**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





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









**TABLE
      OF
      CONTENTS**





**PART
                1**FORWARD-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
            
            8**PART
                II**ITEM
                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
            
            21**PART
                III**ITEM
                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 Tec*knowledge*y,
                  Inc.,
                  Washington, March 2, 1995*3.2
              
              Articles
                  of
                  Amendment of Applied Tec*knowledge*y,
                  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 Tec*knowledge*y,
                  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.
                Blodgett*Board
                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