UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549





FORM 10-KSB/A





ANNUAL REPORT UNDER
SECTION 13 OR SECTION 15(d) OF THE


SECURITIES EXCHANGE
ACT OF 1934





For the Fiscal Year
ended September 30, 2008





Commission File
Number: 333-116255





VIVID LEARNING SYSTEMS,
INC.


(Exact name
of small business issuer as specified in its charter)





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





5728 Bedford
      Street
              Pasco,
      Washington
            
            99301(Address of
      principal executive offices)
            
            (Zip
      Code)





(509)
      545-1800(Issuer's
      telephone number)





Securities
      Registered Pursuant to Section 12(b) of the Act:None





Securities
      Registered Pursuant to Section 12(g) of the Act:Common Stock,
      par value $.0001 per share





Check whether the
Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of
the 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  ̈





Check if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-B is not contained
herein, and no disclosure will be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  ̈





Indicate by check
mark whether the Issuer is a shell company (as defined in Rule 12b-2 of the
Exchange Act) YES  ̈ NO x





State Issuer’s
revenues for its most recent fiscal year: $5,227,236.





The aggregate
market value of the Issuer’s common stock held by non-affiliates of the Issuer
as of October 7, 2008 (based on the closing sale price of U.S. $0.20 per share
of the Issuer’s common stock, as reported on the Over the Counter Bulletin Board
on that date) was approximately U.S. $1,740,311 (based on 8,701,554 shares).
 Common stock held by each officer and director and by each person known to
the Issuer to own 5% or more of the outstanding common stock has been excluded
in that those persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.





The number of
shares of the Issuer’s common stock outstanding as of October 7, 2008 was
13,372,165.





DOCUMENTS
INCORPORATED BY REFERENCE





Document
            
            Part of 10-KSBProxy Statement
      for the 2009 Annual Meeting of Stockholders
            
            Part
      III




Transitional Small
Business Disclosure Format (Check one): YES  ̈ NO x




Vivid
Learning Systems, Inc. [“Vivid”] filed an Annual Report on Form 10-KSB on
December 5, 2008.  Vivid is amending the Form 10-KSB in order to
incorporate the SOX 302 and 906 certifications which were inadvertently omitted
from the original filing.  This amendment does not modify or update
the information previously provided.







TABLE OF
CONTENTS





PART 1FORWARD-LOOKING
      STATEMENTS
            
            1ITEM
      1
            DESCRIPTION
      OF BUSINESS
            
            1ITEM
      2
            DESCRIPTION
      OF PROPERTY
            
            8ITEM
      3
            LEGAL
      PROCEEDINGS
            
            8ITEM
      4
            SUBMISSION OF
      MATTERS TO A VOTE OF SECURITY HOLDERS
            
            8PART IIITEM
      5
            MARKET FOR
      COMMON EQUITY AND RELATED STOCKHOLDERMATTERS
            
            8ITEM
      6
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            
            10ITEM
      7
            FINANCIAL
      STATEMENTS
            
            20ITEM
      8
            CHANGES IN
      AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
      AND FINANCIAL DISCLOSURE
            
            20ITEM
      8A    CONTROLS AND PROCEDURES
            
            20ITEM
      8B     OTHER INFORMATION
            
            21PART IIIITEM
      9
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONSAND CORPORATE
      GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OFTHE EXCHANGE
      ACT
            
            22ITEM
      10
            EXECUTIVE
      COMPENSATION
            
            22ITEM
      11
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS
            
            22ITEM
      12
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR
      INDEPENDENCE
            
            22ITEM
      13
            EXHIBITS
            
            23ITEM
      14
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            
            25FINANCIALS
            
            F-1 to F-24









FORWARD-LOOKING
STATEMENTS





Except for
historical information, this report contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 as amended
(the “Exchange Act”).  Such forward-looking statements involve risks and
uncertainties, including, among other things, statements regarding our business
strategy, future revenues, and anticipated costs and expenses.  Such
forward-looking statements include, among others, those statements including the
words “expects,” “anticipates,” “intends,” “believes”, and similar language.
 Our actual results may differ significantly from those projected in the
forward-looking statements.  Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in the section
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”  You are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of the date of this report.
 We undertake no obligation to publicly release any revisions to
forward-looking statements or reflect events or circumstances taking place after
the date of this document.





PART I




ITEM 1 – DESCRIPTION OF
BUSINESS





SUMMARY OF
CORPORATE HISTORY




Vivid Learning
Systems, Inc. (hereinafter “the Company” or “Vivid”), was incorporated in
December 2003 in the State of Delaware. Vivid is the sole shareholder of its
operating subsidiary Vivid Learning Systems, Inc., a Washington corporation
(hereinafter "Vivid WA"). Vivid WA was incorporated in 1995 in the State of
Washington under the name of Applied Tec knowledgey , Inc. and in April
of 1997 changed its name to Vivid Concepts, Inc. Vivid WA changed its name to
Vivid Learning Systems, Inc. in January 2000. Until June 13, 2007, approximately
83% of the outstanding shares of Vivid were held by Nuvotec USA , Inc. Nuvotec USA , Inc. was
incorporated in the State of Delaware in August 2004 as a result of the
combination of Nuvotec, Inc., a Delaware corporation and Pacific EcoSolutions,
Inc., also a Delaware corporation. Nuvotec, Inc. was a Washington corporation
formed in 1998 as a result of the merger of Technical Resources International,
Inc. and Vivid WA, which both then became subsidiaries of Nuvotec, Inc. In
December 2003 Nuvotec, Inc. exchanged its shares in Vivid WA for 8,100,000
shares of the newly formed Vivid. On June 13, 2007, Nuvotec USA , Inc. distributed
its shares in the Company to the Nuvotec USA , Inc. shareholders
on a pro-rata basis. Said distributed shares were not registered; however, all
such shares are now free-trading under Rule 144.





In May 2004 Vivid
purchased ImageWorks Media Group, Inc., a media development company that Vivid
now operates as a wholly owned subsidiary. Effective October 1, 2005, both
Nuvotec USA and Pacific
EcoSolutions re-organized in the State of Washington. In June 2007, Nuvotec USA and Pacific
EcoSolutions were dissolved.





The Company
develops and delivers computer-based compliance training products and
interactive communications programs, which are marketed nationally and
internationally. We maintain a worldwide web site at http://www.learnatvivid.com . The reference to
our worldwide web address does not constitute incorporation by reference into
this report of information contained at that site.




1




Our stock is quoted
on the Over the Counter (OTC) Bulletin board under the symbol
"VVDL.OB".





History of Former Parent Company
Nuvotec USA , Inc.





Until June 13,
2007, approximately 83% of the outstanding shares of Vivid were held by Nuvotec
USA, Inc. Nuvotec USA , Inc. was
incorporated in the State of Delaware in August 2004 as a result of the
combination of Nuvotec, Inc., a Delaware corporation and Pacific EcoSolutions,
Inc., also a Delaware corporation. Nuvotec, Inc. was a Washington corporation
formed in 1998 as a result of the merger of Technical Resources International,
Inc. and Vivid WA, which both then became subsidiaries of Nuvotec, Inc. In
December 2003 Nuvotec, Inc. exchanged its shares in Vivid WA for 8,100,000
shares of the newly formed Vivid. Effective October 1, 2005, both Nuvotec USA and Pacific
EcoSolutions re-organized in the State of Washington. In June 2007, Nuvotec USA and Pacific
EcoSolutions were dissolved.





Nuvotec USA , Inc. was a
Richland, Washington based technology commercialization and technical services
company with established and profitable business lines in environmental
management and web-based training (including Vivid). The anchor for Nuvotec’s
environmental business line was the nuclear-related technical services it
provided to the Department of Energy (since 1995) in project and construction
management, engineering, and project and field work control. In addition,
Nuvotec also had ongoing waste processing efforts focused on commercial waste
treatment. Nuvotec USA , Inc. was formed
in August 2004 by the merger of Nuvotec, Inc. and Pacific EcoSolutions, Inc. On
June 13, 2007, the sale of Nuvotec USA , Inc. and Pacific
EcoSolutions, Inc. to Perma-Fix Environmental Services, Inc.
closed.





Nuvotec, Inc. was
incorporated in the State of Washington in 1998 as a result of the merger of
Technical Resources International, Inc. and Vivid WA, which both then became
subsidiaries of Nuvotec. In December 2003 Nuvotec exchanged its shares in Vivid
WA for 8,100,000 shares of the newly formed Vivid.





In December of 1998
the stockholders of Vivid WA and Technical Resources International, Inc.
exchanged their respective common stock for common stock in the newly formed
entity, Nuvotec, Inc. Based on the number of shares issued by each company at
that time it was determined that the holder of Technical Resource International,
Inc shares would receive 4.32 shares for each share held by Vivid stockholders
in the tax free exchange. An independent appraisal company was engaged to
separately value the two companies and arrive at the appropriate exchange rate.
There was no cash consideration between the companies for the transaction. The
conclusion of the appraisal firm was that the value of the combined companies
was greater than the sum of the values of the two companies on a stand alone
basis. The synergies that existed between the two companies (common customers,
complementary services, etc.) together with the combined future earning
capacities of the companies caused the appraisal firm to conclude that a
combined entity (Nuvotec, Inc.) would provide greater value in the long-term for
the stockholders.




2




History of Vivid's Product
Development and Industry Focus





In 1995 Applied
Tec knowledgey (later to become
Vivid WA) obtained the Fluor Hanford General Employee Training contract. The
focus of Vivid WA at that time was to develop and deliver computer based
employee training programs to Department of Energy employees and contractors at
the Hanford Nuclear reservation.





In 1997 the Company
developed two commercial CD-ROM based products called Instant OSHA Plus designed to
provide OSHA and employment law focused training specific to the general safety,
utility, and municipal markets. The Company formed relationships with utility
associations and used its in-house sales staff to sell the program (for a one
time fee) to prospective clients.





In 2000, the
Company began developing training libraries that could be delivered over the
web. The Company changed its pricing model from one time product sales to annual
subscriptions. The Company built a large web-enabled OSHA and utility safety
library. Additionally, the Company purchased and enhanced a web based learning
management system. The Company also established a national marketing presence
through a combination of direct sales and marketing, signed on channel sales
partners, worked with industry experts and consultants, exhibited at national
trade shows, and advertised in national magazines. Through an acquisition of
ImageWorks Media Group in 2004, Vivid added high end strategic and interactive
development capabilities to its portfolio of online training products and
services. The ImageWorks brand today offers a comprehensive suite of marketing,
advertising, and custom training programs. The Company now also applies this
marketing mix and brand positioning to several vertical markets including Health
Care, Food Processing, Science and Technology, Manufacturing, and
Mining.





Vivid's Products





Vivid produces,
markets, and delivers web-based compliance training programs designed to help
companies meet mandated state and federal regulatory requirements.




The goal of these
training programs is to increase safety awareness, improve the work environment,
and lessen a company's exposure to regulatory fines and potential litigation.
These products and services are sold to the following industries: general
manufacturing; utility; healthcare; mining; food safety; government; and,
education.




Vivid's training
libraries focus on helping companies meet the training requirements found in the
following regulations: Occupational Health and Safety Act (OSHA); Employment
Law/HR Compliance Training based on federal employment laws; The Joint
Commission on the Accreditation of Healthcare Organizations (JCAHO); Healthcare
Insurance Portability and Accountability Act (HIPAA); Mine Safety and Health Act
(MSHA); Electrical Worker Training (EWT 1910.269); Food Safety Training (based
on Food & Drug Administration requirements); Forklift Operator Training;
Hazardous Waste Operator Training (HAZWOPER); and, U.S. Department of
Transportation Training.




The Company has a
library of over 300 courseware titles organized and tailored to address general
and selected industries and company-specific training requirements. Vivid’s
learning products, depending on the needs of the customer or industry, can also
be customized and delivered via the world-wide-web through Vivid’s Learning
Management System (LMS) software or through the LMS of a third
party.




3




The Company has a
self-contained production group which includes instructional designers,
programmers, media (design, photography, video animation, and simulation) and
technical writers. The company has produced over 300 online lessons and has
actively marketed these programs to the commercial workplace since
1999.





ImageWorks’
Products





The ImageWorks
brand caters to a diverse commercial and institutional audience and range from
marketing communications and sales training to interactive simulations and
custom training. Industry focuses include Food processing, Science and
Technology, Education, and Healthcare. The ImageWorks brand features core
competencies in marketing strategy, web, video, 3D animation, print, and
photography.




Training Industry





Corporate training
is an $57 billion-a-year industry with the technology based training products
market in 2007 at $22.8 billion and growing at a 26% rate according to a 2007
report by Ambient Insight, an industry research and analysis firm. It is
estimated that companies in the US spend nearly $3 billion dollars on regulatory
training annually with more than $900 million being spent on training materials
alone per the U.S. Department of Labor, the American Society for Training and
Development, and Richard K. Miller and Associates.




According to the
U.S. Department of Labor, companies in the U.S. currently spend between 1.5-2.0%
of payroll on training. It is anticipated that the compelling cost savings
derived from online vs. traditional training methods will be used to provide
more training for the same dollar.




Sales and
Marketing




The Company employs
both a direct sales strategy and a channel sales strategy concurrently. Vivid
sells its products and services directly through an in-house sales team (Vivid
employees) and through channel sales partners which include independent
resellers, value-added resellers, associations, and consultants. The members of
Vivid’s in-house sales team are comprised of Account Executives and Client
Support Representatives. The Account Executives have sales and account
management responsibilities in different vertical industries and are also
responsible for managing channel sales partners that sell into their respective
vertical markets. The channel sales partners are compensated on a “success
basis” and are paid sales commissions or referral fees based on securing revenue
on Vivid’s behalf. Channel sales partners are selected based on their market
expertise, distribution capability, and client base.




Through reseller
agreements and associations, Vivid’s products and services are marketed
nationally, in Canada, and in Northern Europe by more than 1,000 sales
professionals from a distribution network of partners including Zee Medical,
Inc., Learn.com, SumTotal, and Element K. The Company has also employed industry
experts as consultants in key vertical markets to assist in lead generation and
content development efforts. The Company's lead generation strategies include
trade shows, direct mail, e-mail blasts, newsletters, and print advertising. The
Company also plans to set up an international distribution network.




4




The Company's
largest customer is Fluor Hanford, Inc. Fluor Hanford accounted for
approximately 13% of revenues in fiscal year 2008, 18% of revenues in fiscal
year 2007, and 19% of revenues in fiscal year 2006. The contract with Fluor
Hanford, which expired September 30, 2008, was renewed for one year effective
October 1, 2008.





Prior to October 1,
2008, Fluor Hanford was the primary management contractor for Project Hanford
and had the ultimate responsibility for the Project Hanford Management Contract
to provide the U.S. Department of Energy with a prime contractor, principal
subcontractors, as well as other subcontractors to manage and integrate a full
range of work to support cleanup of the U.S. Department of Energy’s former
nuclear production facilities at the Hanford Site in southeastern Washington
State. The contract held by Fluor Hanford has been parceled into three new
contracts. The contract under which the Company’s work falls has not yet been
awarded to the successful offeror due to a protest by the unsuccessful offeror.
During this time period, the Company will continue to provide the same services.
The Company is a designated subcontractor to the successful offeror. It is
anticipated the protest will be resolved by the end of the calendar year. Since
1995, Vivid has been responsible for producing, updating, and delivering the
computer and Hanford LAN-based Hanford General Employee Training program to
Fluor Hanford contractors and other U.S. Department of Energy contractors on the
Hanford site. Vivid maintains and services two local training centers and
provides authenticators to proctor the training centers.





Vivid's primary
market focus is in the following industries: general manufacturing; healthcare;
utility; mining; education; and, food services.





1. In the general
manufacturing industry, Vivid currently markets and delivers the following
online training programs to help companies meet applicable federal and/or state
and local regulations: Occupational Health and Safety Administration (OSHA);
U.S. Department of Transportation training; environmental management training;
employment law training; and, company specific/site specific custom training.
The markets for this training are manufacturing companies and businesses
mandated by OSHA and state governments to provide safety training to their
workers.





2. In the
healthcare industry, Vivid currently markets and delivers the following online
training programs to help companies meet applicable federal and/or state
regulations: Occupational Health and Safety Administration (OSHA) training;
Employment Law; The Joint Commission on the Accreditation of Healthcare
Organizations (JCAHO) training; and, Health Insurance Portability and
Accountability Act (HIPAA) training. Additionally, Vivid provides bereavement
training through a reseller agreement with other content development companies.
The primary markets for this training are public and private hospitals and
nursing associations.




3. In the utility
industry, Vivid currently markets and delivers the following online training
programs to help companies meet applicable federal and/or state regulations:
Occupational Health and Safety Administration (OSHA) training; Electrical Worker
Training (EWT) based on CFR 1910.269 standards; and, some employment law and job
specific and technical skills training programs. The markets for this training
are public and private utilities and utility contractors.




5




4. In the mining
industry, Vivid currently markets and delivers the following online training
programs to help companies meet applicable federal and/or state regulations:
Occupational Health and Safety Administration (OSHA) training; and, Mine Safety
and Health Administration (MSHA) Part 46, 47, and 48 training. The markets for
this training are metal and non-metal surface mines and surface mine
contractors.





5. In the education
industry, Vivid currently markets and delivers the following online training
programs to help institutions meet applicable federal and/or state regulations:
Occupational Health and Safety Administration (OSHA) training; and, employment
law training.




6. In the food
service industry, Vivid currently markets and delivers the following online
training programs to help companies meet applicable federal and/or state
regulations: Occupational Health and Safety Administration (OSHA) training;
Employment Law; Food Handler and Food Manager Safety training; and, HACCP
training based on Food and Drug Administration (FDA) regulations. The markets
for this training range from food retail to food service and the food processing
industry.




Acquisitions





In fiscal years
2008 and 2007 Vivid made no acquisitions.





Employees




As of September 30,
2008, Vivid had 33 full-time employees and 12 part-time employees. Of those
employees, 9 full-time employees are in sales and marketing, 19 full-time
employees are in production, 5 full-time employees are administrative, 5 are
part-time authenticators (test proctors), and 7 are part-time in production.
Vivid plans to add 7 or more additional employees in fiscal year 2009. None of
the employees are subject to any collective bargaining agreements.  There is one (1)
employment agreement.





The Company leases
all of its employees from HRnovations, Inc., a professional employer
organization. Under this arrangement, HRnovations, Inc. provides payroll
services, employee benefits, and human resource expertise to the Company’s
management and employees.




Under the terms of
the contract with HRnovations, Inc., the Company pays for the actual costs of
gross personnel earnings, benefits, and federal and state payroll taxes, a
management fee that is equal to two and a half percent (2.5%) of gross payroll,
and miscellaneous costs associated with child care/medical reimbursement
account, employee handbooks, and recruiting. In exchange, HRnovations, Inc.
provides the following services: a) payment of wages as reported by the Company;
b) collection, reporting, and payment of all applicable federal, state, and
local taxes, impositions, and other charges required to be withheld from the
wages and salaries of any of the personnel or required to be paid to any
governmental agency by the employer as a result of the payment of such salaries
and wages; c) prudent administration of employee benefit plans; d) completion,
reporting, and maintenance of payroll and benefit records (with the exception of
actual hours worked which is the responsibility of the Company); d) recruiting
efforts for three positions a year (included in the administrative fee); e)
compilation of employee handbooks and compensation plans, and, f) general human
resources support.




6




Competition





The compliance
training market is fragmented and highly competitive. We believe at this time no
one company has claimed the dominant position in the computer-based compliance
training market and that there is not a clear market leader. The competition
that currently exists comes from four sectors: a) company in-house training; b)
traditional compliance training companies offering instructor led courses; c)
traditional compliance training companies producing computer-based training;
and, d) higher education (Colleges and Universities). Although we believe we
compete favorably, many of our competitors are well-established national
companies that have substantially greater financial resources. Currently, we
consider our primary competitors to be PureSafety, 360training, Coastal Training
Technologies Corp, and Summit Training Source.





Intellectual
Property




Vivid does have
copyright protection on the computer-based training materials of Vivid and
trademark protection on its learning management system; however, there can be no
assurance that any such copyright or trademark will provide meaningful
protection to Vivid or that Vivid will be able to afford the expense of any
litigation which might be necessary to enforce its rights.





Regulation




Changes in
standards at the local, national, or international levels could have an adverse
impact on the market for Vivid’s products and services, as updates are required
and resources must be available to perform such updates or the Vivid products
could be considered out-dated and not relevant. The computer and Internet
training that Vivid develops is focused on helping companies meet mandated state
and federal regulations and thus potentially reducing the companies risk
exposure to regulatory fines and litigation. Vivid has developed training
programs based on the following regulations: Occupational Health and Safety
(OSHA); Joint Commission on the Accreditation of Healthcare Organizations
(JCAHO); Health Insurance Portability and Accountability Act (HIPAA); employment
law/awareness training based on federal employment laws; electrical worker
training for utility linemen based on Code of Federal Regulation 1910.269; food
safety training based on Food and Drug Administration guidelines; surface miner
training based on the Mining Safety and Health Administration regulations
(MSHA); and, training to address some of the U.S. Department of Transportation
requirements.





A tightening or
loosening of these regulations and their enforcement by state and federal
lawmakers may have either a negative or positive impact on Vivid’s ability to
sell these training programs. An example of a positive impact on Vivid’s
training revenue was the recent introduction of stronger training requirements
instituted by MSHA. An example of a negative impact was the current
administration’s repeal in 2001 of the Clinton Administration regulations that
set new workplace ergonomic rules to combat repetitive stress
injuries.




7




ITEM 2 – DESCRIPTION OF
PROPERTY





Our corporate
office is located at 5728 Bedford, Pasco, Washington. Our training center is
located at 2345 Stevens Drive, Richland, Washington. Our video production
facilities are located at 5710 Bedford, Pasco, Washington.




Up until March 31,
2007, the Company's corporate office was at 723 The Parkway which is a space
that the Company's former parent corporation (its largest shareholder) Nuvotec USA , Inc. (“Nuvotec”)
leased. The Company did not pay rent for this space (other than management fee
allocations which include overhead). Nuvotec leased the 723 Parkway office space
from Ferguson Financial Group, which is controlled by Robert Ferguson, who is
Vivid's Chairman of the Board of Directors. Nuvotec's lease required monthly
payments of $12,865.




The Company leases
its training center at 2345 Stevens Drive in Richland, Washington from the Port
of Benton, on an annual basis and is responsible for excise tax and maintenance
expenses based upon its share of office space occupancy in relation to the total
space leased. The Company paid $15,139 and $41,996 for rent, excise tax, and
maintenance of this property for the fiscal years ended September 30, 2008 and
September 30, 2007, respectively.




The Company leases
its video production facilities at 5710 Bedford in Pasco, Washington from Bauer
Hammer Properties, a partnership owned by two Company employees; specifically,
Nick Bauer and Matt Hammer. The lease expires April 30, 2009 and has an option
for three additional five year terms. The monthly rent is $7,750.





The Company leases
office space at 5728 Bedford Street in Pasco, Washington from a third party
consisting of a base rent of $5,000 per month with an option for an additional
five year term. The lease expires December 31, 2010.





ITEM 3 – LEGAL
PROCEEDINGS





We are not aware of
any pending or threatened legal proceedings against us that involve an amount in
excess of 10% of the Company's current assets.




ITEM 4 – SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS





No matters were
submitted to a vote of security holders during the fiscal year covered by this
report except for those items voted upon during the annual shareholders’ meeting
held in January, 2008.




PART II




ITEM 5 – MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS





On August 1, 2005,
the National Association of Securities Dealers (NASD) approved the Company’s
common stock for quotation on the OTC Bulletin Board electronic quotation
system. The stock is currently trading under the symbol “VVDL.OB”.  The
following table sets forth, for the fiscal quarters indicated, the high and low
bid prices per share of our common stock.  The quotations reflect inter
dealer prices, without retail mark-up, mark-down or commissions and may not
represent actual transactions.




8




Year Ending
      September 30, 2008
              
              High
              
              LowSeptember 30,
      2008
              
              $
              0.20
              
              $
              0.16June 30,
      2008
              
              $
              0.25
              
              $
              0.15March 31,
      2008
              
              $
              0.30
              
              $
              0.18December 31,
      2007
              
              $
              0.28
              
              $
              0.23





Source:  Big
Charts





On October 7, 2008
the closing bid price for our common stock was $0.20.





STOCKHOLDERS





As of October 7,
2008, there were approximately 326 stockholders of record of the Company’s
common stock.





DIVIDENDS





We have never
declared or paid any cash dividends on our common stock. We anticipate that any
earnings will be retained for development and expansion of our business and we
do not anticipate paying any cash dividends in the foreseeable future. Our Board
of Directors has sole discretion to pay cash dividends based on our financial
condition, results of operations, capital requirements, contractual obligations,
and other relevant factors.





SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





The following table
sets forth certain information, as of September 30, 2008, concerning outstanding
options to purchase common stock granted to participants in all of the Company’s
equity compensation plans and the number of shares of common stock remaining
available for issuance under such equity compensation plans.





EQUITY COMPENSATION
PLAN INFORMATION





Plan Category
            
            Number of securities
              to be issued upon
              exercise of
              outstanding options,
              warrants and rights
            
            Weighted-average
              exercise price of
              outstanding options,
              warrants and rights
            
            Number of securities
              remaining available
              for future issuance
              under equity
              compensation plans
              (excluding securities
              reflected in column (a))(a)
            
            (b)
            
            (c)Equity
      compensation plans approved by security holders
            
            
            581,638
            (1)
            $
            0.33
            
            
            1,734,862Equity
      compensation plans not approved by security holders
            
            
            N/A
            
            
            N/A
            
            
            N/ATotal
            
            
            581,638
            
            $
            0.33
            
            
            1,734,862




(1) Represents
stock options issued pursuant to the Company’s 2003 Non-Statutory Stock Option
Plan.




9




RECENT SALES OF
UNREGISTERED SECURITIES





There have not been
any sales of unregistered securities. The June 13, 2007 distribution of the
Company shares held by Nuvotec USA , Inc. was deemed
to not be a sale.





The distribution of
securities described above were deemed to be exempt from registration under the
Securities Act of 1933 as amended (the “Securities Act”) in reliance on Section
4(2) of the Securities Act as transactions by an issuer not involving a public
offering. The Company made the determination that the Board of Directors of
Nuvotec USA , Inc. had
sufficient knowledge and experience in finance and business matters to evaluate
the risks and merits of the investment. There was no general solicitation or
general advertising used to market the securities. The Nuvotec USA , Inc. shareholders
acknowledged in the shareholder vote to sell Nuvotec USA , Inc. with the
related transaction of the distribution of the Company’s shares held by Nuvotec USA , Inc. that they
received the securities for their own account. A legend was placed on the stock
certificates stating that the securities had not been registered under the
Securities Act and could be sold or otherwise transferred without an effective
registration or an exemption therefrom.





REPURCHASE OF
SECURITIES





Vivid did not
repurchase any shares of its common stock during the fiscal year ended September
30, 2008.




ITEM 6 – MANAGEMENT’S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION





CAUTIONARY NOTE
REGARDING FORWARD-LOOKING STATEMENTS





This report
contains certain financial information and statements regarding our operations
and financial prospects of a forward-looking nature. Although these statements
accurately reflect management’s current understanding and beliefs, we caution
you that certain important factors may affect our actual results and could cause
such results to differ materially from any forward-looking statements which may
be deemed to be made in this report. For this purpose, any statements contained
in this report which are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as, “may”, “intend”, “expect”, “believe”, “anticipate”, “could”,
“estimate”, “plan”, or “continue” or the negative variations of those words or
comparable terminology are intended to identify forward-looking statements.
There can be no assurance of any kind that such forward-looking information and
statements will be reflective in any way of our actual future operations and/or
financial results, and any of such information and statements should not be
relied upon either in whole or in part in connection with any decision to invest
in the stock of the Company.




10




The following
discussion should be read in conjunction with our consolidated financial
statements, including the related notes, appearing elsewhere in this report.
 The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties.  Our actual results could differ
significantly from those discussed in the forward-looking statements as a result
of the various factors set forth elsewhere in this report.





Overview





Vivid revenues
decreased approximately 14% over the past year. The decrease in revenues was due
to the phase-out of Engineering and Technical Services (“ETS”) contracts.
Non-ETS revenues increased by $508,678, or 11%, in the comparison of the fiscal
years ending September 30, 2008 and 2007. Also, a 26% increase in Non-ETS custom
products and services revenues largely attributable to the efficient and timely
completion of increased custom project activity and related revenues generated
within this business segment contributed to the growth. Training subscription
revenues increased by 3% in the comparison of the two fiscal years due primarily
to an increase in new subscription based sales. Vivid’s gross profit decreased
from 60% in fiscal year 2007 to 58% of revenues in fiscal year 2008. 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.




Critical Accounting
Policies





The preparation of
our consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The estimates and assumptions are evaluated on an ongoing
basis and are based on historical experience and on various other factors that
are believed to be reasonable. Accounts significantly impacted by estimates and
assumptions include, but are not limited to, fixed asset lives, recovery of
long-lived assets and income taxes. If we had made different estimates or
assumptions, our results of operations would have been affected.





We believe that the
following items, although not exclusive, represent our more critical accounting
policies and estimates used in the preparation of our consolidated financial
statements.





Below is a recap of
the Company’s major accounting policies. Also, refer to the audited financial
statements of Vivid for a more detailed listing of critical accounting
policies.




11




Accounting
Methods—The Company’s financial statements are prepared using the accrual method
of accounting in compliance with GAAP.





Accounts
Receivable—The Company carries accounts receivable at net realizable value. On a
periodic basis, the Company evaluates accounts receivable and considers the need
for an allowance for doubtful accounts, based on the Company’s past and expected
collections, and current credit conditions. Most receivables result from
contracted subscriptions and services with large, established customers,
including the federal and state governments. As of September 30, 2008 all
Company receivables are considered collectible and no valuation allowance is
deemed necessary.





Advertising—Advertising
costs are charged to operations in the year incurred.





Revenue and Cost
Recognition—The Company’s revenues are recognized at the time of shipment of
products or performance of the contracted services. The Company sells its
products and services both directly, using in-house sales employees, and
indirectly, using channel sales partners. Channel sales partners are classified
as independent resellers, value-added resellers, industry consultants and
industry associations. Cost of goods is primarily made up of labor costs
associated with software development and training. See Note 4 to the Financial
Statements.





Reseller
Commissions—These commissions are recorded as an expense if the cumulative
affirmative impact of indicators of gross revenue reporting, as outlined in EITF
99-19, Indicators 7-14, are met by the Company in the transaction. The Company
pays each of the channel partners a commission, or a referral fee, recorded as a
selling expense, strictly on a success basis as a result of selling the
Company’s products and services to third party customers. The Company has
contractual arrangements with each of these partners that range from one to
three years. The Company pays these partners a referral fee, or a commission, of
between five and fifty percent of net revenue depending upon their annual sales
levels and other criteria. None of these U.S.-based contracts is exclusive, or
restricts the Company from selling directly or through other channel partners
into any markets. Such expenses paid to resellers are recorded as a reduction to
the underlying selling price if the cumulative affirmative impact of indicators
of net revenue reporting, as outlined in EITF 99-19, Indicators 15-17 are
present in the transaction. The Company does not provide any consideration to
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
Expenses—Royalty payments are recorded as an expense if ownership of the
training content does not reside with the Company in a licensing fee arrangement
between the Company and the owner of the content.





Compensated
Absences—The Company leases all of its employees from HRnovations, Inc., a
professional employer organization. Leased employees are entitled to paid
personal time, which is accrued in the accounts as a current expense and
liability, dependent upon the length of service.





Software
Development Costs—Costs incurred for the internal development of software
training content and enhancements, after technological feasibility has been
established for the related content, 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.




12





Property and
Equipment—Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the remaining useful live of the assets,
ranging from three to ten years. The Company evaluates the recoverability of
property and equipment when events and circumstances indicate that such assets
might be impaired. The Company determines impairment by comparing the
undiscounted future cash flows estimated to be generated by these assets to
their respective carrying amounts. Maintenance and repairs are expensed as
incurred. Replacements and betterments are capitalized. The cost and related
reserves of assets sold or retired are removed from the accounts, and any
resulting gain or loss is reflected in results of operations.





Principles of
Consolidation—the consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, after elimination of the intercompany
accounts and transactions.





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





Provision for
Taxes—Current tax provisions represent the federal income tax the Company would
have incurred on a separate, stand-alone basis. Income taxes are provided based
upon the liability method of accounting pursuant to Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes.” 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.


13


RESULTS OF
OPERATIONS




Our fiscal year
ends September 30. Our operating results for the years ended September 30, 2008
and 2007 are presented below.




Year Ended
              September
              30, 2008
            
            Year Ended
              September
              30, 2007REVENUES
            
            $
            5,227,236
            
            $
            6,056,202COST OF
      REVENUES
            
            
            2,185,991
            
            
            2,439,497GROSS
      PROFIT
            
            
            3,041,245
            
            
            3,616,705EXPENSESMarketing
      & related labor expenses
            
            
            1,275,948
            
            
            1,401,739Bad debt
      expense
            
            
            14,799
            
            
            12,426Reseller
      commissions
            
            
            382,897
            
            
            394,711Depreciation
      & amortization
            
            
            100,315
            
            
            738,769Wages and
      contract labor
            
            
            382,101
            
            
            896,969Other
      Operating expenses
            
            
            345,329
            
            
            1,100,695TOTAL
      OPERATING EXPENSES
            
            
            2,501,389
            
            
            4,545,309INCOME
      (LOSS) FROM OPERATIONS
            
            $
            539,856
            
            $
            (928,604
            )OTHER INCOME
      EXPENSEGain (loss)
      on sale of equipment and intangible assets
            
            
            100
            
            
            (1,733
            )Other
      income
            
            
            175
            
            
            -Interest
      income
            
            
            4,099
            
            
            1,307Interest
      expense
            
            
            (35,887
            )
            
            (49,105
            )TOTAL OTHER
      INCOME (EXPENSE)
            
            
            (31,513
            )
            
            (49,531
            )INCOME (LOSS)
      BEFORE INCOME TAXES
            
            
            508,343
            
            
            (978,135
            )INCOME TAX
      BENEFIT (EXPENSE)
            
            
            (172,837
            )
            
            332,566NET INCOME
      (LOSS)
            
            $
            335,506
            
            $
            (645,569
            )BASIC NET
      INCOME (LOSS) PER SHARE
            
            
            0.03
            
            
            (0.05
            )DILUTED NET
      INCOME (LOSS) PER SHARE
            
            
            0.03
            
            
            (0.05
            )WEIGHED
      AVERAGE NUMBER OF COMMON STOCK SHARES OUTSTANDING:BASIC
            
            
            13,372,165
            
            
            13,261,938DILUTED
            
            
            13,372,165
            
            
            13,261,938





Training Subscriptions and Custom
Products and Services





The Company's
revenue is derived from two operating segments: 1) Training Subscriptions; and,
2) Custom Products and Services. The revenue, costs, and gross margin for these
revenue streams for the two years ending September 30, 2008 and 2007 are as
follows.





Training
              Subscriptions
            
            Sept. 30, 2008
              (year ended)
            
            Percent of
              Revenue
            
            Sept. 30, 2007
              (year ended)
            
            Percent of
              Revenue
            
            Percent
              Increase
              (Decrease)Revenues
            
            
            3,168,963
            
            
            100.0
            %
            
            3,085,747
            
            
            100.0
            %
            
            2.7
            %Cost of
      Revenues
            
            
            902,989
            
            
            28.5
            %
            
            672,740
            
            
            21.8
            %
            
            34.2
            %Gross
      Profit
            
            
            2,265,974
            
            
            71.5
            %
            
            2,413,007
            
            
            78.2
            %
            
            (6.1
            )%




14


Custom Products
                and Services
              
              Sept. 30, 2008
                (year ended)
              
              Percent of
                Revenue
              
              Sept. 30, 2007
                (year ended)
              
              Percent of
                Revenue
              
              Percent
                Increase
                (Decrease)Revenues
              
              
              2,058,273
              
              
              100
              %
              
              2,970,455
              
              
              100.0
              %
              
              (30.1
              )%Cost of
      Revenues
              
              
              1,283,002
              
              
              62.3
              %
              
              1,766,757
              
              
              59.5
              %
              
              (27.4
              )%Gross
      Profit
              
              
              775,271
              
              
              37.7
              %
              
              1,203,698
              
              
              40.5
              %
              
              (35.6
              )%





Comparison of year ended September
30, 2008 to September 30, 2007





Total Revenues


Total revenues
decreased by $828,966, or 14%, to $5,227,236 in 2008 from $6,056,202 in 2007.
The decrease was mainly due to the phase-out of Engineering and Technical
Services (“ETS”) contracts.  Non-ETS revenues
increased by $508,678, or 11%, in the comparison of the fiscal years ending
September 30, 2008 and 2007. Contributing to the Non-ETS revenue growth was a
26% increase in the Custom Products and Services business segment largely
attributable to the efficient and timely completion of increased custom project
activity. Training subscription revenues increased by 3% in the comparison of
the two fiscal years due primarily to an increase in new subscription based
sales. Training Subscription revenues earned are subject to minor amounts of
direct production expenses and, therefore, generate high gross margins. Total
gross profit as a percentage decreased to 58% for the year ended September 30,
2008 compared to 60% for the year ended September 30, 2007.  The decrease
is due to overall lower revenue volumes overall 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.





Training
Subscription revenues increased by $83,216, or 3%, to $3,168,963 for the fiscal
year ended September 30, 2008 compared to $3,085,747 for the fiscal year ended
September 30, 2007. Training Subscriptions accounted for 61% and 51% of total
revenues respectively in fiscal year 2008 and fiscal year 2007. The increase in
Training Subscription revenues was due to consistency in the rate of retention
year over year for subscription renewals and new subscription based sales. The
increase in Training Subscription revenues in fiscal year 2008 compared to
fiscal year 2007 as a percentage of total revenues is from the elimination of
ETS revenues from the revenue base in the fiscal year ended September 30, 2008.




The Custom Products
and Services segment generates a lower gross profit because such revenue is
matched to specific labor costs for the contractual task in order to generate
the revenue for the custom project. The revenue derived from Training
Subscriptions is based on content that has already been built previously with
only minor customization costs required at times as an additional cost to
deliver the content to a specific customer.




Custom Products and
Services revenues decreased by $912,182, or 31%, to $2,058,273 for the fiscal
year ended September 30, 2008 compared to $2,970,455 for the fiscal year ended
September 30, 2007. The large decrease is attributable to the phase-out of low
margin ETS contract revenues. Non-ETS Custom Products and Services revenues
increased 26% or $425,462 in fiscal year 2008 compared to 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.




15




Custom Products and
Services accounted for 39% and 49% of total revenues respectively in fiscal year
2008 and fiscal year 2007. The decrease is from the elimination of ETS revenues
from the revenue base in the fiscal year ended September 30, 2008.





Cost of Revenues


Cost of revenues
decreased by $253,506, or 10%, to $2,185,991 in 2008 from $2,439,497 in 2007
primarily due to the reduction of costs associated with the phase-out of low
margin ETS contract revenues. Cost of revenues as a percentage of sales
increased to 42% in 2008 from 40% in 2007. The main costs included in cost of
revenues are labor related costs, including salaries, payroll taxes, and
benefits. Labor related costs include the labor of the Company’s production
groups required to build software content and/or complete the tasks required by
contracts/services from specific customers/clients.





Training
subscription cost of revenues increased by 34% to $902,989 in fiscal year 2008
from $672,740 in fiscal year 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 comparison of the two
fiscal years .




Custom products and
services cost of revenues decreased by 27% to $1,283,002 in fiscal year 2008
from $1,766,757 in 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 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
$364,404 in the fiscal year ended September 30, 2008 compared to the fiscal year
ended September 30, 2007.




The elements of
labor that comprise the Company’s production group include instructional design,
programming, media production, and training delivery. Included in costs of
revenue also are minor amounts of billable costs, such as supplies or hardware,
that are able to be passed directly through to a customer based upon the
covenants contained in a specific contract.





Marketing and Related Labor
Expenses


Marketing and
related labor expenses decreased by $125,791, or 9%, to $1,275,948 in 2008 from
$1,401,739 in 2007. The decrease is due to marketing labor efficiencies achieved
within the government sector and overall reductions in travel and trade shows
expense categories.





16





Reseller
Commissions


Reseller
commissions decreased slightly by $11,814, or 3%, to $382,897 in 2008 from
$394,711 in 2007. The decrease in the comparison of the two fiscal years is
attributable directly to a slight increase in training subscription revenues
generated from internal sales resources.





Bad debt expense


Bad debt expense
was $14,799, or 0.3% in fiscal year 2008 compared to $12,426 in fiscal year
2007.





Depreciation and
Amortization


Depreciation and
amortization decreased by $638,454 to $100,315 in 2008 from $738,769 in 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 years.
A reduction in the estimated lives of certain intangible assets was made during
the previous fiscal year ending September 30, 2007.





General and Administrative
Expenses


General and
Administrative expenses decreased by 64% to $727,430 in fiscal year 2008 from
$1,997,664 in fiscal year 2007. Labor related expenses decreased by 57% to
$382,101 during 2008 from $896,969 in 2007. The decrease is attributable to
labor efficiencies achieved in the reduction of non-essential administrative
staff and non-billable technical staff. Non-labor related administrative
expenses decreased by 69% to $345,329 during 2008 from $1,100,695 in 2007. The
decrease is primarily attributable to efficiencies achieved via infrastructure
cost management at the detail level and changes in the classification of certain
indirect expenses.





Income (Loss) from
Operations


Income from
Operations increased by $1,468,460 to $539,856 in the fiscal year ended
September 30, 2008 from $(928,604) in the fiscal year ended September 30, 2007.
The increase is due principally to decreases across the board in operating
expenses incurred during 2008, especially in the expense categories of
administration expenses and depreciation and amortization as compared to
2007.





Other Income
(Expense)


The decrease in
Other Expenses is attributable to the decrease in interest expense in 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 $35,877 in the fiscal year ended September 30, 2008
compared to $49,105 in the fiscal year ended September 30, 2007.





Net Income (Loss)


The operation
generated Net Income of $335,506, or 6% of revenues, in the fiscal year ended
September 30, 2008, compared to a Net Loss of $(645,569) in the fiscal year
ended September 30, 2007. The increase in net income of $981,075, or 19% of
revenues, is primarily due to higher custom products and services core revenues
and the phasing out of low margin ETS revenues, and decreasing operating
expenses in all categories during 2008 compared to 2007, partially offset by an
increase in income tax expense in the comparison of the two fiscal
years.





17





Trends, Uncertainties or Other
Material Impacts upon Revenue


Known trends or
uncertainties that may have a material impact upon revenues include: (1) a
general market resistance to on-line training; (2) that many industry
associations develop free or lower cost training against which we may find it
difficult to compete; (3) that our annual subscription revenue model may not be
generally accepted by the industry; (4) that we may not readily be able to adapt
to wireless training and continue with our competitive advantages; (5) that
companies, who may be potential clients, are increasingly deciding to develop
and deliver on-line training programs through internal efforts; and, (6) that
current external economic conditions may impact the rate of industry
growth.





Vivid Learning
Systems has an operating history of 13 years. Other than fluctuating revenues
from two large clients experienced in 2005 and 2006, the Company has not
experienced any infrequent events, transactions or significant economic
conditions that materially impact the amount of revenue.





Liquidity and Capital
Resources


As of September 30,
2008, the Company had cash and cash equivalents of $132,391 as compared to
$80,331 as of September 30, 2007. The Company’s current ratio was 2.89 and 1.24
as of September 30, 2008 and 2007, respectively. Historically, the Company has
financed its cash flow requirements through the management of its line of
credit, local economic development loans, and cash generated from
operations.




As of September 30,
2006, the Company’s major shareholder had a line of credit with Key Bank with a
maximum credit facility of $1,000,000 at an annual interest rate of 8.25%. The
Company had an underlying intercompany agreement with the major shareholder to
make draws as required for operations on the line of credit. The borrowings
under this line at September 30, 2006 attributable to the Company were $670,702
and were recorded as a short-term related party payable. On October 20, 2006 the
Company converted the $670,702 in related party short-term debt due to the major
shareholder into 1,341,404 shares of common stock. The underlying inter-company
line of credit agreement with the former parent was terminated when the parent
company closed on an acquisition transaction and was sold effective June 13,
2007.




On September 4,
2007 the Company secured a line of credit note with Bank of the West. The line
of credit has a maximum credit facility of $250,000 and an initial annual
interest rate of 7.5%. At September 30, 2008 and 2007 outstanding borrowings
under this line were $0 and $57,072, respectively.




Net Cash Provided by Operating
Activities


Cash flows provided
by operating activities amounted to $773,294 in fiscal year 2008 compared to
$279,714 in 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.





Net Cash Used in Investing
Activities


Cash flows used in
investing activities amounted to $237,929 in fiscal year 2008 compared to
$184,957 in fiscal year 2007. The increase is attributable to increased
expenditures related to the acquisition of property and equipment and cost
expenditures for software development.





18




Net Cash Used in Financing
Activities


Cash flows used in
financing activities amounted to $483,305 in fiscal year 2008 compared to
$181,071 in fiscal year 2007. The increase is attributable to increased payments
on notes payable, related parties and increases in debt service payments for
short and long-term debt and long-term liabilities.





Future Needs


We believe that our
anticipated cash flow from operations will be sufficient to satisfy our
operating requirements for at least the next 12 months. Our future capital
requirements and the adequacy of funds available will depend upon many factors,
including cash flow generated from operations, customer retention, new product
development, expanded marketing requirements, and future acquisitions. Changes
in these factors, or other unexpected events, may cause us to seek additional
financing sooner than anticipated. Financing may not be available on acceptable
terms, or at all, and our failure to raise capital could have a material adverse
effect on our growth plans and our financial condition and results of
operations.





Other Material
Events


Vivid’s management
is not aware of any current or anticipated material events that are reasonably
likely to have a material impact on future operations or liquidity. Other
possible negative material events include downward pricing pressure, a marked
decline in the subscription renewal rate, a marked decline in the Vivid revenue
growth rate, a loosening or rollback in the regulatory environment, unforeseen
technologies which render the Vivid program less competitive and the inability
to raise capital to adequately fund our growth strategy.





On August 31, 2005
Vivid completed negotiations and executed an extension to its Hanford General
Employee Training (“HGET”) contract with Fluor Hanford, Vivid's largest customer
and a primary management contractor for Project Hanford, a U.S. Department of
Energy site. The contract award is for three (3) years, with the first extension
year funded and funding for the other two years subject to annual government
budgets. Vivid has held the contract for the HGET scope of work since 1995,
wherein Vivid is responsible for producing, updating, and delivering the
computer and Hanford LAN-based HGET program to Fluor Hanford contractors and
other U.S. Department of Energy contractors on the Hanford Site. This contract
has been renewed for one year effective October 1, 2008.





Off-Balance Sheet
Arrangements


Off-balance sheet
items that could have a material current or future effect on the financial
statements taken as a whole include the following:




•  The Company is a
guarantor on a line of credit with Bank of the West. The overall line is
$250,000 and is collateralized by the assets of the Company. Receivable coverage
of the line is monitored by the bank on an annual basis, which reduces the risk
of loan forfeiture.





•  Future minimum
lease payments total $194,047 for operations in fiscal years 2008-2011 at the
5710 and 5728 Bedford Street, Pasco, WA and the 2345 Stevens Drive, Richland, WA
locations.





19




Material Commitments for Capital
Expenditures


There presently
exist no material commitments to outside vendors for capital expenditures other
than five capital lease obligations recorded on the balance sheet for leasehold
improvements at the Bedford street location, the purchase of a telephone system,
the purchase of computer workstations, and the purchase of video equipment. As
part of the general replacement budget, $150,000 is budgeted for fiscal year
2009 in general purpose replenishment of fully depreciated hardware and
software. The anticipated funding source for this budget item will be the cash
flows generated by operations.





ITEM 7 – FINANCIAL
STATEMENTS





The financial
statements and report of independent registered certified public accounting firm
are included herein immediately following the signature page to this report.
 See Item 13 - Exhibits for a list of the financial statements
included.





ITEM 8 – CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





There were no
changes in or disagreements with our accountants on accounting and financial
disclosure matters in 2008.





ITEM 8A – CONTROLS AND
PROCEDURES





EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES





In connection with
the preparation of this annual report on Form 10-KSB, an evaluation was carried
out by Company’s management, with the participation of the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (“Exchange Act”)) as of December 31,
2007. Disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports filed or submitted under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the SEC rules and forms and that such information is accumulated and
communicated to management, including the Chief Executive Officer and the Chief
Financial Officer, to allow timely decisions regarding required
disclosures.





Based on that
evaluation, Company’s management concluded, as of the end of the period covered
by this report, that Company’s disclosure controls and procedures were effective
in recording, processing, summarizing, and reporting information required to be
disclosed, within the time periods specified in the Securities and Exchange
Commission’s rules and forms.





MANAGEMENT’S REPORT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Management of the
Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is a process, under the supervision of the Chief Executive Officer and
the Chief Financial Officer, designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of the Company’s
financial statements for external purposes in accordance with United States
generally accepted accounting principles (GAAP). Internal control over financial
reporting includes those policies and procedures that:




20




·
            pertain to
      the maintenance of records that in reasonable detail accurately and fairly
      reflect the transactions and dispositions of the Company’s
      assets;


·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of the financial statements in accordance with generally
      accepted accounting principles, and that receipts and expenditures are
      being made only in accordance with authorizations of management and the
      Board of Directors; and,


·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.





Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.





Company management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of September 30, 2008, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).





Based on this
assessment, Company management has concluded that, as of September 30, 2008, the
Company’s internal control over financial reporting was effective based on the
criteria in Internal Control – Integrated Framework issued by the
COSO.





This annual report
does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. We were not
required to have, nor have we, engaged our independent registered public
accounting firm to perform an audit of internal control over financial reporting
pursuant to the rules of the Securities and Exchange Commission that permit us
to provide only management’s report in this annual report.





CHANGES IN INTERNAL
CONTROL OVER FINANCIAL REPORTING





As of the end of
the period covered by this report, there have been no changes in internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act) during the fiscal year ended September 30, 2008, that materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.





ITEM 8B – OTHER
INFORMATION





None.





21





PART  III




ITEM 9 – DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT





Information
regarding our directors appears under “Proposal No. 1 – Election of Directors”
in our Proxy Statement for the 2009 Annual Meeting of Stockholders (the “Proxy
Statement”). Information regarding our executive officers appears under
“Executive Officers” in our Proxy Statement. Information about compliance with
Section 16(a) of the Exchange Act appears under “Section 16(a) Beneficial
Ownership Reporting Compliance” in the Proxy Statement. Information regarding
our Audit Committee and our Audit Committee’s financial expert appears under
“Audit Committee Report” in our Proxy Statement. These portions of the Proxy
Statement are incorporated by reference into this report.





Our Code of Ethics
is incorporated by reference to our Form SB-2 filed with the SEC on January 14,
2005 and is also available online on our website at www.learnatvivid.com. We
will post amendments to or waivers from a provision of our Code of Ethics with
respect to those persons on our website at www.learnatvivid.com .





There were no
material changes to the procedures by which security holders may recommend
nominees to our Board of Directors.




ITEM 10 – EXECUTIVE
COMPENSATION





Information about
compensation of our named executive officers appears under “Executive
Compensation” in the Proxy Statement. That portion of the Proxy Statement is
incorporated by reference into this report.




ITEM 11 – SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





Information about
security ownership of certain beneficial owners and management appears under
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” in the Proxy Statement. That portion of the Proxy Statement
is incorporated by reference into this report.




ITEM 12 – CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Information about
certain relationships and related transactions appears under “Certain
Relationships and Related Transactions” in the Proxy Statement. That portion of
the Proxy Statement is incorporated by reference into this report.




22




ITEM 13 –
EXHIBITS




The following
exhibits filed as a part of this Form 10-KSB include both exhibits submitted
with this Report and those incorporated by reference to other
filings:


Exhibit
                Number
              
              Description3.1
              
              Certificate
      of Incorporation, Applied Tecknowledgey, Inc.,
      Washington, March 2, 1995*3.2
              
              Articles of
      Amendment of Applied Tecknowledgey, Inc.,
      Washington, April 3, 1997*3.3
              
              Amended and
      Restated Articles of Incorporation of Vivid Concepts, Inc., Washington,
      September 2, 1997*3.4
              
              Certificate
      of Amendment, Vivid Concepts, Inc., Washington, February 23,
      2000*3.5
              
              Certificate
      of Incorporation of Vivid Learning Systems, Inc., Delaware, December 23,
      2003*3.6
              
              Amended and
      Restated Articles of Incorporation of Vivid Learning Systems, Inc.,
      Washington, December 24, 2003*3.7
              
              Bylaws of
      Applied Tecknowledgey, Inc.,
      Washington, May 24, 1995*3.8
              
              Amended and
      Restated Bylaws of Vivid Learning Systems, Inc., Washington, November 25,
      2003*3.9
              
              Bylaws of
      Vivid Learning Systems, Inc., Delaware, December 2003*4.1
              
              Specimen
      Certificate of Common Stock*4.2
              
              Warrant
      issued to Matt Hammer, May 25, 2004*4.3
              
              Warrant
      issued to Nick Bauer, May 25, 2004*4.4
              
              Stock Option
      issued to Jackson Steinem, December 23, 2003**4.5
              
              Form of
      Option for 2003 Stock Option Plan, Incentive*4.6
              
              Form of
      Option for 2003 Stock Option Plan, Nonqualified*10.1
              
              2003 Stock
      Option Plan, Vivid Learning Systems, Inc., Delaware*10.2
              
              Lock Up
      Agreement, February 2004*10.3
              
              Lease for 723
      The Parkway, Richland, Washington*10.4
              
              Lease for
      2345 Stevens Road, Richland, Washington**10.5
              
              Contract
      between Human Resource Novations, Inc. and Vivid Concepts, Inc., dated
      April 21, 1999**10.6
              
              Management
      Contract with Nuvotec, Inc.****10.7
              
              Contract with
      Fluor Hanford, Inc.***10.8
              
              Contract with
      Pennsylvania State System of Higher Education
                Foundation,
      Inc., dated August 18, 2004***10.9
              
              Asset
      Purchase Agreement with FoodSafety, Inc.****10.10
              
              Share
      Exchange Agreement ImageWorks Media Group, Inc.****10.11
              
              Agreement
      between Vivid Learning Systems, Inc. and Nuvotec USA, Inc., regarding Line
      of Credit *****10.12
              
              Asset
      Purchase Agreement with TrueActive Software, Inc. , which includes as
      Exhibit B the Employment Agreement with Richard Eaton, president of
      TrueActive Software, Inc. *****10.13
              
              Conveyance,
      Bill of Sale and Assignment Agreement between Vivid Learning Systems, Inc.
      and TrueActive Software, Inc. *****10.14
              
              Promissory
      Note issued to TrueActive Software, Inc. *****10.15
              
              Letter from
      Nuvotec USA, Inc. assuming from Vivid Learning Systems, Inc. the
      obligations to TrueActive Software, Inc., dated September 26, 2005
      *****10.16
              
              Agreement
      between Vivid Learning Systems, Inc. and Nuvotec USA, Inc. regarding Line
      of Credit with Key Bank
*****


23


10.17
              
              Lease for
      5728 Bedford Street, Pasco, Washington ******14
              
              Code of
      Ethics *****


21.1
              
              List of
      Subsidiaries**23.1
              
              Accountant’s
      Consent, Williams & Webster, P.S. (filed herewith)31.1
              
              Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith)31.2
              
              Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (filed herewith)32.1
              
              Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 (filed herewith)32.2
              
              Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 (filed herewith)





*Previously filed
with the Company’s Registration Statement on Form SB-2 filed with the Securities
and Exchange Commission, Registration Statement No. 333-116255, on June 8,
2004.





**Previously filed
with the Company’s Registration Statement on Form SB-2 filed with the Securities
and Exchange Commission, Registration Statement No. 333-116255, on August 12,
2004.





*** Previously
filed with the Company’s Registration Statement on Form SB-2 filed with the
Securities and Exchange Commission, Registration Statement No. 333-116255, on
February 3, 2005. The Securities and Exchange Commission granted Vivid's
application to seek confidential treatment of certain portions of Exhibit 10.08
under Rule 406 of the Securities Act of 1933, as amended. Omitted material for
which confidential treatment was granted was filed separately with the
Securities and Exchange Commission.




**** Previously
filed with the Company’s Registration Statement on Form SB-2 Filed with the
Securities and Exchange Commission, Registration Statement No. 333-116255, on
December 23, 2004.




***** Previously
filed with the Company’s Registration Statement on Form SB-2 Filed with the
Securities and Exchange Commission, Registration Statement No. 333-116255, on
January 14, 2005.




*****Previously
filed with the Company’s fiscal year 2005 10-KSB on December 28,
2005.




******Previously
filed with the Company’s fiscal year 2006 10-KSB on December 28,
2006.




(b) Vivid filed the
following reports on Form 8-K during its fiscal year ended September 30,
2008:





On August 21, 2008,
Vivid filed a Form 8-K to announce the resignation of Conrad Suhadolnik as Chief
Operating Officer.





On March 24, 2008,
Vivid filed a Form 8-K announcing that Robert Ferguson had stepped down as
Chairman of the Board and Andrew Thoresen had taken the position.





On January 17,
2008, Vivid filed a Form 8-K announcing the election of directors, appointment
of corporate officers, and ratification of the independent public accountants
which occurred at the January 16, 2008 annual shareholders meeting.





24




ITEM 14 – PRINCIPAL ACCOUNTANT FEES
AND SERVICES





(1)  Audit
Fees





The aggregate fees
billed for professional services rendered by Williams & Webster, P.S. of
Spokane, Washington for the audit of Vivid's annual financial statements and
review of the financial statements included in the Vivid’s Forms 10-QSB or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for fiscal years 2008 and 2007
were $54,625 (approximate – final billing not yet received) and $39,945,
respectively.





(2)  Audit
Related Fees





The aggregate fees
billed for professional services rendered by Williams & Webster, P.S. for
audit related fees for fiscal years 2008 and 2007 were $2,050 and $4,721
respectively.





(3)  Tax
Fees





The aggregate fees
billed for professional services rendered by Williams & Webster, P.S. for
tax related services for fiscal years 2008 and 2007 were $4,511 and $4,304,
respectively.





(4)  All Other
Fees





The aggregate fees
billed for professional services rendered by Williams & Webster, P.S. for
other fees for fiscal years 2008 and 2007 were none and none,
respectively.





(5)  Audit
Committee Policies and Procedures





Vivid does have an
Audit Committee. The Audit Committee’s report, as well as its pre-approval
policies and procedures appear under “Report of the Audit Committee” in the
Proxy Statement. That portion of the Proxy Statement is incorporated by
reference into this report The Audit Committee and the Board of Directors of
Vivid approved all of the services rendered to Vivid by Williams & Webster,
P.S. for fiscal years 2008 and 2007.





(6)  Audit
Work Attributed to Persons Other than Williams & Webster, P.S.'s Full-time,
Permanent Employees.





Not
applicable.


25


SIGNATURES





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


VIVID
      LEARNING SYSTEMS, INC.Date:
      December 4, 2008
              By:
              /s/Name:
       Matthew J. Hammer
                Title:
         Chief Executive
Officer





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





SIGNATURE
            
            TITLE
            
            DATE/s/
            
            President,
      Chief Executive Officer
            
            December 4,
      2008Matthew J.
      Hammer/s/
            
            Treasurer,
      Secretary, Chief Financial Officer
            
            December 4,
      2008Robert M.
      BlodgettBoard of
      Directors/s/
            
            Director
            
            December 4,
      2008Robert L.
      Ferguson/s/
            
            Director
            
            December 4,
      2008William N.
      Lampson/s/
            
            Director
            
            December 4,
      2008Edward C.
      Reinhart/s/
            
            Director
            
            December 4,
      2008Diehl R.
      Rettig/s/
            
            Chairman
            
            December 4,
      2008Andrew
      Thoresen





VIVID LEARNING SYSTEMS,
INC.
 Consolidated Financial Statements
and
 Report of Independent Registered
Certified Public Accounting Firm
 September 30, 2008 and
2007
 
 INDEX TO FINANCIAL
STATEMENTS
  Vivid Learning Systems,
Inc.
 
 Index to
      Financial Statements
              F-1Report of
      Independent Registered Public Accounting Firm, Williams & Webster,
      P.S.
              F-2Consolidated
      Balance Sheets at September 30, 2008 and September 30,
2007
              F-3Consolidated
      Statements of Income for the years ended September 30, 2008, and September
      30, 2007
              F-4Consolidated
      Statement of Stockholders’ Equity for the years ended September 30, 2008,
      and September 30, 2007
              F-5Consolidated
      Statements of Cash Flows for the for the years ended September 30, 2008,
      and September 30, 2007
              F-6Notes to
      Consolidated Financial Statements
              F-7 to
      F-24
  F-1
 
  F-2


VIVID LEARNING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS





September 30,
            
            September 30,2008
            
            2007ASSETSCURRENT
      ASSETSCash
            
            $
            132,391
            
            $
            80,331Accounts and
      contracts receivable
            
            
            972,151
            
            
            1,157,418Accounts and
      contracts receivable, Fluor Hanford
            
            
            24,994
            
            
            28,822Prepaid
      expenses
            
            
            185,793
            
            
            120,073Other current
      assets
            
            
            138,214
            
            
            186,534TOTAL CURRENT
      ASSETS
            
            
            1,453,543
            
            
            1,573,178PROPERTY,
      PLANT AND EQUIPMENTProperty and
      equipment
            
            
            1,583,630
            
            
            1,518,082Less:
      Accumulated depreciation and amortization
            
            
            (1,247,676
            )
            
            (1,152,471
            )TOTAL
      PROPERTY, PLANT AND EQUIPMENT
            
            
            335,954
            
            
            365,611OTHER
      ASSETSSoftware, net
      of amortization
            
            
            1,229,722
            
            
            1,328,424Goodwill
            
            
            375,000
            
            
            375,000Long-term
      contracts receivable
            
            
            1,321
            
            
            85,202Deferred tax
      asset
            
            
            665,596
            
            
            838,433TOTAL OTHER
      ASSETS
            
            
            2,271,639
            
            
            2,627,059TOTAL
      ASSETS
            
            $
            4,061,136
            
            $
            4,565,848LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
            
            $
            120,807
            
            $
            295,376Line of
      credit payable
            
            
            -
            
            
            57,072Accrued
      contract labor
            
            
            100,933
            
            
            221,374Other current
      liabilities
            
            
            46,811
            
            
            114,667Unearned
      revenue
            
            
            100,518
            
            
            118,654Notes
      payable, related parties
            
            
            25,000
            
            
            350,000Current
      portion of long-term liabilities
            
            
            108,341
            
            
            106,638TOTAL CURRENT
      LIABILITIES
            
            
            502,410
            
            
            1,263,781LONG-TERM
      LIABILITIESLong-term
      debt
            
            
            134,095
            
            
            182,786Other
      long-term liabilities
            
            
            116,709
            
            
            170,954TOTAL
      LONG-TERM LIABILITIES
            
            
            250,804
            
            
            353,740TOTAL
      LIABILITIES
            
            
            753,214
            
            
            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
            
            
            4,408,564
            
            
            4,384,475Accumulated
      deficit
            
            
            (1,101,979
            )
            
            (1,437,485
            )TOTAL
      STOCKHOLDERS' EQUITY
            
            
            3,307,922
            
            
            2,948,327TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            4,061,136
            
            $
            4,565,848





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




F-3





VIVID LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS




Fiscal Year
      EndedSeptember 30,
            
            September 30,2008
            
            2007REVENUESTraining
      subscriptions
            
            $
            2,614,766
            
            $
            2,516,291Training
      subscriptions, Fluor Hanford
            
            
            554,197
            
            
            569,456Custom
      products and services
            
            
            1,950,477
            
            
            2,463,483Custom
      products and services, Fluor Hanford
            
            
            107,796
            
            
            506,9725,227,236
            
            
            6,056,202COST OF
      REVENUESTraining
      subscriptions
            
            
            902,989
            
            
            672,740Custom
      products and services
            
            
            1,283,002
            
            
            1,766,7572,185,991
            
            
            2,439,497GROSS
      PROFIT
            
            
            3,041,245
            
            
            3,616,705EXPENSESMarketing and
      related labor expenses
            
            
            1,275,948
            
            
            1,401,739Bad debt
      expense
            
            
            14,799
            
            
            12,426Reseller
      commissions
            
            
            382,897
            
            
            394,711Depreciation
      and amortization
            
            
            100,315
            
            
            738,769Wages and
      contract labor
            
            
            382,101
            
            
            896,969Other
      operating expenses
            
            
            345,329
            
            
            1,100,695TOTAL
      OPERATING EXPENSES
            
            
            2,501,389
            
            
            4,545,309INCOME (LOSS)
      FROM OPERATIONS
            
            
            539,856
            
            
            (928,604
            )OTHER INCOME
      (EXPENSE)Gain
      <loss> on sale of equipment and intangible assets
            
            
            100
            
            
            (1,733
            )Other
      miscellaneous income
            
            
            175
            
            
            -Interest
      income
            
            
            4,099
            
            
            1,307Interest
      expense
            
            
            (35,887
            )
            
            (49,105
            )TOTAL OTHER
      INCOME (EXPENSE)
            
            
            (31,513
            )
            
            (49,531
            )INCOME (LOSS)
      BEFORE INCOME TAXES
            
            
            508,343
            
            
            (978,135
            )INCOME TAX
      BENEFIT (EXPENSE)
            
            
            (172,837
            )
            
            332,566NET INCOME
      (LOSS)
            
            $
            335,506
            
            $
            (645,569
            )BASIC AND
      DILUTED NET LOSS PER SHARE
            
            $
            0.03
            
            $
            (0.05
            )BASIC AND
      DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
            
            
            13,372,165
            
            
            13,261,938




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


F-4


VIVID LEARNING SYSTEMS,
INC.


CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY





ADDITIONALCOMMON STOCK
            
            PAID-IN
            
            ACCUMULATEDShares
            
            Amount
            
            CAPITAL
            
            DEFICIT
            
            TOTALBalance,
      September 30, 2006
            
            
            12,030,674
            
            $
            1,203
            
            $
            3,673,311
            
            $
            (791,916
            )
            $
            2,882,598Common stock
      issued in exchange for elimination of inter-company debt
            
            
            1,341,404
            
            
            134
            
            
            670,568
            
            
            -
            
            
            670,702Common stock
      issued for exercise of options at $0.25 per share
            
            
            125
            
            
            -
            
            
            31
            
            
            -
            
            
            31Options
      issued as compensation
            
            
            -
            
            
            -
            
            
            40,565
            
            
            -
            
            
            40,565Net Income
      (Loss) for the year ended September 30, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            (645,569
            )
            
            (645,569
            )Balance,
      September 30, 2007
            
            
            13,372,203
            
            
            1,337
            
            
            4,384,475
            
            
            (1,437,485
            )
            
            2,948,327Options
      issued as compensation
            
            
            
            
            
            
            
            
            24,089
            
            
            
            
            
            24,089Miscellaneous
      stock adjustments
            
            
            (38
            )
            
            
            
            
            
            
            
            
            
            
            -Net Income
      for the year ended September 30, 2008
            
            
            
            
            
            
            
            
            
            
            
            335,506
            
            
            335,506Balance,
      September 30, 2008
            
            
            13,372,165
            
            $
            1,337
            
            $
            4,408,564
            
            $
            (1,101,979
            )
            $
            3,307,922





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




F-5





VIVID LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS





Fiscal Year EndedSeptember 30,
            
            September 30,2008
            
            2007CASH FLOWS
      FROM OPERATING ACTIVITIES:Net income
      (loss)
            
            $
            335,506
            
            $
            (645,569
            )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            100,315
            
            
            738,769Amortization
      of capitalized software
            
            
            266,073
            
            
            276,351Bad debt
      expenses
            
            
            14,799
            
            
            12,426Loss (gain)
      on sale of assets
            
            
            (100
            )
            
            1,733Changes in
      deferred tax assets and liabilities
            
            
            172,837
            
            
            (332,566
            )Options
      issued for compensation
            
            
            24,089
            
            
            40,565Changes in
      assets and liabilities:Accounts and
      contracts receivable
            
            
            174,296
            
            
            (247,493
            )Prepaid
      expenses
            
            
            (65,720
            )
            
            24,626Other current
      assets
            
            
            48,320
            
            
            37,842Accounts
      payable
            
            
            (174,569
            )
            
            174,137Accrued
      payroll and related expenses
            
            
            (120,441
            )
            
            (106,343
            )Long-term
      receivable contracts
            
            
            83,881
            
            
            159,173Other current
      liabilities
            
            
            (67,856
            )
            
            47,764Unearned
      revenue
            
            
            (18,136
            )
            
            98,299Net cash
      provided (used) by operating activities
            
            
            773,294
            
            
            279,714CASH FLOWS
      FROM INVESTING ACTIVITIES:Acquisition
      of property, equipment and intangible assets
            
            
            (70,558
            )
            
            (53,720
            )Acquisition
      of software
            
            
            (167,371
            )
            
            (131,237
            )Net cash used
      by investing activities
            
            
            (237,929
            )
            
            (184,957
            )CASH FLOWS
      FROM FINANCING ACTIVITIES:Stock options
      exercised for common stock
            
            
            -
            
            
            31Payments on
      notes payable, related party
            
            
            (325,000
            )
            
            (164,344
            )Payments on
      long-term debt
            
            
            (52,120
            )
            
            (49,274
            )Proceeds from
      line of credit
            
            
            -
            
            
            57,072Payments on
      line of credit payable
            
            
            (57,072
            )
            
            -Payments on
      other long-term liabilities
            
            
            (49,113
            )
            
            (24,556
            )Net cash
      provided (used) by financing activities
            
            
            (483,305
            )
            
            (181,071
            )Net increase
      (decrease) in cash
            
            
            52,060
            
            
            (86,314
            )Cash at
      beginning of period
            
            
            80,331
            
            
            166,645Cash at end
      of period
            
            $
            132,391
            
            $
            80,331SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest paid
            
            $
            35,887
            
            $
            49,105Income taxes
      paid
            
            $
            -
            
            $
            -NON-CASH
      TRANSACTIONS:Common stock
      issued for related party debt
            
            $
            -
            
            $
            670,702Acquisition
      of fixed assets via capital leases
            
            $
            -
            
            $
            124,944Options
      issued as compensation
            
            $
            24,089
            
            $
            40,565




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


F-6




VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 
 NOTE 1 – BUSINESS
ORGANIZATION
 
 Nature of Operations
 The predecessor of
Vivid Learning Systems, Inc. was originally incorporated in 1995 in the State of
Washington under the name of Vivid Concepts, Inc. and later renamed Vivid
Learning Systems, Inc. (“Vivid Washington”). Prior to December 23, 2003, Vivid
Washington was a wholly owned subsidiary of Nuvotec, Inc., a technology
commercialization corporation based in Washington State. On December 23, 2003,
Nuvotec, Inc., exchanged all of its 7,000,000 common stock shares in Vivid
Washington for 8,100,000 shares of common stock with a par value of $0.0001 in a
newly formed Delaware corporation also named Vivid Learning Systems, Inc. The
Delaware company (“Company” or “Vivid Delaware”) serves as the holding company
and parent and sole shareholder of the operating entities Vivid Washington and
ImageWorks Media Group, Inc. (“ImageWorks”). ImageWorks was acquired by the
Company in May, 2004 through a share exchange agreement. 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.
 
 The two wholly
owned subsidiaries of the Company, Vivid Washington and ImageWorks develop and
provide computer-based training products and customized services, which are
marketed nationally. Vivid Delaware and its subsidiaries have a year end of
September 30.
 
 Effective October
1, 2006, the Company entered into an asset purchase agreement with its parent,
Nuvotec USA, Inc. 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, Vivid Learning Systems, Inc. assumed all outstanding liabilities
of ETS and recorded an inter-company related party liability. (See Note
16.)
 
 Nuvotec USA, Inc.
(Nuvotec) prior to June 13, 2007 held approximately eighty-three percent (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. 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.
 
 NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
 
 This summary of
significant accounting policies is presented to assist in understanding the
financial statements. The financial statements and notes are representations of
the Company’s management, which is responsible for their integrity and
objectivity. These accounting policies conform to accounting principles
generally accepted in the United States and have been consistently applied in
the preparation of the financial statements.
 
 Accounting
Methods
 The Company’s
financial statements are prepared using the accrual method of accounting in
accordance with GAAP.
 
 F-7
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 Accounting for Stock Options
and Warrants Granted to Employees and Nonemployees
 Statement of
Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” , defines a fair
value-based method of accounting for stock options and other equity instruments.
The Company has adopted this method, which measures compensation costs based on
the estimated fair value of the award and recognizes that cost over the service
period.
 
 Accounts
Receivable
 The Company carries
its accounts receivable at net realizable value. On a periodic basis, the
Company evaluates its accounts receivable and considers the need for an
allowance for doubtful accounts, based on Company past and expected collections,
and current credit conditions. At September 30, 2008 and 2007, all Company
receivables are considered collectible and no additional valuation allowance is
deemed necessary. The Company’s bad debt expense for the years ended September
30, 2008 and 2007 was $14,799 and $12,426, respectively.
 
 The Company does
not accrue interest on trade receivables.
 
 Advertising
 Advertising
expenses consist primarily of costs incurred in the design, development, and
printing of Company literature and marketing materials. The Company expenses all
advertising expenditures as incurred. The Company's advertising expenses were
$44,909 and $44,453 for the years ended September 30, 2008 and 2007,
respectively.
 
 Cash and Cash
Equivalents
 The Company
considers all highly liquid investments with a maturity of three months or less
at the date of acquisition to be cash equivalents. At September 30, 2008 and
2007, the Company did not have any cash equivalents.
 
 Compensated Absences
 The Company leases
all of its employees from HRnovations, Inc., which was formerly co-owned and
managed by a member of Vivid’s board of directors. The Company, whose former
primary shareholder was Nuvotec USA, Inc., is part of a multi-employer plan,
which is administered by HRnovations, Inc. Leased employees are entitled to paid
personal time dependent upon the length of service. Accruals of compensated
absences at September 30, 2008 and 2007 of $100,933 and $96,805, respectively,
are reflected in the Company’s balance sheets and included in the captioned
liability “accrued contract labor.”
 
 Derivative
Instruments
 The Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(hereinafter “SFAS No. 133”), as amended by SFAS No. 137, “Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133”, and SFAS No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities”, and SFAS No. 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging Activities”. These
statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value.
  F-8
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change.
 
 Historically, the
Company has not entered into derivatives contracts to hedge existing risks or
for speculative purposes.
 
 As of September 30,
2008 and 2007, the Company has not engaged in any transactions that would be
considered derivative instruments or hedging activities.
 
 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. A total of 581,638 common stock options have been
issued, 382,128 of which are exercisable as of September 30, 2008. All options
issued are anti-dilutive.
 
 Fair Value of Financial
Instruments
 The Company's
financial instruments as defined by Statement of Financial Accounting Standards
No. 107, "Disclosures about Fair Value of Financial Instruments," include cash,
trade accounts receivable, accounts payable, and accrued expenses. All
instruments are accounted for on an historical cost basis, which, due to the
short maturity of these financial instruments, approximates fair value at
September 30, 2008 and 2007.
 
 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, Vivid’s major shareholder at that time, the Company, as a
subsidiary guaranteeing this debt which was owed to a third party, in fact had a
guarantee which was excluded from the disclosure requirements of the
Interpretation, and was 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.
  F-9
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 The Company secured
a line of credit note on September 4, 2007 with Bank of the West. The line has a
maximum credit facility of $250,000 and an initial annual interest rate of 7.5%.
The rate is a variable rate tied to the bank’s prime rate minus one, and is
subject to an annual pricing adjustment. At September 30, 2007 outstanding
borrowings under this line are $57,072. The Company offers its assets as
collateral as described in an executed commercial security agreement. The line
of credit note has been renewed effective September 4, 2008 with no changes to
the original terms.
  Impaired Asset
Policy
 In August 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets” (hereinafter “SFAS No. 144”). SFAS No. 144 replaces SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of.” This standard establishes a single accounting model for
long-lived assets to be disposed of by sale, including discontinued operations.
SFAS No. 144 requires that these long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or discontinued operations.
 
 In complying with
this standard, the Company reviews its long-lived assets quarterly to determine
if any events or changes in circumstances have transpired which indicate that
the carrying value of its assets may not be recoverable. The Company determines
impairment by comparing the undiscounted future cash flows estimated to be
generated by its assets to their respective carrying amounts.
 
 The Company does
not believe any adjustments are needed to the carrying value of its assets at
September 30, 2008 and 2007.
 
 Intangible
Assets
 Goodwill represents
the excess of the purchase price and related direct costs over the fair value of
net assets acquired as of the date of the acquisition of ImageWorks Media Group.
The Company reviews periodically its goodwill to assess recoverability based on
projected undiscounted cash flows from operations. Impairments are recognized in
operating results when a permanent diminution in value occurs. At September 30,
2008, no impairment was deemed necessary for the Company’s
goodwill.
 
 Intangible assets
also include software and related materials, copyrights, trademarks, patent
applications and database assets and are amortized over their useful lives.
During the year ended September 30, 2007 $448,443 was amortized in intangible
assets consisting of a customer list, a covenant not to compete, contracts in
place, and technology software pertaining to the acquisition of ImageWorks in
May, 2004.
 
 Management Services Provided
by Nuvotec
 In Vivid’s
consolidated statements of income, “Other Operating Expenses” for the year ended
September 30, 2007 included $80,982 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 were
applied to the Vivid operation. The majority of the allocated expenses
represented labor related costs applied to the Vivid operation. All identifiable
direct costs of administration are booked directly to the Vivid operation.
Detailed time charges are accounted for daily by all personnel, including
Nuvotec central administrative personnel for the year ended September 30, 2007,
with time charged to Vivid tasks. These tasks and costs were analyzed on a
recurring basis to adjust the amount of the allocation of central overhead costs
to Vivid. There were no such allocations in the year ended September 30,
2008.
  F-10
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 Principles of
Consolidation
 The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries, after elimination of the inter-company accounts and transactions.
The wholly owned subsidiaries of the Company are Vivid Washington and
ImageWorks.
 
 Property, Plant and
Equipment
 Property, plant and
equipment are recorded at cost and depreciated utilizing the straight-line
method over estimated useful lives of three to ten years. Amortization of
leasehold improvements is provided using the straight-line method over the term
of the lease plus options. See Note 13.
 
 The Company
evaluates the recoverability of property and equipment when events and
circumstances indicate that such assets might be impaired. The Company
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying amounts.
Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized. The cost and related reserves of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
 
 Provision for
Taxes
 The current tax
provision represents the federal income tax which the Company would have
incurred on a separate, stand-alone basis. The Company received the benefit of
losses resulting from the federal income tax returns filed on a consolidated
basis by its former majority shareholder, Nuvotec, Inc. for the year ended
September 30, 2007. The consolidated tax returns with its subsidiaries are filed
on an annual fiscal year basis.
 
 Income taxes are
provided based upon the liability method of accounting pursuant to Statement of
Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under
this approach, deferred income taxes are recorded to reflect the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year end. A valuation
allowance is recorded against deferred tax assets if management does not believe
the Company has met the “more likely than not” standard imposed by Statement of
Financial Accounting Standard No. 109 to allow recognition of such an asset. See
Note 14.
 
 Recent Accounting
Pronouncements
 
 Stock Based
Compensation
 In December 2007,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110
(SAB 110), Share Based Payment. This SAB expresses the views of the staff
regarding the use of a "simplified" method, as discussed in SAB No. 107 (SAB
107), in developing an estimate of expected term of "plain vanilla" share
options in accordance with Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment. The staff stated in SAB 107 that it would
not expect a company to use the simplified method for share option grants after
December 31, 2007. However, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007. The
guidance in SAB 110 is effective beginning January 1, 2008. The Company uses
historical information to estimate the expected term of its stock option grants
and, therefore, it does not expect that adoption of SAB 110 will have a material
impact on the Company’s financial position, results of operations, or cash
flows.
  F-11
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 Business Combinations
 In December 2007,
the FASB issued Financial Accounting Standards Statement No. 141 (Revised 2007)
(SFAS 141(R)), Business
Combinations . Under SFAS
141(R), an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. Additionally, SFAS 141(R) will change the
accounting treatment for certain specific items, including:
 
 ·
              Acquisition
      costs will be generally expensed as incurred;
 ·
              Noncontrolling
      interests (formerly known as "minority interests") will be valued at fair
      value at the acquisition date;
 ·
              Acquired
      contingent liabilities will be recorded at fair value at the acquisition
      date and subsequently measured at either the higher of such amount or the
      amount determined under existing guidance for non-acquired contingencies;
 ·
              In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition date;
 ·
              Restructuring
      costs associated with a business combination will be generally expensed
      subsequent to the acquisition date; and
 ·
              Changes in
      deferred tax asset valuation allowances and income tax uncertainties after
      the acquisition date generally will affect income tax expense.
 
 SFAS 141(R) also
includes a substantial number of new disclosure requirements. SFAS 141(R)
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008 and earlier adoption is prohibited. Accordingly, the
Company will be required to record and disclose business combinations following
existing U.S. GAAP until April 1, 2009. The Company does
not expect that adoption of SFAS 141(R) will have a material effect on its
financial position, results of operation, or cash flows.
 
 Accounting for Financial
Guarantee Insurance Contracts
 In May, 2008, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 163, “Accounting for Financial Guarantee Insurance Contracts—an
interpretation of FASB Statement No. 60” (SFAS 163). This Statement requires
that an insurance enterprise recognize a claim liability prior to an event of
default (insured event) when there is evidence that credit deterioration has
occurred in an insured financial obligation. This Statement also clarifies how
Statement 60 applies to financial guarantee insurance contracts, including the
recognition and measurement to be used to account for premium revenue and claim
liabilities. Those clarifications will increase comparability in financial
reporting of financial guarantee insurance contracts by insurance enterprises.
This Statement requires expanded disclosures about financial guarantee insurance
contracts. The accounting and disclosure requirements of the Statement will
improve the quality of information provided to users of financial statements.
This Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those fiscal
years, except for some disclosures about the insurance enterprise’s
risk-management activities. This Statement requires that disclosures about the
risk-management activities of the insurance enterprise be effective for the
first period (including interim periods) beginning after issuance of this
Statement. Except for those disclosures, earlier application is not permitted.
The adoption of this statement will have no material effect on the Company’s
financial condition or results of operations.
  F-12
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 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 principles1 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 cleared2 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.
 
 Disclosures about Derivative
Instruments and Hedging Activities
 In March 2008, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 161, “Disclosures about Derivative Instruments and Hedging
Activities—an amendment of FASB Statement No. 133” (SFAS No. 161). This
statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. This Statement is intended to enhance the current disclosure
framework in Statement 133. The Statement requires that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation. This disclosure better conveys the purpose of derivative use in
terms of the risks that the entity is intending to manage. Disclosing the fair
values of derivative instruments and their gains and losses in a tabular format
should provide a more complete picture of the location in an entity’s financial
statements of both the derivative positions existing at period end and the
effect of using derivatives during the reporting period. Disclosing information
about credit-risk-related contingent features should provide information on the
potential effect on an entity’s liquidity from using derivatives. Finally, this
Statement requires cross-referencing within the footnotes, which should help
users of financial statements locate important information about derivative
instruments. The adoption of this statement will have no material effect on the
Company’s financial condition or results of operations.
  F-13
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 Noncontrolling Interests in
Consolidated Financial Statements
 In December 2007,
the FASB issued Financial Accounting Standards Statement No. 160 (SFAS
160), Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No.
51. SFAS 160
establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and
separate from the parent's equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement. SFAS 160 clarifies that changes in a parent's ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In
addition, SFAS 160 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be measured using
the fair value of the noncontrolling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008 and earlier adoption is prohibited. As of September 30,
2008, the Company did not have any minority interests. The adoption of
SFAS No. 160 will not impact the Company’s consolidated financial
statements.
 
 Fair Value
Measurements
 During September
2006 the FASB issued Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS 157).
FASB 157 defines fair value, establishes a framework for measuring fair
value under U.S. GAAP, expands disclosures about fair value measurements and
addresses how companies should measure fair value when they are required to use
a fair value measure for recognition or disclosure purposes under
U.S. GAAP. SFAS 157 does not require any new fair value measurements. This
standard is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years
(fiscal year 2009 for the Company). However, 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. Based on the type of assets and
liabilities currently held by the Company, management does not believe that the
adoption will have a material impact on the financial position or results of
operation.
 
 Reclassifications
 Certain prior year
amounts in the accompanying financial statements have been reclassified to
conform to the fiscal 2008 presentation. The reclassifications have no effect on
net assets, net revenues, or net earnings.
 
 F-14
 
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008


Revenue and Cost
Recognition
 The Company’s
revenues are recognized at the time of shipment of products or performance of
the contracted services. The Company sells its products and services both
directly, using in-house sales employees, and indirectly, using channel sales
partners. Channel sales partners are classified as independent resellers,
value-added resellers, industry consultants and industry associations. Cost of
goods principally consists of labor costs associated with software custom
development and training subscriptions. See Note 4.
 
 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.
  The Company amended
and renewed, effective June 29, 2007, for three additional years, a material
reseller agreement with Element K of Rochester, New York.
  Royalty payments
are recorded as an expense of ownership if the training content does not reside
with the Company in a licensing fee arrangement between the Company and the
owner of the content.
 
 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 a 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 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. The Company’s amortization method assumes that sales of
the Company’s existing software products will continue for at least the ensuing
five years.
  F-15
 VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
 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.
 
 NOTE 3 – SOFTWARE
 
 Software
development costs consist of the following at the dates shown:
 
 September,
                30,
      2008
              
              September
                30,
                2007Software
      development costs
              
              $
              3,754,564
              
              $
              3,587,193Accumulated
      amortization
              
              
              (2,524,842
              )
              
              (2,258,769
              )$
              1,229,722
              
              $
              1,328,424
 
 The Company
amortizes its existing software products over a period of five years. For the
years ended September 30, 2008 and 2007, $266,073 and $276,351 of amortization
expense were recorded, respectively as a component of cost of revenue.
 
 NOTE 4 – 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 September 30, 2008 and September 30, 2007,
no subscription contracts were paid in advance. In accordance with EITF 01-14,
the Company’s reimbursable costs are recorded as gross revenue, with the actual
costs recorded as a direct cost.
 
 The Company’s
internet sales are less than 0.5% of total revenue. Internet transactions are
recorded as training subscriptions, with training delivered via the hosted web
sites of Vivid. Revenue is recorded when the training is delivered, when
evidence of a persuasive arrangement exists, and when collection is reasonably
assured.
 
 F-16


VIVID LEARNING
SYSTEMS, INC.


NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS


September 30,
2008





The Company does
not offer formal warranties or returns to customers, although the relationship
with the customer is considered when evaluating terms pertaining to product
returns or warranties. There is no determinable basis for the calculation of an
allowance for such returns or warranties.





NOTE 5 – RELATED PARTY
TRANSACTIONS





At September 30,
2008 and September 30, 2007, the current related party payables consisted of
$25,000, and $350,000, respectively, of current amounts due to the former owners
of ImageWorks.





The former majority
stockholder of the Company had been providing financial resources for the
Company which were recorded as an inter-company payable as draws were made. The
boards of directors of the Company and the former majority owner approved
exchanges of a portion of the inter-company payables for equity in the form of
common stock of Vivid. During the fiscal year ended September 30, 2007, the
Company converted $670,702 in related party short-term debt due to Nuvotec, USA,
Inc., into 1,341,404 shares of common stock, respectively, which shares were
part of the distribution of Nuvotec USA, Inc. shares effective June 13,
2007.





NOTE 6 – PROFIT-SHARING AND PENSION
PLANS





The Company’s
401(k) plan implemented in 1999 covers all employees over the age of 21 with
1,000 hours of service in a 12-month eligibility computation. The Company makes
a contribution equal to one-half of the employee’s contribution up to the
maximum of 5%. Employees’ contributions may not exceed 18% of their compensation
for the plan year (maximum reflects money purchase and 401(k) combined). Company
contributions to the 401 (k) plan for the years ended September 30, 2008 and
2007 amounted to $60,885 and  $79,251,
respectively.





The plan includes a
profit sharing component wherein the Company can make discretionary
contributions as determined by its board of directors, not to exceed the amount
permissible under the Internal Revenue Code. The Company did not make any profit
sharing contributions in 2008 or 2007.




F-17


VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008


NOTE 7 – NOTES AND LOANS PAYABLE





The Company’s
long-term liabilities at September 30, 2008 and 2007 are as follows:





2008
            
            2007Note payable
      to Benton-Franklin Economic Development District, due in monthly
      installments of $2,560, payable at 10.5% interest per annum, maturing
      September 1, 2015, collateralized by Company assets
            
            $
            149,121
            
            $
            162,579Agreement
      with third party lessor for building improvements due in monthly
      installments of $1,200, payable at 7.75% interest per annum, due December
      1, 2010 with additional five year option which, if not exercised, results
      in a lump sum payment of $50,000 as payment to fully amortize the
      leasehold improvements, collateralized by the improvements
            
            
            80,034
            
            
            87,899Note payable,
      to FoodSafety.com, due in monthly installments of $3,3441, payable at 4.8%
      per annum, maturing in July, 2009, Uncollateralized
            
            
            33,663
            
            
            72,325Notes payable
      to related party, uncollateralized
            
            
            25,000
            
            
            350,000Capital lease
      obligation for phone system, due in monthly installments of $775, payable
      at 11% interest per annum, due February 28, 2011, collateralized by
      telephone system
            
            
            18,975
            
            
            25,774Capital lease
      obligation for purchase of Dell computers, due in monthly installments of
      $651, payable at 15% interest per annum, due September 28, 2009,
      collateralized by computers
            
            
            7,215
            
            
            13,431Capital lease
      obligation for purchase of phone system enhancements, due in monthly
      installments of $858, payable at 11% per annum, due December 1, 2009,
      collateralized by phone system
            
            
            11,977
            
            
            20,451Capital lease
      obligation for purchase of video equipment, due in monthly installments of
      $2,457, payable at 6.69% per annum, due July 25, 2010, collateralized by
      video equipment
            
            
            58,160
            
            
            77,919384,145
            
            
            810,378Less: Current
      portionNotes
      payable
            
            
            108,341
            
            
            106,638Notes
      payable, related party
            
            
            25,000
            
            
            350,000$
            250,804
            
            $
            353,740





Amounts due on
long-term liabilities in the succeeding five fiscal years ended September 30 are
as follows:





Notes payable
            
            Notes payable,
              related party2009
            
            $
            108,341
            
            $
            25,0002010
            
            $
            65,887
            
            
            -2011
            
            $
            33,981
            
            
            -2012
            
            $
            31,607
            
            
            -2013
            
            $
            34,914
            
            
            -





NOTE 8 – CAPITAL
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
September 30, 2008 and 2007, no preferred stock has been issued by the
Company.




F-18


VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008


The Company has
committed and issued 100,000 shares of common stock with a value of $25,000 to
the former owners of ImageWorks relating to the acquisition of ImageWorks. (See
Note 17.)





NOTE 9 – 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 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 three years.





During the year
ended September 30, 2006, additional options totaling 153,606 were issued of
which 65,939 vested and had a fair value of $32,777. During the year ended
September 30, 2007, 10,939 of these options vested and had a fair value of
$4,525. During the year ended September 30, 2008, a total of 10,939 of these
options vested and had a fair value of $4,525. The fair value of each option
granted is estimated on the grant date using the Black-Scholes Option Price
Calculation. The following assumptions were made in estimating the fair value:
risk-free interest is 4.75%; volatility is 101.36%; expected life is three to
five years, and with no effective dividend yield.





During the year
ended September 30, 2007, additional options totaling 89,500 were issued and had
a fair value of $19,730. During the year ended September 30, 2008, a total of
29,333 of these 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 three to five 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
three to five years, and with no effective dividend yield.





The value of the
unvested options at September 30, 2008 was $29,636.





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
            
            
            581,638
            
            $
            0.33
            
            
            1,734,862




F-19


VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008


Number of
              Shares
            
            Weighted
      Average Exercise
              PriceOutstanding
      at October 1, 2006
            
            
            570,940
            
            $
            0.33Granted
            
            
            89,500
            
            
            0.29Exercised
            
            
            (125
            )
            
            0.25Expired or
      terminated
            
            
            (144,417
            )
            
            0.25Outstanding
      at September 30, 2007
            
            
            515,898
            
            $
            0.34Options
      exercisable at September 30, 2007
            
            
            304,265
            
            $
            0.33Outstanding
      at October 1, 2007
            
            
            515,898
            
            $
            0.34Granted
            
            
            69,740
            
            
            0.23Exercised
            
            
            -
            
            
            -Expired or
      terminated
            
            
            (4,000
            )
            
            0.29Outstanding
      at September 30, 2007
            
            
            581,638
            
            $
            0.33Options
      exercisable at September 30, 2007
            
            
            382,128
            
            $
            0.31





Common Stock
Warrants


Pursuant to the
acquisition of ImageWorks, 200,000 warrants to purchase the Company’s common
stock were granted in May 2004 of which zero remain outstanding and have fully
expired as of September 30, 2008.





In May 2005, 80,000
warrants were issued and remain outstanding as of September 30, 2007. The
warrants have an exercise price of $1.00 and a term of four years. The following
assumptions were made in estimating the fair value: risk-free interest is 4.75%,
volatility is 0.3 and expected life is 4 years. The value of the unvested
warrants at September 30, 2008 was $182.





NOTE 10 – LEASE
COMMITMENTS





The Company rented
office space on an annual basis from Nuvotec through December 31, 2006 and,
thereafter, on a month to month basis and was responsible for excise tax and
maintenance expenses based upon its share of office space occupancy in relation
to the total office space leased by Nuvotec. On June 13, 2007, the lessor on
this space became the Port of Benton. The Company paid $15,139 and $41,996 for
rent, excise tax, and maintenance of this property for the years ended September
30, 2008 and 2007, respectively . The lease expires
January 31, 2009.





The Company leases
office space for ImageWorks from the previous owners of ImageWorks at $7,750 per
month. The lease expires April 30, 2009.





The Company leases
office space from a third party consisting of a base rent of $5,000 per month
with an option for an additional five year term. The lease expires December 31,
2010.





Minimum rental
payments over the terms of the leases are as follows for the fiscal years ended
September 30:




2009
            
            $
            119,0472010
            
            $
            60,0002011
            
            $
            15,000




F-20


VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008
  NOTE 11 – 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 year ended September 30, 2008 and 2007, services provided to these
contractors aggregated $1,094,729 and $2,403,542,  representing 21%
and 40% of total revenue, respectively. At September 30, 2008 and 2007, amounts
due from these contractors are included in accounts receivable in the amounts of
$144,402 and $355,072, 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:





Fiscal Year
              September 30,
              2008
            
            Fiscal Year
              September 30,
              2007Revenues—FluorHanford
            
            $
            661,993
            
            $
            1,079,518Accounts
      ReceivableFluor
      Hanford
            
            $
            24,994
            
            $
            28,822





NOTE 12 – 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 years ending September 30, 2008 and 2007, the Company
incurred $115,567 and $99,094 in royalty obligations, respectively, which are
recorded in marketing expense. At September 30, 2008 and 2007, the Company had
outstanding royalty obligations of $15,081 and $0, respectively.





NOTE 13 – PROPERTY AND
EQUIPMENT





The following is a
summary of property, equipment, and accumulated depreciation:





September 30,
              2008
            
            September 30,
              2007Computers and
      equipment
            
            $
            1,278,182
            
            $
            1,221,404Furniture and
      fixtures
            
            
            182,264
            
            
            176,191Leasehold
      Improvements
            
            
            123,184
            
            
            120,4871,583,630
            
            
            1,518,082Less
      accumulated depreciation
            
            
            (1,247,676
            )
            
            (1,152,471
            )Property and
      equipment, net
            
            $
            335.954
            
            $
            365,611





Depreciation
expense for the years ended September 30, 2008 and 2007 was $100,315 and
$290,326, respectively.




F-21


VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008


NOTE 14 – INCOME TAXES





Significant
components of the provision (benefit) for income taxes are as
follows:





September 30,
              2008
            
            September 30,
              2007Amount
            
            Percent
            
            Amount
            
            PercentRecorded tax
      provision
            
            $
            194,140
            
            
            34
            
            $
            (412,583
            )
            
            34Amortization
      book toTax
      difference
            
            
            22,572
            
            
            nil
            
            
            38,173
            
            
            nilStock and
      options effect
            
            
            8,190
            
            
            nil
            
            
            13,792
            
            
            nilOther
      permanent adjustments
            
            
            (52,065
            )
            
            nil
            
            
            28,052
            
            
            nilTotal current
      taxexpense
      (benefit)
            
            $
            172,837
            
            
            34
            
            $
            (332,566
            )
            
            34





The current
estimated tax expense, computed at the expected federal statutory rate of 34%,
is reported for tax filing purposes as part of the consolidated
group.





Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.





Significant
components of the deferred tax assets at September 30, 2008 and 2007 are as
follows:





September 30,
              2008
            
            September 30,
              2007Deferred tax asset:Net operating
      loss carryforwards
            
            $
            634,027
            
            $
            786,361Temporary
      difference inDepreciation
      methods
            
            
            23,379
            
            
            38,173Stock options
            
            
            8,190
            
            
            13,899Total
      deferred tax asset
            
            $
            665,596
            
            $
            838,433





At September 30,
2008, the Company’s income tax reporting of the consolidated group had federal
net operating loss carryforwards for use against future taxable income of
approximately $1,800,000, which expire in the years 2025 to 2027. The decrease
in the Company’s estimated deferred tax asset from September 30, 2007 to 2008
was approximately $173,000 which was principally due to the Company realizing
income from operations.





Effective
October 1, 2007, the Company adopted the Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting and reporting for uncertainties in income tax law. In
accordance with FIN 48, the company recognizes the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon settlement. Additionally, FIN
48 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The adoption of FIN
48 did not have a material impact on the Company’s financial position, results
of operation or liquidity.




F-22


VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008


We may from time to
time be assessed interest or penalties by major tax jurisdictions. In the event
we receive an assessment for interest and/or penalties, it will be classified in
the financial statements as tax expense. Income tax expense for the year ended
September 30, 2008 includes no interest and penalties. As of September 30, 2008,
we have no accrued interest and penalties related to uncertain tax positions.





The Company has not
taken a tax position that, if challenged, would have a material effect on the
financial statements or the effective tax rate for the twelve-months ended
September 30, 2008, or during the prior year applicable under FIN 48. The
Company has determined it is not reasonably possible for the amounts of
unrecognized tax benefits to significantly increase or decrease within twelve
months of the adoption of FIN 48. The Company is currently subject to a three
year statute of limitations by major tax jurisdictions.





NOTE 15 – SEGMENT
INFORMATION





The Company has two
operating segments at September 30, 2008: training subscriptions and custom
products and services.





Separate management
of each segment is required because each business unit is subject to different
marketing, production, and technology strategies.





Training
subscriptions derives revenues from the sale of computer-based safety training
products and services throughout the United States. Custom products and services
derive its revenue from custom products and services designed specifically for
the end user.





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




September 30,
            
            September 30,2008
            
            2007Revenues:Training
      subscriptions
            
            $
            3,168,963
            
            $
            3,085,747Custom
      products and services
            
            
            2,058,273
            
            
            2,970,455Total
      Revenues
            
            $
            5,227,236
            
            $
            6,056,202Cost of
      Revenues:Training
      subscriptions
            
            $
            902,989
            
            $
            672,740Custom
      products and services
            
            
            1,283,002
            
            
            1,766,757Total Cost of
      Revenues
            
            $
            2,185,991
            
            $
            2,439,497Gross
      Profit:Training
      subscriptions
            
            $
            2,265,974
            
            $
            2,413,007Custom
      products and services
            
            
            775,271
            
            
            1,203,698Total Gross
      Profit
            
            $
            3,041,245
            
            $
            3,616,705Operating
      Expenses:Training
      subscriptions
            
            $
            1,402,757
            
            $
            1,452,405Custom
      products and services
            
            
            350,689
            
            
            622,459Corporate
            
            
            779,456
            
            
            2,519,976Total
      Operating Expenses
            
            $
            2,532,902
            
            $
            4,594,840Income (Loss)
      before Income TaxesTraining
      subscriptions
            
            $
            863,217
            
            $
            960,602Custom
      products and services
            
            
            424,582
            
            
            581,239Corporate
            
            
            (779,456
            )
            
            (2,519,976
            )Total Income
      (Loss) before Income Taxes
            
            $
            508,343
            
            $
            (978,135
            )




F-23


VIVID LEARNING
SYSTEMS, INC.
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 September 30,
2008


September 30,
            
            September 30,2008
            
            2007Identifiable
      assets:Training
      subscriptions
            
            $
            1,229,722
            
            $
            1,328,424Custom
      products and services
            
            
            482,933
            
            
            490,559Corporate
            
            
            2,348,481
            
            
            2,746,865Total
      Identifiable Assets
            
            $
            4,061,136
            
            $
            4,565,848Depreciation
      and amortization:Training
      subscriptions
            
            $
            266,073
            
            $
            276,351Custom
      products and services
            
            
            48,411
            
            
            216,457Corporate
            
            
            51,904
            
            
            522,312Total
      Depreciationand
      Amortization
            
            $
            366,388
            
            $
            1,015,120




NOTE 16 – ACQUISTION





Effective October
1, 2006, Vivid Learning Systems, Inc. entered into an asset purchase agreement
with its parent, Nuvotec USA, Inc. (“seller”). Pursuant to the agreement, the
Company purchased from the seller the assets of the Engineering and Technical
Services (“ETS”) business line of the seller. The business line has historically
performed at a revenue neutral operational level. In satisfaction of the
purchase price, Vivid Learning Systems, Inc. assumed all outstanding liabilities
of ETS and recorded an inter-company related party liability of $85,970, which
was deemed to be equal to the fair market value of this business
enterprise.




NOTE 17—SUBSEQUENT
EVENT





On May 1, 2004, the
Company acquired ImageWorks Digital Media Group, Inc. (ImageWorks) through a
share exchange agreement with the former owners. The Company issued as part of
the original acquisition 100,000 shares of the Company’s common stock to the
former owners of ImageWorks. The share exchange agreement provided that if said
shares did not achieve a certain public market value as of May 24, 2008, the
former owners would have the option to request a buyback of the shares from the
Company. At the request of the former owners the share certificates were
returned to the Company on October 24, 2008 as treasury stock in exchange for
full payment of the buyback amount.




F-24