**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





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


**SECURITIES
      EXCHANGE ACT OF 1934**


For
      the
      quarterly period ended March 31, 2008





**OR**





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


**SECURITIES
      EXCHANGE ACT OF 1934**


For
      the
      Transition Period from ___________ to ___________





**Commission
      File Number: 333-116255**





**VIVID
      LEARNING SYSTEMS, INC.**


(Exact
      name of Registrant as specified in its charter)





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





**5728
      Bedford Street**


**Pasco,
      WA 99301**


(Address
      of principal executive offices, including zip code)





**(509)
      545-1800**


(Registrant's
      telephone number, including area code)




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





The
      number of shares of the Registrant's common stock issued and outstanding at
      May
      13, 2008 was 13,372,165.





Transitional
      Small Business Disclosure Format:  Yes o  No
x













**VIVID
      LEARNING SYSTEMS, INC.**


**MARCH
      31, 2008** **QUARTERLY REPORT ON FORM 10-QSB**





**TABLE
      OF CONTENTS**





**PAGE**Special
                Note Regarding Forward Looking Statements
            3**PART
                I****FINANCIAL
                INFORMATION**Item
                1
            Financial
                Statements
            4Item
                2
            Management’s
                Discussion And Analysis Of Financial Condition And Results Of
                Operations
            17Item
                3
            Controls
                and Procedures
            22**PART
                II****OTHER
                INFORMATION**Item
                6
            Exhibits
            23




2





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





To
      the
      extent that the information presented in this Quarterly Report on Form 10-QSB
      for the quarter ended March 31, 2008, discusses financial projections,
      information, or expectations about our products or markets, or otherwise makes
      statements about future events, such statements are forward-looking. We are
      making these forward-looking statements in reliance on the safe harbor
      provisions of the Private Securities Litigation Reform Act of 1995. Although
      we
      believe that the expectations reflected in these forward-looking statements
      are
      based on reasonable assumptions, there are a number of risks and uncertainties
      that could cause actual results to differ materially from such forward-looking
      statements. These risks and uncertainties are described, among other places
      in
      this Quarterly Report, in “Management’s Discussion And Analysis Of Financial
      Condition And Results Of Operations.”





In
      addition, we disclaim any obligations to update any forward-looking statements
      to reflect events or circumstances after the date of this Quarterly Report.
      When
      considering such forward-looking statements, you should keep in mind the risks
      referenced above and the other cautionary statements in this Quarterly
      Report.


3





**PART
      I - FINANCIAL INFORMATION**





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




4




**VIVID
      LEARNING SYSTEMS, INC. - CONSOLIDATED BALANCE SHEEETS**





March 31,
            
            September 30,2008
            
            2007(unaudited)**ASSETS**CURRENT
                ASSETSCash
            
            $
            309,944
            
            $
            80,331Accounts
                and contracts receivable
            
            
            874,299
            
            
            1,157,418Accounts
                and contracts receivable, Fluor Hanford
            
            
            6,594
            
            
            28,822Prepaid
                expenses
            
            
            207,998
            
            
            120,073Other
                current assets
            
            
            98,118
            
            
            186,534TOTAL
                CURRENT ASSETS
            
            
            1,496,953
            
            
            1,573,178PROPERTY,
                PLANT AND EQUIPMENTProperty
                and equipment
            
            
            1,545,472
            
            
            1,518,082Less:
                Accumulated depreciation
            
            
            (1,196,551
            )
            
            (1,152,471
            )TOTAL
                PROPERTY, PLANT AND EQUIPMENT
            
            
            348,921
            
            
            365,611OTHER
                ASSETSSoftware,
                net of amortization
            
            
            1,238,154
            
            
            1,328,424Goodwill
            
            
            375,000
            
            
            375,000Long-term
                contracts receivable
            
            
            -
            
            
            85,202Deferred
                tax asset
            
            
            740,701
            
            
            838,433TOTAL
                OTHER ASSETS
            
            
            2,353,855
            
            
            2,627,059**TOTAL
                ASSETS**
            
            $
            4,199,729
            
            $
            4,565,848**LIABILITIES
                AND STOCKHOLDERS' EQUITY**CURRENT
                LIABILITIESAccounts
                payable
            
            $
            158,484
            
            $
            295,376Line
                of credit payable
            
            
            -
            
            
            57,072Accrued
                contract labor
            
            
            96,517
            
            
            221,374Other
                current liabilities
            
            
            49,999
            
            
            114,667Unearned
                revenue
            
            
            58,590
            
            
            118,654Notes
                payable, related parties
            
            
            275,000
            
            
            350,000Current
                portion of long-term liabilities
            
            
            111,207
            
            
            106,638TOTAL
                CURRENT LIABILITIES
            
            
            749,797
            
            
            1,263,781LONG-TERM
                LIABILITIESLong-term
                debt
            
            
            155,359
            
            
            182,786Other
                long-term liabilities
            
            
            146,878
            
            
            170,954TOTAL
                LONG-TERM LIABILITIES
            
            
            302,237
            
            
            353,740TOTAL
                LIABILITIES
            
            
            1,052,034
            
            
            1,617,521COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -STOCKHOLDERS'
                EQUITYPreferred
                stock, $0.0001 par value; 5,000,000 shares authorized, no shares
                issued
                and outstanding
            
            
            -
            
            
            -Common
                stock, $0.0001 par value; 200,000,000 shares authorized, 13,372,165
                and
                13,372,203 shares issued and outstanding, respectively
            
            
            1,337
            
            
            1,337Additional
                paid-in capital
            
            
            4,394,743
            
            
            4,384,475Accumulated
                deficit
            
            
            (1,248,385
            )
            
            (1,437,485
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            3,147,695
            
            
            2,948,327**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            4,199,729
            
            **$**
            4,565,848





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




5


**VIVID
      LEARNING SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**








Three Months Ended
            
            Six Months EndedMarch 31, 2008
            
            March 31, 2007
            
            March 31, 2008
            
            March 31, 2007(Unaudited)
            
            (Unaudited)
            
            (Unaudited)
            
            (Unaudited)REVENUESTraining
                subscriptions
            
            $
            773,502
            
            $
            680,784
            
            $
            1,525,010
            
            $
            1,380,989Training
                subscriptions, Fluor Hanford
            
            
            138,052
            
            
            142,224
            
            
            276,384
            
            
            280,540Custom
                products and services
            
            
            401,542
            
            
            467,346
            
            
            799,029
            
            
            965,148Custom
                products and services, Fluor Hanford
            
            
            19,572
            
            
            133,041
            
            
            36,629
            
            
            281,9711,332,668
            
            
            1,423,395
            
            
            2,637,052
            
            
            2,908,648COST
                OF REVENUESTraining
                subscriptions
            
            
            233,425
            
            
            143,962
            
            
            485,856
            
            
            322,505Custom
                products and services
            
            
            316,252
            
            
            407,057
            
            
            611,701
            
            
            794,589549,677
            
            
            551,019
            
            
            1,097,557
            
            
            1,117,094GROSS
                PROFIT
            
            
            782,991
            
            
            872,376
            
            
            1,539,495
            
            
            1,791,554EXPENSESMarketing
                and related labor expenses
            
            
            358,116
            
            
            395,149
            
            
            623,138
            
            
            744,906Bad
                debt expense
            
            
            -
            
            
            9,137
            
            
            2,038
            
            
            10,677Reseller
                commissions
            
            
            140,584
            
            
            93,003
            
            
            185,086
            
            
            190,254Depreciation
                and amortization
            
            
            24,410
            
            
            53,096
            
            
            49,190
            
            
            107,901Wages
                and contract labor
            
            
            100,291
            
            
            236,862
            
            
            215,271
            
            
            433,198Other
                operating expenses
            
            
            60,936
            
            
            270,091
            
            
            163,223
            
            
            548,816TOTAL
                OPERATING EXPENSES
            
            
            684,337
            
            
            1,057,338
            
            
            1,237,946
            
            
            2,035,752INCOME
                (LOSS) FROM OPERATIONS
            
            
            98,654
            
            
            (184,962
            )
            
            301,549
            
            
            (244,198
            )OTHER
                INCOME (EXPENSE)Gain
                on sale of equipment and intangible assets
            
            
            100
            
            
            -
            
            
            100
            
            
            901Interest
                income
            
            
            1,348
            
            
            385
            
            
            2,155
            
            
            666Interest
                expense
            
            
            (10,685
            )
            
            (14,681
            )
            
            (16,974
            )
            
            (28,196
            )TOTAL
                OTHER INCOME (EXPENSE)
            
            
            (9,237
            )
            
            (14,296
            )
            
            (14,719
            )
            
            (26,629
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            89,417
            
            
            (199,258
            )
            
            286,830
            
            
            (270,827
            )INCOME
                TAX BENEFIT (EXPENSE)
            
            
            (30,637
            )
            
            68,919
            
            
            (97,730
            )
            
            92,081NET
                INCOME (LOSS)
            
            $
            58,780
            
            $
            (130,339
            )
            $
            189,100
            
            $
            (178,746
            )BASIC
                AND DILUTED NET INCOME (LOSS) PER SHARE
            
            $
            -
            
            $
            (0.01
            )
            $
            0.01
            
            $
            (0.01
            )BASIC
                AND DILUTEDWEIGHTED
                AVERAGE NUMBER OF SHARES
            
            
            13,372,165
            
            
            13,372,203
            
            
            13,372,165
            
            
            13,151,068





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


6


**VIVID
      LEARNING SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Six Months
              
              Six MonthsEnded
              
              EndedMarch 31, 2008
              
              March 31, 2007(unaudited)
              
              (unaudited)**CASH FLOWS FROM OPERATING ACTIVITIES:**Net income (loss)
              
              $
              189,100
              
              $
              (178,746
              )Adjustments
                    to reconcile net income (loss) to
                    net cash provided by operating activities:Depreciation
                  and amortization
              
              
              49,190
              
              
              107,901Amortization
                  of capitalized software
              
              
              135,220
              
              
              123,366Bad
                  debt expense
              
              
              2,038
              
              
              10,677Options
                  issued for compensation
              
              
              10,268
              
              
              7,970Changes
                  in assets and liabilities:Accounts
                  and contracts receivable
              
              
              303,309
              
              
              (21,611
              )Prepaid
                  expenses
              
              
              (87,925
              )
              
              775Other
                  current assets
              
              
              88,416
              
              
              116,427Deferred
                  tax asset
              
              
              97,732
              
              
              (92,081
              )Accounts
                  payable
              
              
              (136,892
              )
              
              112,114Accrued
                  contract labor and related expenses
              
              
              (124,857
              )
              
              (62,595
              )Long-term
                  receivable contracts
              
              
              85,202
              
              
              78,861Other
                  current liabilities
              
              
              (64,668
              )
              
              35,802Unearned
                  revenue
              
              
              (60,064
              )
              
              42,983Net
                  cash provided by operating activities
              
              
              486,069
              
              
              281,843**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Acquisition
                  of property, equipment and intangible assets
              
              
              (32,499
              )
              
              (34,923
              )Acquisition
                  of software
              
              
              (44,950
              )
              
              (66,458
              )Net
                  cash used by investing activities
              
              
              (77,449
              )
              
              (101,381
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Stock
                  options exercised for common stock
              
              
              -
              
              
              31Payments
                  on notes payable, related party
              
              
              (75,000
              )
              
              (265,604
              )Payments
                  on line of credit payable
              
              
              (57,072
              )
              
              -Payments
                  on long-term debt
              
              
              (25,693
              )
              
              (24,494
              )Payments
                  on long-term liabilities
              
              
              (21,242
              )
              
              (10,984
              )Net
                  cash provided (used) by financing activities
              
              
              (179,007
              )
              
              (301,051
              )Net
                  increase (decrease) in cash
              
              
              229,613
              
              
              (120,589
              )Cash
                  at beginning of period
              
              
              80,331
              
              
              166,645Cash
                  at end of period
              
              $
              309,944
              
              $
              46,056SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid $
              
              $
              -
              
              $
              28,196Income
                  taxes paid
              
              $
              -
              
              $
              -NON-CASH
                  TRANSACTIONS:Common
                  stock issued for related party debt
              
              $
              -
              
              $
              670,702Acquisition
                  of fixed assets via capital lease
              
              $
              -
              
              $
              45,014Options
                  issued as compensation
              
              $
              10,268
              
              $
              7,970
  The
        accompanying condensed notes are an integral part of these interim consolidated
        financial statements.


7


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**





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





Nature
      of Operations


Vivid
      Learning Systems, Inc. (hereinafter “Vivid Washington”) was incorporated in 1995
      in the State of Washington under the name of Applied Tec *knowledge* y,
      Inc.
      and then later known as Vivid Concepts, Inc. Prior to December 23, 2003, Vivid
      Washington was a wholly owned subsidiary of Nuvotec, Inc., a technology
      commercialization corporation based in Washington State. On December 23, 2003,
      Nuvotec, Inc. exchanged all of its 7,000,000 common stock shares in Vivid
      Washington for 8,100,000 shares of common stock with a par value of $0.0001
      in a
      newly formed Delaware corporation also named Vivid Learning Systems, Inc. The
      Delaware company (the “Company” or “Vivid Delaware”) serves as the holding
      company and parent and sole shareholder of the operating entity Vivid
      Washington. An additional 1,987,996 shares of the Company’s common stock was
      issued in a private placement to approximately seventy individual shareholders
      at September 30, 2004.





Vivid
      Washington develops and provides computer-based training products and services,
      which are marketed nationally. Vivid Delaware and its subsidiaries, Vivid
      Washington and ImageWorks Digital Media, Inc., have a year end of September
      30.





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





Nuvotec
      prior to June 13, 2007 held approximately 83% of the Company. On June 13, 2007,
      Nuvotec closed on an acquisition transaction wherein one of the conditions
      to
      closing was that the shares of the Company were to be distributed on a pro-rata
      basis to the Nuvotec shareholders according to the Agreement and Plan of
      Distribution. Due to rounding, 38 shares that had been held by Nuvotec were
      retired as treasury shares.  The
      shares in common stock of the Company were distributed to approximately 300
      individuals. The effective date of the transaction, June 13, 2007, resulted
      in
      the change of control of the Company. No individual who received the
      distribution from Nuvotec was given a controlling interest in the Company.
      There
      was no consideration as this was a Nuvotec shareholder tax-free
      distribution.





Basis
      of Presentation


The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      information and the instructions to Form 10-QSB and Rule 10-01 of Regulation
      S-X. Accordingly, they do not include all of the information and footnotes
      required by accounting principles generally accepted in the United States for
      complete financial statements. These unaudited interim financial statements
      should be read in conjunction with the audited financial statements for the
      period ended September 30, 2007. In the opinion of management, all adjustments
      (consisting of normal recurring adjustments) considered necessary for a fair
      presentation of interim results have been included. Operating results for the
      six months ended March 31, 2008 are not necessarily indicative of the results
      that may be expected for the fiscal year ending September 30, 2008. For further
      information, refer to the Company’s consolidated audited financial statements at
      September 30, 2007 and footnotes thereto.


8


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**





**NOTE
      2**–**SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





This
      summary of significant accounting policies is presented to assist in
      understanding the financial statements. The financial statements and notes
      are
      representations of the Company’s management, which is responsible for their
      integrity and objectivity. These accounting policies conform to accounting
      principles generally accepted in the United States and have been consistently
      applied in the preparation of the financial statements.





Recent
      Pronouncements


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





Accounting
      Methods and Consolidation


The
      Company’s financial statements are prepared using the accrual method of
      accounting. The consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiaries, after elimination of inter-company
      accounts and transactions. The wholly owned subsidiaries of the Company are
      Vivid Washington and ImageWorks Media Group, Inc.




Earnings
      Per Share


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





Guarantees
      and Line of Credit


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


9


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**





Management
      Services Provided by Nuvotec


In
      Vivid
      Delaware’s consolidated statements of income, “Other Operating Expenses”
contains amounts that represent allocations of central overhead expenses,
      including legal and contracts, finance (including accounting and reporting,
      receivables and collection activities, payables and cash management, budgeting,
      etc.), executive and administrative expenses that are applied to the Vivid
      Washington operation. The majority of the allocated expenses represent labor
      related costs applied to the Vivid Washington operation. All identifiable direct
      costs of administration are booked directly to the Vivid Washington operation.
      Detailed time charges are accounted for daily by all personnel, including
      Nuvotec central administrative personnel with time charged to Company tasks.
      As
      of April 1, 2007, all corporate personnel had been transferred to Vivid
      Washington and there were no further allocations as noted above.





Provision
      for Taxes


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





Income
      taxes are provided based upon the liability method of accounting pursuant to
      Statement of Financial Accounting Standards No. 109, “Accounting for Income
      Taxes.” Under this approach, deferred income taxes are recorded to reflect the
      tax consequences in future years of differences between the tax basis of assets
      and liabilities and their financial reporting amounts at each year end. A
      valuation allowance is recorded against deferred tax assets if management does
      not believe the Company has met the “more likely than not” standard imposed by
      Statement of Financial Accounting Standard No. 109 to allow recognition of
      such
      an asset.


10


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**




Reclassifications


Certain
      prior year amounts in the accompanying financial statements have been
      reclassified to conform to the fiscal year 2008 presentation. The
      reclassifications have no effect on net assets, net revenues, or net
      earnings.





Reseller
      Commissions and Royalty Expenses


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




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





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





Software
      Development Costs


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





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.


11


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**





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





March
                31,
              2008
            
            September
                30,
              2007Software
                development costs
            
            $
            3,632,143
            
            $
            3,587,193Accumulated
                amortization
            
            
            (2,393,989
            )
            
            (2,258,769
            )$
            1,238,154
            
            $
            1,328,424





The
      amount of software costs written down to net realizable value was zero during
      the six months ended March 31, 2008 and September 30, 2007, respectively.





Use
      of
      Estimates


The
      process of preparing financial statements in conformity with accounting
      principles generally accepted in the United States of America requires the
      use
      of estimates and assumptions regarding certain types of assets, liabilities,
      revenues, and expenses. Such estimates primarily relate to unsettled
      transactions and events as of the date of the financial statements. Accordingly,
      upon settlement, actual results may differ from estimated amounts.




Revenue
      and Cost Recognition


The
      Company’s custom products and services contracts are contracted primarily on a
      fixed unit rate basis, with underlying hourly billing rates negotiated with
      the
      customer. The contract revenues are earned as hours are expended and
      reimbursable costs are incurred.





Training
      revenues are recognized at the time of shipment of products or performance
      of
      contracted services. Products are shipped FOB shipping point. Training contracts
      may contain elements of both custom contract work (contracted services) and
      subscription arrangements (delivery of training products). Training subscription
      revenues are recorded when collection of the subscription is highly probable
      and
      no significant Company obligations remain after the product has been delivered.
      The Company defers revenue recognition on training contracts related to payments
      received during the current period for the portion of the subscription contract
      that extends into future periods. At March 31, 2008 no subscription contracts
      were paid in advance. In accordance with EITF 01-14, the Company’s reimbursable
      costs are recorded as gross revenue, with the actual costs recorded as a direct
      cost.


12


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**





The
      Company’s internet sales are less than 0.5% of total revenue. Internet
      transactions are recorded as training subscriptions, with training delivered
      via
      the hosted web sites of Vivid Washington. Revenue is recorded when the training
      is delivered, when evidence of a persuasive arrangement exists, and when
      collection is reasonably assured.





The
      Company does not offer warranties or returns.





**NOTE
      3**–**RELATED PARTY TRANSACTIONS**





At
      March
      31, 2008 and September 30, 2007, the current related party payables consisted
      of
      $275,000 and $350,000, respectively, of current amounts due to the former owners
      of ImageWorks.





**NOTE
      4**–**STOCKHOLDERS’ EQUITY**





Preferred
      Stock


The
      Company has authorized 5,000,000 shares of $0.0001 par value preferred stock,
      which may be issued in one or more series. The Company’s Board of Directors is
      also authorized to determine or alter the rights, preferences, privileges,
      and
      restrictions granted to or imposed upon any series of preferred
      stock . At
      March
      31, 2008 and September 30, 2007, no preferred stock has been issued by the
      Company.





**NOTE
      5**–**STOCK-BASED COMPENSATION**




During
      the year ended September 30, 2007, 225,250 options vested which had been issued
      in 2004, and had a fair value of $36,040. During the six month period ending
      March 31, 2008, 34,564 options vested which had been issued in 2004 and had
      a
      fair value of $5,530.





Options
      issued in 2004 and 2005 were originally valued at approximately $0.16 per option
      using the Black-Scholes Option Price Calculation. During the period ended March
      31, 2008 a total of 259,814 of these options had vested and had a fair value
      of
      $41,570. The following assumptions were made in estimating the fair value:
      risk-free interest is 3%, volatility is 0.3 and expected life is three years.





During
      the year ended September 30, 2006, additional options totaling 153,606 were
      issued of which 65,939 vested and had a fair value of $32,777. During the year
      ended September 30, 2007 10,939 of these options vested and had a fair value
      of
      $4,525. The fair value of each option granted is estimated on the grant date
      using the Black-Scholes Option Price Calculation. The
      following assumptions were made in estimating the fair value: risk-free interest
      is 4.75%; volatility is 1.0136; expected life is three to five years; dividend
      yield is $0.


13


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**





The
      value
      of the unvested options at March 31, 2008 was $37,024.





The
      following is a summary of stock option activity:





Equity
              compensation
              plans
              approved by
              shareholders
            
            Number of
              shares to be
              issued upon
              exercise of
              outstanding
              options
            
            Weighted-
              average
              exercise price
              of outstanding
              options
            
            Number of shares
              remaining
              available for
              future issuance
              under equity
              compensation
              plans2003 Stock Option Plan
            
            
            515,898
            
            $
            0.34
            
            
            1,800,602Total
            
            
            515,898
            
            
            
            
            
            1,800,602




Number of
              Shares
            
            Weighted
              Average Exercise
              PriceOutstanding
                at October 1, 2006
            
            
            570,940
            
            $
            0.33Granted
            
            
            89,500
            
            
            0.29Exercised
            
            
            (125
            )
            
            0.25Expired
                or terminated
            
            
            (144,417
            )
            
            0.25Outstanding
                at September 30, 2007
            
            
            515,898
            
            $
            0.34Options
                exercisable at September 30, 2007
            
            
            304,265
            
            $
            0.33Outstanding
                at October 1, 2007
            
            
            515,898
            
            $
            0.34Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Expired
                or terminated
            
            
            -
            
            
            -Outstanding
                at March 31, 2008
            
            
            515,898
            
            $
            0.34Options
                exercisable at March 31, 2008
            
            
            356,795
            
            $
            0.32




**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, 2008 and March 31,
      2007, services provided to these contractors aggregated $505,746 and
      $1,154,139, **** representing
      19% and 40% of total revenue, respectively. At March 31, 2008 and March 31,
      2007, amounts due from these contractors are included in accounts receivable
      in
      the amounts of $100,586 and $181,379, respectively.


14


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**





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 31,2008
              
              2007Revenues—FluorHanford
              
              $
              313,013
              
              $
              562,510Accounts
                  ReceivableFluor
                  Hanford
              
              $
              6,594
              
              $
              27,908





**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, 2008 and 2007, the
      Company incurred $60,304 and $69,613 in royalty obligations, respectively,
      which
      are recorded in marketing expense. At March 31, 2008 and 2007, there were no
      incurred royalty obligations to be accrued and recorded in other current
      liabilities on the balance sheet.





**NOTE
      8**– **SEGMENT
      INFORMATION**





The
      Company has two operating segments at March 31, 2008: training subscriptions
      and
      custom products and services.





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





Segment
      information (after inter-company eliminations) for the six months ended March
      31,
      2008 and March 31, 2007 is as follows:


15


**VIVID
      LEARNING SYSTEMS, INC.**


**NOTES
      TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
      (Unaudited)**


**March
      31, 2008**




March
                  31,
              
              March
                  31,2008
              
              2007Revenues:Training
                  subscriptions
              
              $
              1,801,394
              
              $
              1,661,529Custom
                  products and services
              
              
              835,658
              
              
              1,247,119**Total
                  Revenues**
              
              $
              2,637,052
              
              $$
              2,908,648Income
                  (loss) before income taxes:Training
                  subscriptions
              
              
              1,315,538
              
              
              1,339,024Custom
                  products and services
              
              
              223,957
              
              
              452,530Corporate
              
              
              (1,252,665
              )
              
              (2,062,381
              )**Income
                  (loss) before income taxes**
              
              $
              286,830
              
              $$
              (270,827
              )




March
                  31,
              
              March
                  31,2008
              
              2007Identifiable
                  assets:Training
                  subscriptions
              
              $
              1,238,154
              
              $
              1,428,131Custom
                  products and services
              
              
              403,259
              
              
              220,159Corporate
              
              
              2,558,316
              
              
              3,169,547**Total
                  Identifiable Assets**
              
              $
              4,199,729
              
              $
              4,817,837Depreciation
                  and amortization:Training
                  subscriptions
              
              $
              135,220
              
              $
              123,366Custom
                  products and services
              
              
              14,081
              
              
              6,776Corporate
              
              
              35,109
              
              
              101,125**Total
                  Depreciation****and
                  Amortization**
              
              $
              184,410
              
              $
              231,267




**NOTE
      9**–**INCOME TAXES**





During
      the six months ended March 31, 2008, the Company realized a profit before income
      taxes of $286,830. As a result, the Company has recognized $97,730 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, 2008 principally consists of the prospective income tax benefit (at
      34%) of net operating losses in 2005, 2006, and 2007.


16





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





**Results
      of Operations:**





**RESULTS
      OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2008 COMPARED WITH THREE
      MONTHS ENDED MARCH 31, 2007**





**Revenues**


Overall
      revenues decreased 6% to $1,332,668 in the second quarter of fiscal year 2008
      from $1,423,395 in the second quarter of fiscal year 2007. The decrease was
      due
      to the phase-out of Engineering and Technical Services (“ETS”) contracts.
      Non-ETS revenues increased by $261,972, or 24%, in the comparison of the fiscal
      quarters ending March 31, 2008 and March 31, 2007.





Training
      subscription revenues increased by 11% to $911,554 in the second quarter of
      fiscal year 2008 from $823,008 in the second quarter of fiscal year 2007 due
      to
      the addition of new subscription customers and consistency year over year in
      subscription renewals.





Custom
      products and services revenues decreased overall by 30% to $421,114 within
      the
      second quarter of fiscal year 2008 from $600,387 within the second quarter
      of
      fiscal year 2007. The large decrease is attributable to the phase-out of ETS
      commercial and federal contracts during the second quarter of fiscal year 2008.
      Non-ETS Custom Products and Services revenues increased 70% to $173,426 in
      the
      second quarter of the current fiscal year compared to the second quarter of
      the
      previous fiscal year. The increase was mainly from the timely completion of
      increased custom projects and related revenues generated within this business
      segment.




**Operating
      Expenses**





**Cost
      of Revenues:**


Overall,
      Cost of Revenues decreased slightly to $549,677 in the second quarter of fiscal
      year 2008 from $551,019 in the second quarter of fiscal year 2007. The slight
      decrease is due to overall lower revenue volumes in the Custom Products and
      Services business segment due to the phase-out of ETS contracts partially offset
      by an increase in the classifications for indirect costs incurred in the
      production process in the quarter ending March 31, 2008 compared to the quarter
      ending March 31, 2007. The gross profit margin achieved on total revenues
      decreased to 59% from 61% in comparing the second quarter of fiscal year 2008
      to
      the second quarter of fiscal year 2007. The small decrease is attributable
      to
      overall lower margins realized on revenues due to increases in the
      classifications for indirect costs incurred in the production process in the
      second quarter of fiscal year 2008 compared to fiscal year 2007. The effect
      of
      the classification of indirect costs was to reduce the gross profit margin
      from
      68% to 59% in the second quarter of fiscal year 2008.


17





Training
      subscription cost of revenues increased by 62% to $233,425 in the second quarter
      of fiscal year 2008 from $143,962 in the second quarter of fiscal year 2007.
      This increase is directly related to the increase in revenues and
      classifications for indirect costs incurred in the production process within
      this business segment in the quarter ending March 31, 2008 compared to the
      quarter ending March 31, 2007.





Custom
      products and services cost of revenues decreased by 22% to $316,252 in the
      second quarter of fiscal year 2008 from $407,057 in the second quarter of fiscal
      year 2007. The decrease is due to overall lower revenue volumes in the Custom
      Products and Services business segment due to the phase-out of low margin ETS
      federal custom contracts partially offset by increases from indirect cost
      classifications incurred in the production process.





The
      effect of the difference in indirect cost classification was to increase cost
      of
      revenues by $107,437 in the second quarter of fiscal year 2008 compared to
      the
      second quarter of fiscal year 2007.





**Marketing
      and Related Labor Expenses:**


Marketing
      and related labor expenses decreased by 9% to $358,116 in the second quarter
      of
      fiscal year 2008 from $395,149 in the second quarter of fiscal year 2007. The
      reason for the decrease is due to marketing labor efficiencies achieved within
      the government sector.





**Reseller
      Commissions:**


Reseller
      commissions increased by 51% to $140,584 in the second quarter of fiscal year
      2008 from $93,003 in the second quarter of fiscal year 2007. The increase is
      attributable directly to the timing of training subscription revenues generated
      from external sales resources during the fiscal quarter as compared to the
      same
      quarter in the previous fiscal year.





**Depreciation
      and Amortization:**


Depreciation
      and Amortization decreased to $24,410 in the second quarter of fiscal year
      2008
      compared to $53,096 in the second quarter of fiscal year 2007. The decrease
      is
      attributable to an increase in fully depreciated fixed assets and fully
      amortized intangible assets in the comparison of the two fiscal
      quarters.





**General
      and Administrative Expenses:**


General
      and Administrative expenses decreased by 68% to $161,227 in the second quarter
      of fiscal year 2008 from $506,953 in the second quarter of fiscal year 2007.
      Labor related expenses decreased by 58% to $100,291 during the fiscal quarter
      from $236,862 in the same fiscal quarter of one year ago. The decrease is
      attributable to labor efficiencies achieved in the reduction of outsourced
      and
      non-essential administrative staff. Non-labor related administrative expenses
      decreased by 77% to $60,936 during the fiscal quarter from $270,091 in the
      same
      fiscal quarter of one year ago. The decrease is primarily attributable to
      efficiencies achieved via infrastructure detailed cost management and changes
      in
      the classification of certain indirect expenses.


18





**Income
      (Loss) from Operations:**


Income
      from Operations increased by $283,616 to $98,654 in the second quarter of fiscal
      year 2008 from ($184,962) in the second quarter of fiscal year 2007. The
      increase is due principally to decreases in operating expenses incurred during
      the quarter ending March 31, 2008 as compared to the quarter ending March 31,
      2007, partially offset by a decrease in the gross profit margin in the
      comparison of the two reporting periods.





**Other
      Income (Expense):**


The
      decrease in Other Expenses is attributable to the decrease in interest expense
      in the second quarter of the current fiscal year resulting from the reduction
      of
      operating line of credit debt partially offset by increased term borrowings
      and
      equipment financings. Interest expense on debt was $10,685 in the quarter ended
      March 31, 2008 compared to $14,681 in the quarter ended March 31,
      2007.




**Net
      Income**


The
      operation generated Net Income of $58,780 in the second quarter of fiscal year
      2008 compared to a net loss of $130,339 in the second quarter of fiscal year
      2007. The increase in net income of $189,119 is primarily due to higher training
      subscription and custom products and services core revenues and phasing out
      of
      low margin ETS revenues, and decreasing general and administration expenses
      during the second fiscal quarter in the current year compared to the same period
      in the previous year.




**Seasonality
      and Other Factors Affecting Quarterly Results**


Custom
      products and services revenues within the government sector may fluctuate
      beginning in the second quarter of each fiscal year based upon the timing of
      passing of a new federal budget. We expect quarterly fluctuations in operating
      results due to many factors including acquisitions and roll-out of new product
      offerings. The operating results for any quarter are not necessarily indicative
      of the results for any future period.





**Liquidity
      and Capital Resources**


As
      of
      March 31, 2008 the Company had cash of $309,944 compared to $46,056 as of March
      31, 2007. The Company’s current ratio is 2.00 as of March 31, 2008 compared to
      1.24 at the audit date of September 30, 2007.





Cash
      flows provided by operating activities amounted to $314,282 in the second
      quarter of fiscal year 2008 compared to cash flows provided by operating
      activities of $108,007 in the second quarter of fiscal year 2007. The increase
      is attributable to an overall reduction in receivable related accounts partially
      offset by reductions in current liability accounts.





Cash
      flows used in investing activities amounted to $44,355 in the second quarter
      of
      fiscal year 2008 compared to $66,846 in the second quarter of fiscal year 2007.
      The decrease is attributable to decreased expenditures for internal software
      development.





Cash
      flows used in financing activities amounted to $103,450 in the second quarter
      of
      fiscal year 2008 compared to $147,074 in the second quarter of fiscal year
      2007.
      The decrease is attributable to the reduction of payment requirements for notes
      payable related party indebtedness partially offset by increased debt service
      payments for the line of credit and long-term liabilities.


19





**RESULTS
      OF OPERATIONS – SIX MONTHS ENDED MARCH 31, 2008 COMPARED WITH SIX MONTHS
      ENDED MARCH 30, 2007**





**Revenues:**


Overall
      revenues decreased 9% to $2,637,052 in the six months year to date of fiscal
      year 2008 from $2,908,648 in the six months year to date of fiscal year 2007.
      The decrease was mainly due to the phase-out of Engineering and Technical
      Services (“ETS”) contracts. Non-ETS revenues increased by $436,974 or 20%, in
      the comparison of the fiscal quarters ending March 31, 2008 and March 31, 2007.





Training
      subscription revenues increased by 8% to $1,801,394 in the six months year
      to
      date of fiscal year 2008 from $1,661,529 in the six months year to date of
      fiscal year 2007 due to new subscription based sales and consistency in the
      rate
      of retention year over year for subscription renewals.





Custom
      products and services revenues decreased overall by 33% to $835,658 in the
      six
      months year to date of fiscal year 2008 from $1,247,119 in the six months year
      to date of fiscal year 2007. The large decrease is attributable to the phase-out
      of low margin ETS contract revenues. Non-ETS Custom Products and Services
      revenues increased 55% and $297,109 in the six months year to date of fiscal
      year 2008 compared to the same period in fiscal year 2007. The increase was
      mainly due to the efficient and timely completion of increased custom project
      activity and related revenues generated within this business segment. Additional
      factors contributing to the increase of revenues within this segment include
      consistency of sales efforts and cross-selling due to the integration of sales
      efforts across the Company.




**Operating
      Expenses**





**Cost
      of Revenues:**


Overall,
      cost of revenues for the current six months year to date decreased by 2% to
      $1,097,557 from $1,117,094 for the same period one year ago. The slight decrease
      is due to overall lower revenue volumes in the Custom Products and Services
      business segment partially offset by an increase in the classifications for
      indirect costs incurred in the production process in the six months ending
      March
      31, 2008 compared to the six months ending March 31, 2007. The gross profit
      margin achieved on total revenues decreased to 58% from 62% in comparing the
      year to date six month period of fiscal year 2008 to the year to date six month
      period of fiscal year 2007. The small decrease is attributable to overall lower
      margins realized on revenues due to increases in the classifications for
      indirect costs incurred in the production process in the six months ending
      March
      31, 2008 compared to fiscal year 2007. The effect of the classification of
      indirect costs was to reduce the gross profit margin from 66% to 58% in the
      six
      months ending March 31, 2008.





Training
      subscription cost of revenues increased by 51% to $485,856 in the six months
      year to date of fiscal year 2008 from $322,505 in the six months ended March
      31,
      2007. This increase is directly related to the increase in revenues within
      this
      business segment and classifications for indirect costs incurred in the
      production process in the six months ending March 31, 2008 compared to the
      six
      months ending March 31, 2007.


20





Custom
      products and services cost of revenues decreased by 23% to $611,701 in the
      six
      months year to date of fiscal year 2008 from $794,589 in the six months ended
      March 31, 2007. The decrease is due to overall lower revenue volumes in the
      Custom Products and Services business segment due to the phase-out of low margin
      ETS contracts partially offset by increases from indirect cost classifications
      incurred in the production process.





The
      effect of the difference in indirect cost classification was to increase cost
      of
      revenues by $200,362 in the six months ending March 31, 2008 compared to the
      same period of fiscal year 2007.





**Marketing
      and Related Labor Expenses:**


Marketing
      and related labor expenses decreased by 16% to $623,138 in the six months year
      to date of fiscal year 2008 from $744,906 in the six months year to date of
      fiscal year 2007. The reason for the decrease is due to marketing labor
      efficiencies achieved within the government sector and overall reductions in
      travel and trade shows expense categories.





**Reseller
      Commissions:**


Reseller
      commissions decreased by 3% to $185,086 in the six months year to date of fiscal
      year 2008 from $190,254 in the six months year to date of fiscal year 2007.
      The
      year to date decrease in the comparison of the two fiscal years is attributable
      directly to a slight decrease in training subscription revenues generated from
      sales resources external to the Company.





**Depreciation
      and Amortization:**


Depreciation
      and Amortization decreased to $49,190 in the six months to date of fiscal year
      2008 from $107,901 in the comparable period of fiscal year 2007. The decrease
      is
      attributable to an increase in fully depreciated fixed assets and fully
      amortized intangible assets in the comparison of the fiscal year to date periods
      ending March 31 st .





**General
      and Administrative Expenses:**


General
      and Administrative expenses decreased by 61% to $378,494 in the six months
      year
      to date of fiscal year 2008 from $982,014 in the six months year to date of
      fiscal year 2007. Labor related expenses decreased by 50% to $215,271 during
      the
      six months to date of fiscal year 2008 from $433,198 in the same year to date
      period of one year ago. The decrease is attributable to labor efficiencies
      achieved in the reduction of non-essential administrative staff and non-billable
      technical staff. Non-labor related administrative expenses decreased by 70%
      to
      $163,223 during the six months to date of fiscal year 2008 from $548,816 in
      the
      same year to date period of one year ago. The decrease is primarily attributable
      to efficiencies achieved via infrastructure detailed cost management and changes
      in the classification of certain indirect expenses.





**Income
      (Loss) from Operations:**


Income
      from Operations increased by $545,747 to $301,549 in the six months year to
      date
      of fiscal year 2008 from $(244,198) in the six months year to date of fiscal
      year 2007. The increase is due principally to decreases across the board in
      operating expenses incurred during the six months ending March 31, 2008 as
      compared to the six months ending March 31, 2007, partially offset by a decrease
      in the gross profit margin in the comparison of the two reporting periods.


21





**Other
      Income (Expense):**


The
      decrease in Other Expenses is attributable to the decrease in interest expense
      in the six months ending of the current fiscal year resulting from the reduction
      of operating line of credit debt partially offset by increased term borrowings
      and equipment financings. Interest expense on debt was $16,974 in the quarter
      ended March 31, 2008 compared to $28,196 in the quarter ended March 31,
      2007.





**Net
      Income:**


The
      operation generated Net Income of $189,100 in the six months ending March
      31 st of
      fiscal year 2008 compared to a Net Loss of $178,746 in the six months ending
      March 31 st of
      fiscal year 2007. The increase in net income of $367,846, or 14% of revenues,
      is
      primarily due to higher training subscription and custom products and services
      core revenues and the phasing out of low margin ETS revenues, and decreasing
      operating expenses in all categories during the six months ending March
      31 st in the
      current fiscal year compared to the same period in the previous fiscal year.





**Liquidity
      and Capital Resources**


As
      of
      March 31, 2008, the Company had cash and cash equivalents of $309,944 as
      compared to $80,331 at the audit date of September 30, 2007.





Cash
      flows provided by operating activities amounted to $486,069 in the six months
      year to date of fiscal year 2008 compared to $281,843 in the six months year
      to
      date of fiscal year 2007. The main reasons for the increase in cash flows
      provided by operations is attributable to generated net income, reductions
      in
      receivable accounts and contracts, partially offset by reductions in liability
      accounts.





Cash
      flows used in investing activities amounted to $77,449 in the six months year
      to
      date of fiscal year 2008 compared to $101,381 in the six months year to date
      of
      fiscal year 2007. The decrease is attributable to decreased expenditures for
      internal software development.





Cash
      flows used by financing activities amounted to $179,007 in the six months year
      to date of fiscal year 2008 compared to $301,051 in the six months year to
      date
      of fiscal year 2007. The decrease is attributable to a net reduction in payments
      on notes payable, related parties, partially offset by increases in debt service
      payments for short and long-term debt and long-term liabilities.





**ITEM
      3**–**CONTROLS AND PROCEDURES**





Our
      Chief
      Executive Officer and Chief Financial Officer evaluated the effectiveness of
      our
      disclosure controls and procedures (as defined in Rule 13a-14(c) under the
      Securities Exchange Act of 1934) as of the end of the three month period ended
      March 31, 2008. Based on this evaluation, our Chief Executive Officer and Chief
      Financial Officer have concluded that our controls and procedures are effective
      in providing reasonable assurance that the information required to be disclosed
      in this report is accurate and complete and has been recorded, processed,
      summarized and reported within the time period required for the filing of this
      report. Subsequent to the date of this evaluation, there have not been any
      significant changes in our internal controls or, to our knowledge, in other
      factors that could significantly affect our internal controls.


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**PART
      II**-**OTHER INFORMATION**





**ITEM
      6****EXHIBITS**





(a)  Exhibits





The
      following exhibits are filed as a part of this report on Form 10-QSB:





**Exhibit
                No.**
            **Description**31.1
            Rule
                13(a)-14(a)/15(d)-14(a) Certification of Chief Executive
                Officer31.2
            Rule
                13(a)-14(a)/15(d)-14(a) Certification of Chief Financial
                Officer32.1
            Rule
                1350 Certification of Chief Executive Officer32.2
            Rule
                1350 Certification of Chief Financial
                Officer




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**SIGNATURES**




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




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




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