Inc.





Vivid
Washington develops and provides computer-based training products and services,
which are marketed nationally.  Vivid Washington (the “Company”) and
its subsidiary, ImageWorks Digital Media, Inc., 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-Q 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, 2008 included in the Company’s
annual report on Form 10-KSB/A which was filed with the SEC on December 30,
2008.  In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation of
interim results have been included.  Operating results for the six
months ended March 31, 2009 are not necessarily indicative of the results that
may be expected for the fiscal year ending September 30, 2009.  For
further information, refer to the Company’s consolidated audited financial
statements at September 30, 2008 and footnotes thereto.





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.


7





VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





Recent
Pronouncements





Hierarchy of Generally
Accepted Accounting Principles


In May,
2008, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (SFAS No. 162). This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The sources of accounting principles
that are generally accepted are categorized in descending order of authority as
follows:





a. FASB
Statements of Financial Accounting Standards and Interpretations, FASB Statement
133 Implementation Issues, FASB Staff Positions, and American Institute of
Certified Public Accountants (AICPA) Accounting Research Bulletins and
Accounting Principles Board Opinions that are not superseded by actions of the
FASB





b. FASB
Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
Accounting Guides and Statements of Position





c. AICPA
Accounting Standards Executive Committee Practice Bulletins that have been
cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force
(EITF), and the Topics discussed in Appendix D of EITF Abstracts(EITF
D-Topics)





d.
Implementation guides (Q&As) published by the FASB staff, AICPA Accounting
Interpretations, AICPA Industry Audit and Accounting Guides and Statements of
Position not cleared by the FASB, and practices that are widely recognized and
prevalent either generally or in the industry.





The
adoption of this statement will have no material effect on the Company’s
financial condition or results of operations.





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 subsidiary, after elimination of
inter-company accounts and transactions.  The wholly owned subsidiary
of the Company is 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.




8





VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





Fair Value
Measurement


On April
1, 2008, the Company adopted the provisions of SFAS No. 157 related to its
financial assets and liabilities measured at fair value on a recurring
basis.  SFAS No. 157 establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1 measurement) and the lowest priority to
unobservable inputs (Level 3 measurement).




The three
levels of the fair value hierarchy defined by SFAS No. 157 are as
follows:




Level 1 – Quoted prices are
available in active markets for identical assets or liabilities. Active markets
are those in which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.




Level 2 – Pricing inputs are
other than quoted prices in active markets included in Level 1, which are either
directly or indirectly observable as of the reporting date. Level 2 includes
those financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider
various assumptions, including quoted forward prices for commodities, time
value, volatility factors, and current market and contractual prices for the
underlying instruments, as well as other relevant economic measures.
Substantially all of these assumptions are observable in the marketplace
throughout the full term of the instrument, can be derived from observable data
or are supported by observable levels at which transactions are executed in the
marketplace.




Level 3 – Pricing inputs
include significant inputs that are generally unobservable from objective
sources. These inputs may be used with internally developed methodologies that
result in management’s best estimate of fair value. Level 3 instruments include
those that may be more structured or otherwise tailored to the Company’s
needs.




As
required by SFAS No. 157, financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the
fair value measurement.  The Company’s assessment of the significance
of a particular input to the fair value measurement requires judgment, and may
affect the valuation of fair value assets and liabilities and their placement
within the fair value hierarchy levels.





There
were no money market accounts or investments in equity securities requiring
disclosure by level within the fair value of Company assets and liabilities
measured and reported on the Consolidated Balance Sheet as of March 31, 2009 at
fair value on a recurring basis.





On
December 14, 2007 the FASB issued a proposed FASB staff position ("FSP")
that would amend SFAS 157 to delay its effective date for all non-financial
assets and non-financial liabilities, except for those that are recognized or
disclosed at fair value in the financial statements on a recurring basis, that
is, at least annually.  For items within the scope of the proposed FSP
the effective date of SFAS 157 would be delayed to fiscal years beginning
after November 15, 2008 (fiscal 2010 for the Company) and interim periods
within those fiscal years. During February 2008, the FASB confirmed and made
effective the FSP.  The Company has chosen not to implement SFAS 157
for non-financial assets and non-financial liabilities at this
time.


9




VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





Provision for
Taxes


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 2009 presentation.  The
reclassifications have no effect on net assets, net revenues, or net
earnings.





Reseller Commissions and
Royalty Expenses


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





Expenses
paid to resellers are recorded as a reduction of the underlying selling price if
the cumulative affirmative impact of indicators of net revenue reporting, as
outlined in EITF 99-19, Indicators 15-17 are present in the transaction. The
Company does not provide any consideration to the resellers’ end-users other
than negotiated price discounts for subscriptions based on the size of the
contract.  Contract size is defined by the number of employees
(seats), number of lessons, and length of the contract.





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





Software Development
Costs


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


10





VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





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:





March 31,
                    2009
                  
                  
                  September 30,
                    2008Software
      development costs
                  
                  $
                  3,968,443
                  
                  
                  $
                  3,754,564Accumulated
      amortization
                  
                  
                  (2,686,759
                  )
                  
                  
                  (2,524,842
                  )$
                  1,281,684
                  
                  
                  $
                  1,229,722





The
amount of software costs written down to net realizable value was zero during
the six months ended March 31, 2009 and 2008, 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 March 31, 2009 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.


11





VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





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 the
Company.  Revenue is recorded when the training is delivered, when
evidence of a persuasive arrangement exists, and when collection is reasonably
assured.





The
Company does not offer warranties or returns.





NOTE
3 – RELATED PARTY TRANSACTIONS





At March
31, 2009 and September 30, 2008, the related party payables consisted of $0 and
$25,000, respectively, of current amounts due to the former owners of
ImageWorks.





The
Company formerly leased all of its employees, via a professional employer
organization (PEO) from HRnovations, Inc., which was formerly co-owned and
managed by a member of Vivid’s Board of Directors.  HRnovations, Inc.
provided payroll processing services and benefits administration for the
Company.  The Company was also part of a multi-employer 401K plan,
which was administered by HRnovations, Inc.





Effective
January 1, 2009, the Company no longer utilizes a PEO for leased employee
services, and employs its own contractors to assist in the processing of payroll
and administration of benefits for its employees.  The Company also
sponsors its own 401K plan, which utilizes the same investment advisor as the
former PEO.  Effective January 1, 2009, plan assets were transferred
to the Company plan with the identical features and services of the previous
plan.





NOTE
4 – STOCKHOLDERS’ EQUITY





Preferred
Stock


The
Company has authorized 5,000,000 shares of no par value par value preferred
stock, which may be issued in one or more series.  The Company’s Board
of Directors is also authorized to determine or alter the rights, preferences,
privileges, and restrictions granted to or imposed upon any series of preferred
stock.  At March 31, 2009 and September 30, 2008, no preferred stock
has been issued by the Company.





The
February 11, 2009 merger of Vivid Delaware into Vivid Washington created a no
par value common stock for all common shares authorized and issued.





NOTE
5 – STOCK-BASED COMPENSATION





During
the year ended September 30, 2008, 34,564 options vested which had been issued
in 2004 and had a fair value of $5,743.





Options
issued in 2004 and 2005 were originally valued at approximately $0.16 per option
using the Black-Scholes Option Price Calculation.  As of September 30,
2008 a total of 323,511 of these options had vested and had a fair value of
$51,762.  During the year ended September 30, 2008, 44,069 options
vested which had been issued in 2005 and had a fair value of
$7,051.  The following assumptions were made in estimating the fair
value:  risk-free interest is 3%, volatility is 0.3, and expected life
is seven years.


12





VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





During
the year ended September 30, 2008, a total of 10,939 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 101.36%; expected
life is three to six years, and with no effective dividend yield.





During
the year ended September 30, 2008, a total of 29,333 options vested and had a
fair value of $6,770.  The assumptions made in estimating the fair
value included an annual risk-free interest rate of 4.75%, volatility of
101.11%, expected life of six years, and with no effective dividend
yield.





During
the year ended September 30, 2008, additional options totaling 69,740 were
issued and had a fair value of $6,734.  During the year ended
September 30, 2008, none of these options vested.  The assumptions
made in estimating the fair value included an annual risk-free interest rate of
4.75%, volatility of 39.32%, expected life of six years, and with no effective
dividend yield.





During
the six months ended March 31, 2009, additional options totaling 454,396 were
issued and had a fair value of $29,364.  During the six months ended
March 31, 2009, 384,396 of these options vested, which had a value of
$23,064.  The assumptions made in estimating fair value included an
annual risk-free interest rate of 3.03%, volatility of 126.25%, expected life of
seven years, and with no effective dividend yield.





25,000 of
the issued options expired during the three months ended March 31,
2009.





The
following is a summary of stock option activity:





Equity compensation
                    plansapproved by
                    shareholders
                  
                  Number of
                    shares tobe
                    issued upon
                    exercise of
                    outstanding
                    options
                  
                  
                  Weighted-
                    average
                    exercise price
                    ofoutstanding
                    options
                  
                  
                  Number of shares
                    remaining
                    availablefor future
                    issuanceunder
                    equity
                    compensation
                    plans2003
      Stock Option Plan
                  
                  
                  1,010,034
                  
                  
                  $
                  0.25
                  
                  
                  
                  1,306,466





Number of
                                Shares
                              
                              
                              Weighted
                                Average Exercise
                                PriceOutstanding
      at October 1, 2007
                              
                              
                              515,898
                              
                              
                              $
                              0.34Granted
                              
                              
                              69,740
                              
                              
                              
                              0.23Exercised
                              
                              
                              -
                              
                              
                              
                              -Expired
      or terminated
                              
                              
                              (4,000
                              )
                              
                              
                              0.29Outstanding
      at September 30, 2008
                              
                              
                              581,638
                              
                              
                              $
                              0.33Options
      exercisable at September 30, 2008
                              
                              
                              382,128
                              
                              
                              $
                              0.31Outstanding
      at October 1, 2008
                              
                              
                              581,638
                              
                              
                              $
                              0.33Granted
                              
                              
                              454,396
                              
                              
                              
                              0.19Exercised
                              
                              
                              -
                              
                              
                              
                              -Expired
      or terminated
                              
                              
                              (25,000
                              )
                              
                              
                              1.00Outstanding
      at March 31, 2009
                              
                              
                              1,011,034
                              
                              
                              $
                              0.25Options
      exercisable at March 31, 2009
                              
                              
                              791,837
                              
                              
                              $
                              0.22




13




VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





NOTE
6 – ECONOMIC DEPENDENCY




The
Company provides services in Washington State to a dozen large corporate
contractors within the framework of a diverse set of programs and
tasks.  Most of the funding for these services originates from the
Department of Energy / Federal Government.  During the six months
ended March 31, 2009 and 2008, services provided to these contractors aggregated
$452,364 and $505,746, representing 14% and 19% of total revenue,
respectively.





At March
31, 2009 and 2008, amounts due from these contractors are included in accounts
receivable in the amounts of $63,940 and $100,586, 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:





Six
      Months Ending
                      March 31,2009
                    
                    
                    2008Revenues—FluorHanford
                    
                    $
                    306,348
                    
                    
                    $
                    313,013Accounts
      ReceivableFluor
      Hanford
                    
                    $
                    8,700
                    
                    
                    $
                    6,594Revenues—KeyTechnology
                    
                    $
                    301,913
                    
                    
                    $
                    -Accounts
      ReceivableKey
      Technology
                    
                    $
                    44,200
                    
                    
                    $
                    -





NOTE
7 – COMMITMENTS AND CONTINGENCIES





Commitments


The
Company is obligated, under separate agreements, to make royalty payments based
on varying percentages (8% to 25%) of cash collections from the sale of specific
software applications. For the six months ending March 31, 2009 and 2008, the
Company incurred $52,139 and $60,304 in royalty obligations, respectively, which
are recorded in marketing expense.  At March 31, 2009 and 2008, there
were no incurred royalty obligations to be accrued and recorded in other current
liabilities on the balance sheet.


14





VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





NOTE
8 – BANK FINANCING





The
Company secured a line of credit facility on December 22, 2008 with Wells Fargo
Bank, N.A.  The line has a maximum credit facility of $250,000 and an
initial annual interest rate of 4.25%.  The rate is a variable rate
tied to the bank’s prime rate plus one, and is subject to an annual pricing
adjustment.  The availability period is subject to renewal on January
10, 2010.  The previous line of credit facility with Bank of the West
has been paid in full and is no longer in effect.  The Company offers
its assets as collateral as described in an executed commercial security
agreement.





The
Company secured a $250,000 promissory note on December 22, 2008 with Wells Fargo
Bank, N.A.  The term of the note is two years payable monthly at
$11,079 starting February 10, 2009 including annual interest of 5.9%.The final payment on the
note is January 10, 2011.  The Company offers its assets as collateral
as described in an executed commercial security agreement.





NOTE
9 – SEGMENT INFORMATION





The
Company has two operating segments at March 31, 2009:  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 six months ended March 31,
2009 and 2008 is as follows:


15





VIVID
LEARNING SYSTEMS, INC.


CONDENSED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2009





March
      31,
                                                          
                                                          
                                                          March
      31,2009
                                                          
                                                          
                                                          2008Revenues:Training
      subscriptions
                                                          
                                                          $
                                                          1,871,524
                                                          
                                                          
                                                          $
                                                          1,801,394Custom
      products and services
                                                          
                                                          
                                                          1,306,504
                                                          
                                                          
                                                          
                                                          835,658Total
      Revenues
                                                          
                                                          $
                                                          3,178,028
                                                          
                                                          
                                                          $
                                                          2,637,052Cost
      of Revenues:Training
      subscriptions
                                                          
                                                          $
                                                          448,308
                                                          
                                                          
                                                          $
                                                          485,856Custom
      products and services
                                                          
                                                          
                                                          780,449
                                                          
                                                          
                                                          
                                                          611,701Total
      Cost of Revenues
                                                          
                                                          $
                                                          1,228,757
                                                          
                                                          
                                                          $
                                                          1,097,557Gross
      Profit:Training
      subscriptions
                                                          
                                                          $
                                                          1,423,216
                                                          
                                                          
                                                          $
                                                          1,315,538Custom
      products and services
                                                          
                                                          
                                                          526,055
                                                          
                                                          
                                                          
                                                          223,957Total
      Gross Profit
                                                          
                                                          $
                                                          1,949,271
                                                          
                                                          
                                                          $
                                                          1,535,495Operating
      Expenses:Training
      subscriptions
                                                          
                                                          $
                                                          778,912
                                                          
                                                          
                                                          $
                                                          677,815Custom
      products and services
                                                          
                                                          
                                                          194,720
                                                          
                                                          
                                                          
                                                          169,454Corporate
                                                          
                                                          
                                                          533,434
                                                          
                                                          
                                                          
                                                          405,396Total
      Operating Expenses
                                                          
                                                          $
                                                          1,507,066
                                                          
                                                          
                                                          $
                                                          1,252,665Income
      (Loss) before Income TaxesTraining
      subscriptions
                                                          
                                                          $
                                                          644,304
                                                          
                                                          
                                                          $
                                                          637,723Custom
      products and services
                                                          
                                                          
                                                          331,335
                                                          
                                                          
                                                          
                                                          54,503Corporate
                                                          
                                                          
                                                          (533,434
                                                          )
                                                          
                                                          
                                                          (405,396
                                                          )Total
      Income before Income Taxes
                                                          
                                                          $
                                                          442,205
                                                          
                                                          
                                                          $
                                                          286,830





March
      31,
                                
                                
                                March
      31,2009
                                
                                
                                2008Identifiable
      assets:Training
      subscriptions
                                
                                $
                                1,281,684
                                
                                
                                $
                                1,238,154Custom
      products and services
                                
                                
                                449,984
                                
                                
                                
                                403,259Corporate
                                
                                
                                2,876,185
                                
                                
                                
                                2,558,316Total
      Identifiable Assets
                                
                                $
                                4,607,853
                                
                                
                                $
                                4,199,729Depreciation
      and amortization:Training
      subscriptions
                                
                                $
                                161,917
                                
                                
                                $
                                158,220Custom
      products and services
                                
                                
                                19,748
                                
                                
                                
                                14,081Corporate
                                
                                
                                18,766
                                
                                
                                
                                12,109Total
      Depreciation and Amortization
                                
                                $
                                200,431
                                
                                
                                $
                                184,410





NOTE
10 – INCOME TAXES





During
the six months ended March 31, 2009, the Company realized a profit before income
taxes of $442,205.  As a result, the Company has recognized $150,353
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 March 31, 2009 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 MARCH 31, 2009 COMPARED WITH THREE MONTHS
ENDED MARCH 31, 2008





Revenues


Overall
revenues increased 11% to $1,481,718 in the second quarter of fiscal year 2009
from $1,332,668 in the second quarter of fiscal year 2008. The increase was due
to the acquisition of substantial new contracts within the Custom Products and
Services segment offset by a slight decrease in revenue volume within the
Training Subscriptions segment in the fiscal quarter ending March 31, 2009
compared to the fiscal quarter ending March 31, 2008.





Training
subscription revenues decreased by 7% to $845,076 in the second quarter of
fiscal year 2009 from $911,554 in the second quarter of fiscal year 2008 due to
the addition of new subscription customers offset by a slight reduction in year
over year subscription renewals.





Custom
Products and Services revenues increased by 51% to $636,642 during the second
quarter of fiscal year 2009 from $421,114 during the second quarter of fiscal
year 2008.  The large increase is attributable to the acquisition of
large new custom contracts combined with the timely completion of custom
projects and related revenues generated within this business
segment.





Operating
Expenses





Cost
of Revenues:


Overall,
cost of revenues increased to $586,906 in the second quarter of fiscal year 2009
from $549,677 in the second quarter of fiscal year 2008.  The increase
is due to increasing revenue volumes in the custom products and services
business segment in the quarter ending March 31, 2009 compared to the quarter
ending March 31, 2008.  The gross profit margin achieved on total
revenues increased to 60% from 59% in comparing the second quarter of fiscal
year 2009 to the second quarter of fiscal year 2008.  The slight
increase reflects a higher incremental gross profit realized on increasing
revenue volumes which provide excess cost coverage.





Training
subscription cost of revenues increased by 2% to $237,671 in the second quarter
of fiscal year 2009 from $233,425 in the second quarter of fiscal year
2008.  This slight increase is attributable to a slightly lower
revenue volume in relation to similar levels of fixed indirect costs within this
business segment in the quarter ending March 31, 2009 compared to the quarter
ending March 31, 2008.





Custom products and services cost of
revenues increased by 10% to $349,235 in the second quarter of fiscal year 2009
from $316,252 in the second quarter of fiscal year 2008.  The increase
is due to significantly higher revenue volumes and related direct costs from new
custom contracts in the Custom Products and Services business segment in the
second quarter of fiscal year 2009 compared to the second quarter of fiscal year
2008.


17





Marketing
and Related Labor Expenses:


Marketing
and related labor expenses decreased by 10% to $322,035 in the second quarter of
fiscal year 2009 from $358,116 in the second quarter of fiscal year
2008.  The reasons for the decrease are due to decreased travel and
trade show expenses in the current fiscal quarter compared to the same quarter
one year ago.





Reseller
Commissions:


Reseller
commissions increased to $159,870 in the second quarter of fiscal year 2009 from
$140,584 in the second quarter of fiscal year 2008.  The increase is
attributable directly to the timing of training subscription revenues generated
from external sales resources during the fiscal quarter as compared to the same
quarter in the previous fiscal year.





Depreciation
and Amortization:


Depreciation
and Amortization increased to $33,613 in the second quarter of fiscal year 2009
compared to $24,410 in the second quarter of fiscal year 2008.  The
increase in depreciation is attributable to an increase in fixed assets
purchased in the comparison of the two fiscal quarters.





General
and Administrative Expenses:


General
and Administrative expenses increased to $259,624 in the second quarter of
fiscal year 2009 from $161,227 in the second quarter of fiscal year
2008.  Labor related expenses increased to $114,470 during the fiscal
quarter from $100,291 in the same fiscal quarter of one year ago.  The
increase is attributable to increased G&A labor allocations within
administrative staff.  Non-labor related administrative expenses
increased to $145,154 during the fiscal quarter from $60,936 in the same fiscal
quarter of one year ago.  The increase is primarily attributable to
fees and rent expenses attributable to administration.





Income
from Operations:


Income
from Operations increased by $21,016 to $119,670 in the second quarter of fiscal
year 2009 from $98,654 in the second quarter of fiscal year 2008.  The
increase is due principally to an increase in the gross profit margin partially
offset by increases in operating expenses incurred during the quarter ending
March 31, 2009 as compared to the quarter ending March 31, 2008.





Other
Income (Expense):


The
increase in Other Expenses is attributable to a slight increase in interest
expense in the second quarter of the current fiscal year resulting from the
increase in capital equipment financing.  Interest expense on debt was
$14,244 in the quarter ended March 31, 2009 compared to $10,685 in the quarter
ended March 31, 2008.





Net
Income


The
operation generated Net Income of $69,626 in the second quarter of fiscal year
2009 compared to $58,780 in the second quarter of fiscal year 2008. The increase
in net income of $10,846 is due to higher overall revenues partially offset by
increases in operating and income tax expenses during the second fiscal quarter
in the current year compared to the same period in the previous
year.


18





Seasonality
and Other Factors Affecting Quarterly Results


We expect
quarterly fluctuations in operating results due to many factors including
acquisitions and roll-out of new product offerings. The operating results for
any quarter are not necessarily indicative of the results for any future
period.





Liquidity
and Capital Resources


As of
March 31, 2009 the Company had cash of $689,340 compared to $309,944 as of March
31, 2008.  The Company’s current ratio is 2.96 as of March 31, 2009
compared to 2.89 at the audit date of September 30, 2008.





Cash
flows provided by operating activities amounted to $490,785 in the second
quarter of fiscal year 2009 compared to cash flows provided by operating
activities of $314,282 in the second quarter of fiscal year 2008.  The
increase is attributable to collections realized from reductions in accounts
receivable during the fiscal quarter.





Cash
flows used in investing activities amounted to $210,634 in the second quarter of
fiscal year 2009 compared to $44,355 in the second quarter of fiscal year
2008.  The increase is attributable to increased cost expenditures for
software development and acquisitions of property and equipment.





Cash
flows used in financing activities amounted to $48,707 in the second quarter of
fiscal year 2009 compared to cash flows used in financing activities of $103,450
in the second quarter of fiscal year 2008.  The decrease in cash flows
used in financing activities is attributable to a reduction in requirements for
notes payable related party indebtedness.





RESULTS
OF OPERATIONS – SIX MONTHS ENDED MARCH 31, 2009 COMPARED WITH SIX MONTHS ENDED
MARCH 31, 2008





Revenues:


Overall revenues increased 21% to
$3,178,028 in the six months year to date of fiscal year 2009 from $2,637,052 in
the six months year to date of fiscal year 2008.The increase was due to the acquisition
of substantial new contracts within the Custom Products and Services segment and
a slight increase in revenue volume within the Training Subscriptions segment in
the six months year to date ending March 31, 2009 compared to the six months
year to date ending March 31, 2008.





Training
subscription revenues increased by 4% to $1,871,524 in the six months year to
date of fiscal year 2009 from $1,801,394 in the six months year to date of
fiscal year 2008 due to new subscription based sales and consistency in the rate
of retention year over year for subscription renewals.





Custom
products and services revenues increased overall by 56% to $1,306,504 in the six
months year to date of fiscal year 2009 from $835,658 in the six months year to
date of fiscal year 2008.  The large increase is attributable to the
acquisition of large new custom contracts combined with the timely completion of
custom projects and related revenues generated within this business
segment.


19





Operating
Expenses





Cost
of Revenues:


Overall,
cost of revenues for the current six months year to date increased by 12% to
$1,228,757 from $1,097,557 for the same period one year ago.  The
increase is due to increasing revenue volumes in the Custom Products and
Services business segment in the six months year to date ending March 31, 2009
compared to the six months year to date ending March 31, 2008.  The
gross profit margin achieved on total revenues increased to 61% from 58% in
comparing the two six month year to date reporting periods.  The
increase reflects a higher incremental gross profit realized on increasing
revenue volumes which provide excess cost coverage.





Training
subscription cost of revenues decreased by 8% to $448,308 in the six months year
to date of fiscal year 2009 from $485,856 in the six months ended March 31,
2008.  This decrease is attributable to efficiencies realized in
production management of direct costs and similar levels of fixed indirect costs
within this business segment in the six months year to date ending March 31,
2009 compared to the six months year to date ending March 31, 2008.





Custom
products and services cost of revenues increased by 28% to $780,449 in the six
months year to date of fiscal year 2009 from $611,701 in the six months ended
March 31, 2008.  The increase is due to significantly higher revenue
volumes and related direct costs from new custom contracts in the Custom
Products and Services business segment in the six months year to date ending
March 31, 2009 compared to the six months year to date ending March 31,
2008.





Marketing
and Related Labor Expenses:


Marketing
and related labor expenses increased by 3% to $641,876 in the six months year to
date of fiscal year 2009 from $623,138 in the six months year to date of fiscal
year 2008.  The reason for the increase is due to increased marketing
labor costs related to higher revenue volume.





Reseller
Commissions:


Reseller
commissions increased by 52% to $281,500 in the six months year to date of
fiscal year 2009 from $185,056 in the six months year to date of fiscal year
2008.  The increase is attributable directly to the timing of training
subscription revenues generated from external sales resources during the first
six months of the fiscal year as compared to the comparable period in the
previous fiscal year.





Depreciation
and Amortization:


Depreciation
and Amortization increased to $61,514 in the six months to date of fiscal year
2009 from $49,190 in the comparable period of fiscal year 2008.  The
increase in depreciation is attributable to an increase in fixed assets
purchased in the comparison of the two fiscal year six month reporting
periods.





General
and Administrative Expenses:


General
and Administrative expenses increased by 31% to $499,505 in the six months year
to date of fiscal year 2009 from $380,532 in the six months year to date of
fiscal year 2008.  Labor related expenses increased by 2% to $219,857
during the six months year to date of fiscal year 2009 from $215,271 in the same
year to date period of one year ago.  The increase is attributable to
increased G&A labor allocations within administrative
staff.  Non-labor related administrative expenses increased by 71% to
$279,648 during the six months year to date of fiscal year 2008 from $163,223 in
the same year to date period of one year ago.  The increase is
primarily attributable to fees, merger expenses, and changes in the
classification of certain indirect expenses.


20





Income
from Operations:


Income
from Operations increased by $163,327 to $464,876 in the six months year to date
of fiscal year 2009 from $301,549 in the six months year to date of fiscal year
2008.  The increase is due principally to an increase in the gross
profit margin partially offset by increases in operating expenses incurred
during the six months year to date ending March 31, 2009 as compared to the six
months year to date ending March 31, 2008.





Other
Income (Expense):


The
increase in Other Expenses is attributable to the increase in interest expense
in the six months ending of the current fiscal year resulting from the increase
in capital equipment financing.  Interest expense on debt was $23,032
in the six months year to date ended March 31, 2009 compared to $16,974 in the
six months year to date ended March 31, 2008.





Net
Income:


The
operation generated Net Income of $291,852 in the six months ending March
31st of
fiscal year 2009 compared to a Net Income of $189,100 in the six months ending
March 31st of
fiscal year 2008. The increase in net income of $102,752 is primarily due to
higher training subscription and custom products and services revenues partially
offset by an increase in overall operating and income tax expenses during the
six months ending March 31st in the
current fiscal year compared to the same period in the previous fiscal
year.





Liquidity
and Capital Resources


As of
March 31, 2009, the Company had cash and cash equivalents of $689,340 as
compared to $132,391 at the audit date of September 30, 2008.





Cash
flows provided by operating activities amounted to $757,252 in the six months
year to date of fiscal year 2009 compared to $486,069 in the six months year to
date of fiscal year 2008.  The main reasons for the increase in cash
flows provided by operations are attributable to generated net income and
reductions through collections in receivable accounts and
contracts.





Cash
flows used in investing activities amounted to $323,603 in the six months year
to date of fiscal year 2009 compared to $77,449 in the six months year to date
of fiscal year 2008. The increase is attributable to increased expenditures for
internal software development and expenditures for property and
equipment.





Cash
flows provided (used) by financing activities amounted to $123,300 in the six
months year to date of fiscal year 2009 compared to ($179,007) in the six months
year to date of fiscal year 2008.  The increase in cash flows provided
by financing activities is attributable to proceeds from term loan financing
partially offset by payment requirements for notes payable related party
indebtedness and by debt service payments for long-term
liabilities.


21


ITEM
4T – 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 six month period ended
March 31, 2009. 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.





PART
II – OTHER INFORMATION





ITEM 6 – EXHIBITS





Exhibit
                No.
              Description31.1
              302
      Certification of Matthew J. Hammer, Chief Executive
  Officer31.2
              302
      Certification of Robert M. Blodgett, Chief Financial
    Officer32.1
              906
      Certification of Matthew J. Hammer, Chief Executive
  Officer32.2
              906
      Certification of Robert M. Blodgett, Chief Financial
    Officer




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




Date:
      May 12,  2009
              Vivid
      Learning Systems, Inc.By:
              /s/ Matthew J. HammerMatthew
      J. HammerChief
      Executive Officer(Principal
      Executive Officer and duly authorized to sign on behalf of the
      Registrant)


22