**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, 2006





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 o





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. o





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





State
      Issuer’s revenues for its most recent fiscal year: $4,141,604.









The
      aggregate market value of the Issuer’s common stock held by non-affiliates of
      the Issuer as of December 28, 2006 (based on the closing sale price of U.S.
      $0.17 per share of the Issuer’s common stock, as reported on the Over the
      Counter Bulletin Board on that date) was approximately U.S. $370,854 (based
      on
      approximately 2,181,496 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 December 28,
      2006 was 13,372,203.





DOCUMENTS
      INCORPORATED BY REFERENCE




Document
            Part of 10-KSBProxy Statement for the 2007 Annual
              Meeting
              of Stockholders
            Part III





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










**TABLE
        OF CONTENTS**
 
 **PART
        1**
 
 FORWARD-LOOKING
                  STATEMENTS
              1ITEM
                  1
              DESCRIPTION
                  OF BUSINESS
              1ITEM
                  2
              DESCRIPTION
                  OF PROPERTY
              7ITEM
                  3
              LEGAL
                  PROCEEDINGS
              7ITEM
                  4
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              8
 
 **PART
        II**
 
 ITEM
                  5
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
              8ITEM
                  6
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              10ITEM
                  7
              FINANCIAL
                  STATEMENTS
              18ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              18ITEM
                  8A
              CONTROLS
                  AND PROCEDURES
              19ITEM
                  8B.
              OTHER
                  INFORMATION
              19
 
 **PART
        III**
 
 ITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS,CONTROL PERSONS AND CORPORATE GOVERNANCE;
                  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
              19ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              19ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              20ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              20ITEM
                  13.
              EXHIBITS
              20ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              22FINANCIALS
              
              F1
                  to F-22


**** **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. Approximately 83%
      of
      the outstanding shares of Vivid are 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. 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.





The
      Company develops and provides computer-based compliance training products and
      services, 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.





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





**History
      of Parent Company Nuvotec** **USA** **,
      Inc.**





Approximately
      83% of the outstanding shares of Vivid are 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.




1




Nuvotec USA ,
      Inc. is
      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 is the nuclear-related technical services it
      provides to the Department of Energy (since 1995) in project and construction
      management, engineering, and project and field work control. In addition,
      Nuvotec also has 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.





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.





**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 and purchased and enhanced a web based learning 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. The Company now also applies this marketing mix and focus to the
      health care and food safety markets.




2




**Vivid's
      Products**





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




The
      goals
      of these training programs are 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/Awareness Training based on federal employment laws; Joint
      Commission on the Accreditation of Healthcare Organizations (JCAHO); Healthcare
      Insurance Portability and Accountability Act (HIPAA); Mining Safety and Health
      Administration (MSHA); Electrical Worker Training (EWT 1910.269); Food Safety
      Training (based on Food & Drug Administration requirements); Forklift
      Training; Hazardous Waste Operations 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 be delivered via the world-wide-web through Vivid’s Learning
      Management System (LMS) software or through the LMS of a third
      party.





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 200 online
      lessons and has actively marketed these programs to the commercial workplace
      since 1999.





**Training
      Industry**





Corporate
      training is an $85 billion-a-year industry with a 25% growth from e-learning
      applications utilizing the Internet according to Bersin Associates, an industry
      analyst for the training industry. 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.




3




**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 Industry Managers and
      Account Representatives. The Industry Managers have sales and 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 1000 sales
      professionals from a distribution network of partners including Zee Medical,
      Inc., New Horizons Computer Learning Centers, Inc., Element K, Learn.com, and,
      Saba. 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.




The
      Company's largest customer is Fluor Hanford. Fluor Hanford accounted for
      approximately 19% of revenues in fiscal year 2006, and 22% of revenues in fiscal
      year 2005. The contract with Fluor Hanford expires September 30,
      2008.





Fluor
      Hanford is the primary management contractor for Project Hanford and has 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. 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;
      Joint Commission on the Accreditation of Healthcare Organizations (JCAHO)
      training; and, Health Insurance Portability and Accountability Act (HIPAA)
      training. Additionally, Vivid provides some employment law, bereavement,
      phlebotomy, and continuing education training (through a reseller agreement
      with
      other content development companies). The primary markets for this training
      are
      public and private hospitals and nursing associations.




4




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 based on CFR 1910.269 standards; and, some employment
      law and job specific training programs. The markets for this training are public
      and private utilities and utility contractors.




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;
      Food
      Safety training HACCP based on Food and Drug Administration (FDA) regulations;
      and, some employment law training. The markets for this training are food
      handlers and food managers at retail food stores.




**Acquisitions**





In
      fiscal
      year 2006 Vivid made no acquisitions, but made one acquisition in
      2005.





On
      March
      14, 2005, Vivid entered into an Asset Purchase Agreement with TrueActive
      Software, Inc., a Washington corporation ("TrueActive"). Pursuant to the
      Agreement, Vivid purchased from TrueActive intellectual property with respect
      to
      certain software and other assets including TrueActive's customer database,
      accounts receivable, inventory, and marketing materials. The consideration
      for
      the purchase of the assets consisted of: 1) $120,000 in cash; 2) an interest
      free $120,000 one year promissory note with principal payable monthly beginning
      May 2005; 3) four year warrants to purchase 80,000 shares of Vivid's Common
      Stock at an exercise price of $1.00 per share vesting over two years and issued
      to certain stockholders of TrueActive; 4) a two year employment agreement with
      Richard E. Eaton, president of TrueActive, and providing for, among other
      things, annual salary of $75,000; 5) royalties of 8% of net sales of certain
      software products purchased and 4% of net sales on derivative software products
      for a period of three years to be paid to TrueActive's successor corporate
      entity. Effective
      July 1, 2005, the TrueActive Software assets that Vivid had held were
      transferred to Nuvotec USA ,
      Inc.
      along with all attendant liabilities incurred as a result of the asset
      acquisition.





**Employees**




As
      of
      September 30, 2006, Vivid had 28 full-time employees and 12 part-time employees.
      Of those employees, 10 full-time employees are in sales, 15 full-time employees
      are in production, 3 full-time employees are administrative, and 7 are part-time
      authenticators (test proctors), and 5 part-time in production. Vivid plans
      to
      add 13 or more additional employees in fiscal year 2007. None of the employees
      are subject to any collective bargaining agreements.  There
      are
      no employment agreements.




5




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.





**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 delivering via CD-ROM; and, d) companies producing internet and
      intranet delivered programs. 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, Summitt Training
      Source, Inc., and FirstNet Learning, Inc.





**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;
      and,
      training to address some of the U.S. Department of Transportation requirements.




6




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.




**ITEM
      2.  DESCRIPTION OF PROPERTY**





Our
      corporate office has recently moved to 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.




During
      the past year, the Company's corporate office was at 723 The Parkway which
      is a
      space that the Company's parent corporation (its largest shareholder) Nuvotec USA ,
      Inc.
      (“Nuvotec”) leases. The Company has not paid rent for this space (other than
      management fee allocations which include overhead). Nuvotec leases 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. During
      the
      past year, Nuvotec's lease required monthly payments of $12,865.




The
      Company leases its training center at 2345 Stevens Drive in Richland, Washington
      from Nuvotec, Vivid's parent corporation, 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 by Nuvotec. The Company paid
      $70,448 and $121,381 for rent, excise tax, and maintenance of this property
      for
      the fiscal years ended September 30, 2006 and September 30, 2005,
      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.





7




**ITEM
      4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year covered by this report.




**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.





High
            
            LowYear
                Ending September 30, 2006September
                30, 2006
            
            $
            0.48
            
            $
            0.20June
                30, 2006
            
            $
            0.95
            
            $
            0.40March
                31, 2006
            
            $
            1.51
            
            $
            0.39December
                31, 2005
            
            $
            1.25
            
            $
            0.25








Source:
       Big Charts





On
      December 28, 2006, the closing bid price for our common stock was
      $0.17.





STOCKHOLDERS





As
      of
      December 28, 2006, there were 60 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, 2006,
      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.





8





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
            
            
            570,940
                (1
            )
            $
            0.33
            
            
            1,745,685Equity
                compensation plans not approved by security holdersTotal
            
            
            570,940
            
            $
            0.33
            
            
            1,745,685




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





RECENT
      SALES OF UNREGISTERED SECURITIES





Nuvotec
      has been providing financial resources for the Company recorded as a
      inter-company payables as draws are made. The Boards of Directors of Vivid
      and
      Nuvotec have approved exchanges of a portion of the inter-company payables
      for
      equity in the form of common stock of Vivid. On October 26, 2006, inter-company
      payables were reduced by $670,702 Nuvotec in exchange for 1,341,404 shares
      of
      Vivid common stock. The exchange ratio was based on the last 6 months average
      weighted trading price of Vivid of $0.50 per share.





The
      issuances 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
      purchasers 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
      purchasers represented in writing that they acquired 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, 2006.




9




**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.





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 grew by 15% over the past year. The increase in revenues is largely
      attributable to a 26% increase in training subscription revenues from new
      subscription based sales and a consistent year over year increase in
      subscription renewals. Vivid’s gross profit also increased from 57% in fiscal
      year 2005 to 68% of revenues in fiscal year 2006. The improvement in gross
      profit margin achieved on total revenues is mainly attributable to reductions
      in
      the fixed cost labor component of costs of revenues .





In
      early
      fiscal year 2007, Vivid acquired the Engineering & Technical Services
      business line from its parent company, Nuvotec USA ,
      Inc.
      There will be non-recurring costs associated with the initial assimilation
      of
      the business that may impact net profits in 2007.





The
      Company intends to actively pursue strategically advantageous partnerships,
      mergers, and acquisitions to further enhance its revenues and impact net
      earnings during 2007.





**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.




10




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. Refer to the audited financial statements
      of
      Vivid for a more detailed listing of critical accounting policies.





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





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 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, 2006 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 are 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, and determined based upon the length of service.




11




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.





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. Amortization of leasehold improvements
      is provided using the straight-line method over the term of the lease plus
      options. 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.





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.





**RESULTS
      OF OPERATIONS**




Our
      fiscal year ends September 30. Our operating results for the years ended
      September 30, 2006 and 2005 are presented below.


Year
                Ended
              September
                30, 2006
            
            Year
                Ended
              September
                30, 2005REVENUES
            
            $
            4,141,604
            
            $
            3,586,159COST
                OF REVENUES
            
            
            1,342,006
            
            
            1,558,696GROSS
                PROFIT
            
            
            2,799,598
            
            
            2,027,463EXPENSESMarketing
                & related labor expenses
            
            
            1,068,252
            
            
            941,039Bad
                debt expense
            
            
            12,111
            
            
            171,230Reseller
                commissions
            
            
            307,380
            
            
            250,962Depreciation
                & amortization
            
            
            144,113
            
            
            173,180Wages
                and contract labor
            
            
            579,589
            
            
            915,713Other
                Operating expenses
            
            
            909,197
            
            
            1,062,313TOTAL
                OPERATING EXPENSES
            
            
            3,020,642
            
            
            3,514,437INCOME
                FROM OPERATIONS
            
            $
            (221,044)
            
            $
            (1,486,974)OTHER
                INCOME EXPENSEGain
                on sale of equipment and settlement of debt
            
            
            30,276
            
            
            75,000Other
                income
            
            
            80,106
            
            
            2,713Interest
                income
            
            
            2,075
            
            
            569Interest
                expense
            
            
            (84,435)
            
            
            (56,208
            )TOTAL
                OTHER INCOME (EXPENSE)
            
            
            28,022
            
            
            22,074
            )INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            (193,022)
            
            
            (1,464,900)INCOME
                TAX BENEFIT (EXPENSE)
            
            
            46,001
            
            
            488,140
            )NET
                INCOME (LOSS)
            
            $
            (147,021)
            
            $
            (976,760)BASIC
                NET INCOME (LOSS) PER SHARE
            
            
            (0.01)
            
            
            (0.10)DILUTED
                NET INCOME (LOSS) PER SHARE
            
            
            (0.01)
            
            
            (0.10)WEIGHED
                AVERAGE NUMBER OF COMMON STOCK SHARES OUTSTANDING:BASIC
            
            
            11,147,261
            
            
            10,247,996DILUTED
            
            
            11,147,261
            
            
            10,247,996




12




**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, direct costs,
      and gross margin for these revenue streams for the two years ending September
      30, 2006 and 2005 are as follows.





Training
                Subscriptions
            
            **Sept.
                30, 2006**
              **(year
                ended)**
            
            **Percent
                of Revenue**
            
            **Sept.
                30, 2005**
              **(year
                ended)**
            
            **Percent
                of Revenue**
            
            **Percent
                Increase**
              **(Decrease)**Revenues
            
            
            2,542,296
            
            
            100.0
            %
            
            2,023,889
            
            
            100.0
            %
            
            25.6
            %Cost
                of Revenues
            
            
            596,874
            
            
            23.5
            %
            
            727,568
            
            
            35.9
            %
            
            (18.0
            )%Gross
                Profit
            
            
            1,945,422
            
            
            76.5
            %
            
            1,296,321(1
            )
            
            64.1
            %
            
            50.0
            %





Custom
                Products and Services
            
            **Sept.
                30, 2006**
              **(year
                ended)**
            
            **Percent
                of Revenue**
            
            **Sept.
                30, 2005**
              **(year
                ended)**
            
            **Percent
                of Revenue**
            
            **Percent
                Increase (Decrease)**Revenues
            
            
            1,599,308
            
            
            100
            %
            
            1,562,270
            
            
            100.0
            %
            
            2.4
            %Cost
                of Revenues
            
            
            745,132
            
            
            46.6
            %
            
            831,128
            
            
            53.2
            %
            
            (10.3
            )%Gross
                Profit
            
            
            854,176
            
            
            53.4
            %
            
            731,142(1
            )
            
            46.8
            %
            
            16.8
            %




(1)
      2005
      amounts in the accompanying financial statements have been reclassified to
      conform to the fiscal 2006 presentation. The reclassifications have no effect
      on
      net assets, net revenue, or net earnings.




13




**Comparison
      of year ended September 30, 2006 to September 30, 2005**





**Total
      Revenues**


Total
      revenues increased by $555,445, or 15%, to $4,141,604 in 2006 from $3,586,159
      in
      2005. The increase in revenues is attributable to a 26% increase in training
      subscription revenues. 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 increased to 68% for the year ended
      September 30, 2006 compared to 57% for the year ended September 30, 2005. 
This increase was largely due to reductions in the fixed cost components of
      costs of revenues resulting from a streamlining of the operation.





Training
      Subscription revenues increased by $518,407, or 26%, to $2,542,296 for the
      fiscal year ended September 30, 2006 compared to $2,023,889 for the fiscal
      year
      ended September 30, 2005. Gross profits generated from the Training Subscription
      segment for the fiscal year ending September 30, 2006 were $1,945,422 and 77%
      of
      revenues compared to $1,296,321 and 64% for the fiscal year ended September
      30,
      2005. Training Subscriptions accounted for 61% and 56% of total revenues
      respectively in fiscal year 2006 and fiscal year 2005. The increase in Training
      Subscription revenues was due to the addition of new subscription customers
      and
      a consistent year over year increase in subscription renewals.




The
      Custom Products and Services segment generates a lower gross profit than the
      Training Subscription segment 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 increased slightly by $37,038 to $1,599,308
      for
      the fiscal year ended September 30, 2006 compared to $1,562,270 for the fiscal
      year ended September 30, 2005. Gross profits generated from Custom Products
      and
      Services for fiscal year ending September 30, 2006 were $854,176 and 54% of
      revenues compared to $731,142 and 47% for the fiscal year ended September 30,
      2005. The reason for the change experienced was the streamlining of the
      operation.




Custom
      Products and Services accounted for 39% and 44% of total revenues respectively
      in fiscal year 2006 and fiscal year 2005. The decrease is attributable to a
      larger base in overall revenues resulting from increased revenues in the
      training subscriptions segment of the business.





**Cost
      of Revenues**


Cost
      of
      revenues decreased by $216,690, or 14%, to $1,342,006 in 2006 from $1,558,696
      in
      2005 primarily due to lower costs incurred in labor and technical assistance
      expense categories resulting from a streamlining of the operation. Cost of
      revenues as a percentage of sales decreased to 32% in 2006 from 43% in 2005.
      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 group required to build software content and/or
      complete the tasks required by contracts/services from specific
      customers/clients.




14




Training
      subscription cost of revenues decreased by 18% to $596,874 in fiscal year 2006
      from $727,568 in fiscal year 2005. This decrease is due to cost reductions
      in
      labor resulting from a streamlining of the operation. The gross profit margin
      realized on training subscription revenues in the fiscal year ending September
      30, 2006 was 77% versus 64% in the reporting period of one year
      ago.





Custom
      products and services cost of revenues decreased by 10% to $745,132 in fiscal
      year 2006 from $831,128 in fiscal year 2005. The decrease in cost of revenues
      on
      similar revenue levels between the fiscal years is primarily attributable to
      cost reductions in labor and technical assistance resulting from
      streamlining.





The
      method of discreet cost identification (rather than cost allocation on the
      basis
      of estimates) was utilized in the reclassification of cost of revenues between
      the 2 segments in fiscal years 2006 and 2005. The effect of the
      reclassifications in the fiscal year 2006 and 2005 was to increase training
      subscription cost of revenues and decrease custom products and services cost
      of
      revenues by $287,616 and $388,714, respectively.





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. Direct costs related
      to training subscriptions are minor because the software content of the
      underlying subscription has already been built (labor cost of such content
      is
      amortized over five years) and, typically, such subscriptions are subject only
      to minor customization costs to fit the needs of a specific customer.





**Marketing
      and Related Labor Expenses**


Marketing
      and related labor expenses increased by $127,213, or 14%, to $1,068,252 in
      2006
      from $941,039 in 2005. The increase is mainly attributable to increased labor
      related expenses partially offset by decreased sales consulting expenses.
      Increased labor related expenses ($677,684 in fiscal year 2006 compared to
      $509,160 in fiscal year 2005) are as a result of an increasing internal
      investment to more effectively manage our various industry segments. It is
      anticipated that marketing and related labor expenses will increase during
      2007
      due to the anticipated addition of sales personnel.





**Reseller
      Commissions**


Reseller
      commissions increased $56,418, or 22%, to $307,380 in 2006 from $250,962 in
      2005. This expense increase is the direct result of an increase in training
      subscription revenues generated from sales resources external to the Company.
      Reseller commissions are expected to rise in proportion to anticipated revenue
      increases as continued reliance is placed on this channel.





**Bad
      debt expense**


Bad
      debt
      expense fell to $12,111 in fiscal year 2006 from $171,230 in fiscal year 2005.
      This large decrease was primarily due to the one time write off in fiscal year
      2005 of revenue that had been due from the Pennsylvania State System of Higher
      Education Foundation, Inc.





15





**Depreciation
      and Amortization**


Depreciation
      and amortization decreased by $29,067, or 17%, to $144,113 in 2006 from $173,180
      in 2005. The decrease is due to an increase in fully depreciated assets in
      comparing the two fiscal years.





**General
      and Administrative Expenses**


General
      and Administrative expenses decreased by $489,240, or 25%, to $1,488,786 in
      fiscal year 2006 from $1,978,026 in fiscal year 2005. The significant expense
      categories of decrease in comparing the two fiscal years are the costs of labor
      and an overall reduction in infrastructure general and administrative expenses.
      The labor decrease ($579,589 in fiscal year 2006 compared to $915,713 in fiscal
      year 2005) is due to management and staff reductions to realign the
      infrastructure of the Company. The overall reduction in infrastructure general
      and administrative expenses ($909,197 in fiscal year 2006 compared to $1,062,313
      in fiscal year 2005) is the result of overhead efficiencies
      achieved.





**Income
      from Operations**


Income
      from Operations increased by $1,265,930 to ($221,044) in fiscal year 2006 from
      ($1,486,974) in fiscal year 2005. Principally, the increase is due to increased
      revenues, decreases in cost of revenues, and the realization of cost
      efficiencies in administrative expenses.





**Other
      Income (Expense)**


The
      main
      increases in other income are attributable to the gain realized from a liability
      insurance settlement of $80,106, and $30,276 realized in the sale of a small
      business segment. The gains were partially offset by an increase attributable
      to
      interest expense resulting from rising interest rates on debt in fiscal year
      2006 compared to 2005. Interest expense on debt was $84,435 in fiscal year
      2006
      compared to $56,208 in fiscal year 2005.




**Net
      Loss**


The
      operation sustained a net loss of $147,021 in fiscal year 2006 compared to
      a net
      loss of $976,760 in fiscal year 2005. The decrease in net loss of $829,739
      is
      due mainly to increased revenues, reductions in cost of revenues, and
      infrastructure expenses to align more directly with revenues, and partially
      offset by a reduction in the resulting federal income tax benefits.





**Trends,
      Uncertainties, or Other Material Impacts upon Revenue**


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





Vivid
      Learning Systems has an operating history of 11 years. Other than the loss
      of
      revenue from the Pennsylvania State System of Higher Education Foundation,
      Inc.
      in 2005, Vivid’s management team has not experienced any infrequent events,
      transactions, or significant economic conditions that materially impact the
      amount of revenue.





**Liquidity
      and Capital Resources**


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 had cash of $166,645 as
      compared to $16,622 as of September 30, 2005.




16




As
      of
      September 30, 2006, the Company’s major shareholder has 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 has 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
      are
      $670,702 and are 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.





**Net
      Cash Provided by Operating Activities**


Cash
      flows provided by operating activities amounted to $669,354 in fiscal year
      2006
      compared to cash flows used by operating activities of $562,253 in fiscal year
      2005. The main reasons for the increase are attributable to a decrease in net
      loss generated by the operation of $829,739 and a decrease in other current
      assets of $456,144, offset by decreases in accrued payroll related expenses
      of
      $168,008, and other current liabilities of $141,984 in the comparison of the
      same period of the two fiscal years.





**Net
      Cash Used in Investing Activities**


Cash
      flows used in investing activities decreased by $216,829 to $142,748 in fiscal
      year 2006 from $359,577 in fiscal year 2005. The decrease is attributable to
      lower expenditures related to the acquisition of software, costs associated
      with
      internally developed software, and property and equipment.





**Resources
      Provided by Financing Activities**


Cash
      flows, and non-cash transactions provided in financing activities, including
      conversion of related party short-term debt into common stock, proceeds of
      an
      economic development loan, and lease financing, decreased by $24,624 to $864,377
      in fiscal year 2006 compared to cash flows provided by financing activities
      of
      $889,001 in fiscal year 2005. It should also be noted that the Company converted
      $1,094,477 of related party debt into additional paid in capital in a non-cash
      transaction with its parent company. In September 2006, the Company received
      proceeds of $175,000 through a financing arrangement with a local economic
      development district.





**Accounts
      and Contracts Receivable**


The
      decrease in current receivables and contracts as of September 30, 2006 compared
      to the balance as of September 30, 2005 was $382,277. The decrease in current
      receivables and contracts is attributable primarily to greater efficiencies
      achieved in collection activities and improved negotiated payment terms with
      large customers. Significant portions of Vivid receivables are owed from federal
      and state governments, large utilities, large hospitals, and contracted renewals
      for subscription clients. Since Vivid WA’s formation in 1995, in each fiscal
      year less than 2% of recorded revenues on an average annual basis have required
      a write-off, although in fiscal year 2005 the write-off was 4.8%.




**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.




17




**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.





**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 Nuvotec USA ’s
      (the
      Company's parent) line of credit. The overall line is $1 million and is
      collateralized by accounts receivable of the parent and the Company. The line
      cannot be drawn upon beyond 80% of receivables. Receivable coverage of the
      line
      is monitored by the bank, which reduces the risk of loan
      forfeiture.




•  The
      Company has guaranteed the market price of common stock to be issued in
      connection with the acquisition of ImageWorks. The projected price point of
      $3
      per share for the stock represents 100,000 shares, which is less than 1% of
      the
      presently issued outstanding shares of the Company. The acquisition agreement
      contains a provision for a potential cash-out to the former owners of ImageWorks
      on common stock warrants. If the remaining warrants are exercised then 100,000
      additional shares could be issued, which presently represents less than 1%
      of
      the issued outstanding shares of the Company.




•  Future
      minimum lease payments for office space total $505,681 for operations in fiscal
      years 2007 to 2011.





**Material
      Commitments for Capital Expenditures**


There
      presently exist no material commitments to outside vendors for capital
      expenditures other than two capital lease obligations recorded on the balance
      sheet for leasehold improvements at the Bedford Street location and the purchase
      of a telephone system. As part of the general replacement budget, $100,000
      is
      budgeted for fiscal year 2007 for 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.




**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 2006.




18




**ITEM
      8A.  CONTROLS AND PROCEDURES**





Our
      current principal executive officer and principal financial officer have
      evaluated the effectiveness of the Company’s disclosure controls and procedures
      (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
      the
      end of the period covered by this report. Based on their evaluation, the
      Company’s current principal executive officer and principal financial officer
      have concluded that the Company’s disclosure controls and procedures are
      effective in ensuring that the information required to be disclosed by the
      Company in reports that it files or submits under the Exchange Act is recorded,
      processed, summarized, and reported within the time periods specified in the
      rules and forms promulgated by the Securities and Exchange Commission
      (“SEC”).





There
      have not been any significant changes in the Company’s internal control over
      financial reporting during the Company’s fourth fiscal quarter that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.





**ITEM
      8B.  OTHER INFORMATION**





None.


**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 2007 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 10-KSB filed with the
      SEC on December 28, 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.





19




**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.




**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 EducationFoundation,
                Inc., dated August 18, 2004***




20




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 *****10.17
            
            Lease
                for 5728 Bedford Street, Pasco, Washington (filed
                herewith)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.




(b)
      Vivid
      filed the following reports on Form 8-K during the last quarter of its fiscal
      year ended September 30, 2006:




21




On
      September 8, 2006, Vivid filed a Form 8-K to announce that it had signed an
      agreement with the Benton-Franklin Economic Development District for an economic
      development loan.




**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 2006
      and
      2005 were $58,200 and 53,377, 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 2006 and 2005 were $22,176
      and $21,500, respectively.





(3)
       Tax Fees





The
      aggregate fees billed for professional services rendered by Williams &
Webster, P.S. for tax related services for fiscal years 2006 and 2005 were
      $3,845 and $3,800, respectively.





(4)
       All Other Fees





Vivid
      did
      not incur any other fees apart from those listed above during the fiscal years
      2006 and 2005.





(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 2006 and
      2005.





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





Not
      applicable.





22




**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 28, 2006
            By:
            /s/Name:
            Christopher L. BrittonTitle:
            CEO and
              Vice-Chairman




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/
              Christopher
                L. Britton
            
            Chief
                Executive Officer and Vice-Chairman
            
            December
                28, 2006/s/
              Robert
                Blodgett
            
            Treasurer,
                Chief Financial and Accounting Officer
            
            December
                28, 2006/s/
              Sandra
                Muller
            
            Secretary,
                Corporate Counsel
            
            December
                28, 2006Board
                of Directors/s/
              Robert
                Ferguson
            
            Chairman
            
            December
                28, 2006/s/
              Andrew
                Thoresen
            
            Director
            
            December
                28, 2006/s/
              Robert
                Turner
            
            Director
            
            December
                28, 2006/s/
              William
                N. Lampson
            
            Director
            
            December
                28, 2006





23











Vivid
                Learning Systems, Inc.
              Richland,
                Washington




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




We
      have
      audited the accompanying balance sheets of Vivid Learning Systems, Inc. as
      of
      September 30, 2006 and 2005, and the related statements of operations,
      stockholders’ equity and cash flows for the years then ended. These financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.






We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.






In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Vivid Learning Systems, Inc. as
      of
      September 30, 2006 and 2005 and the results of its operations, stockholders'
      equity and its cash flows for the years then ended in conformity with accounting
      principles generally accepted in the United States of America.




/s/
                Williams & Webster, P.S.




Williams
      & Webster, P.S.


*Certified
      Public Accountants*


Spokane,
      Washington


December
      21, 2006











F-1




**VIVID
      LEARNING SYSTEMS, INC.**


**Consolidated
      Financial Statements and**


**Report
      of Independent Registered Certified Public Accounting Firm**


**September
      30, 2006 and 2005**








**INDEX
      TO FINANCIAL STATEMENTS**




Vivid
      Learning Systems, Inc.







Report
                of Independent Registered Public Accounting Firm, Williams & Webster,
                P.S.
            
            
            F-1Index
                to Financial Statements
            
            
            F-2Consolidated
                Balance Sheets at September 30, 2006 and September 30,
                2005
            
            
            F-3Consolidated
                Statements of Income for the years ended September 30, 2006, and
                September
                30, 2005
            
            
            F-4Consolidated
                Statement of Stockholders’ Equity for the years ended September 30, 2006,
                and September 30, 2005
            
            
            F-5Consolidated
                Statements of Cash Flows for the for the years ended September 30,
                2006,
                and September 30, 2005
            
            
            F-6Notes
                to Consolidated Financial Statements
            
            
            F-7
                to F-21




F-2




**VIVID
        LEARNING SYSTEMS, INC.**
 **CONSOLIDATED
          BALANCE SHEETS**





September
                30,
            
            September
                30,2006
            
            2005ASSETSCURRENT
                ASSETSCash
            
            $
            166,645
            
            $
            16,622Accounts
                and contracts receivable
            
            
            700,115
            
            
            1,028,197Accounts
                and contracts receivable, Fluor Hanford
            
            
            27,077
            
            
            81,272Prepaid
                expenses
            
            
            119,110
            
            
            105,867Other
                current assets
            
            
            219,795
            
            
            374,059TOTAL
                CURRENT ASSETS
            
            
            1,232,742
            
            
            1,606,017PROPERTY,
                PLANT AND EQUIPMENTProperty
                and equipment
            
            
            1,318,651
            
            
            1,223,847Less:
                Accumulated depreciation and amortization
            
            
            (862,828
            )
            
            (892,570
            )TOTAL
                PROPERTY, PLANT AND EQUIPMENT
            
            
            455,823
            
            
            331,277OTHER
                ASSETSSoftware,
                net of amortization
            
            
            1,485,038
            
            
            1,654,305Intangibles,
                net of amortization
            
            
            436,943
            
            
            537,943Goodwill
            
            
            375,000
            
            
            375,000Long-term
                contracts receivable
            
            
            244,375
            
            
            368,542Deferred
                tax asset
            
            
            505,867
            
            
            460,081TOTAL
                OTHER ASSETS
            
            
            3,047,223
            
            
            3,395,871TOTAL
                ASSETS
            
            $
            4,735,788
            
            $
            5,333,165LIABILITIES
                AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIESAccounts
                payable
            
            $
            94,049
            
            $
            129,539Payable
                to related party
            
            
            670,702
            
            
            1,000,000Accrued
                contract labor
            
            
            160,300
            
            
            243,879Other
                current liabilities
            
            
            63,136
            
            
            183,035Unearned
                revenue
            
            
            20,355
            
            
            44,376Notes
                payable, related parties
            
            
            111,853
            
            
            111,000Current
                portion of long-term liabilities
            
            
            25,795
            
            
            -TOTAL
                CURRENT LIABILITIES
            
            
            1,146,190
            
            
            1,711,829LONG-TERM
                LIABILITIESLong-term
                debt
            
            
            162,579
            
            
            -Related
                party payables
            
            
            422,325
            
            
            1,753,145Other
                long-term liabilities
            
            
            122,096
            
            
            -TOTAL
                LONG-TERM LIABILITIES
            
            
            707,000
            
            
            1,753,145TOTAL
                LIABILITIES
            
            
            1,853,190
            
            
            3,464,974COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -STOCKHOLDERS'
                EQUITYPreferred
                stock, $0.0001 par value;5,000,000
                shares authorized, no shares issued and outstanding
            
            
            -
            
            
            -Common
                stock, $0.0001 par value;200,000,000
                shares authorized, 12,030,674 and 10,247,996shares
                issued and outstanding, respectively
            
            
            1,203
            
            
            1,025Additional
                paid-in capital
            
            
            3,673,311
            
            
            2,512,061Accumulated
                deficit
            
            
            (791,916
            )
            
            (644,895
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            2,882,598
            
            
            1,868,191TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            4,735,788
            
            $
            5,333,165




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
                  30,2006
              
              2005REVENUESTraining
                  subscriptions
              
              $
              1,977,293
              
              $
              1,423,787Training
                  subscriptions, Fluor Hanford
              
              
              565,003
              
              
              600,102Custom
                  products and services
              
              
              1,378,995
              
              
              1,344,410Custom
                  products and services, Fluor Hanford
              
              
              220,313
              
              
              217,8604,141,604
              
              
              3,586,159COST
                  OF REVENUESTraining
                  subscriptions
              
              
              596,874
              
              
              727,568Custom
                  products and services
              
              
              745,132
              
              
              831,1281,342,006
              
              
              1,558,696GROSS
                  PROFIT
              
              
              2,799,598
              
              
              2,027,463EXPENSESMarketing
                  and related labor expenses
              
              
              1,068,252
              
              
              941,039Bad
                  debt expense
              
              
              12,111
              
              
              171,230Reseller
                  commissions
              
              
              307,380
              
              
              250,962Depreciation
                  and amortization
              
              
              144,113
              
              
              173,180Wages
                  and contract labor
              
              
              579,589
              
              
              915,713Other
                  operating expenses
              
              
              909,197
              
              
              1,062,313TOTAL
                  OPERATING EXPENSES
              
              
              3,020,642
              
              
              3,514,437INCOME
                  (LOSS) FROM OPERATIONS
              
              
              (221,044
              )
              
              (1,486,974
              )OTHER
                  INCOME (EXPENSE)Gain
                  on settlement of debt
              
              
              -
              
              
              75,000Gain
                  on sale of equipment and intangible assets
              
              
              30,276
              
              
              -Other
                  miscellaneous income
              
              
              80,106
              
              
              2,713Interest
                  income
              
              
              2,075
              
              
              569Interest
                  expense
              
              
              (84,435
              )
              
              (56,208
              )TOTAL
                  OTHER INCOME (EXPENSE)
              
              
              28,022
              
              
              22,074INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              (193,022
              )
              
              (1,464,900
              )INCOME
                  TAX BENEFIT (EXPENSE)
              
              
              46,001
              
              
              488,140NET
                  INCOME (LOSS)
              
              $
              (147,021
              )
              $
              (976,760
              )BASIC
                  AND DILUTED NET LOSS PER SHARE
              
              $
              (0.01
              )
              $
              (0.10
              )BASIC
                  AND DILUTEDWEIGHTED
                  AVERAGE NUMBER OF SHARES
              
              
              11,147,261
              
              
              10,247,996
              ****




F-4




**VIVID
        LEARNING SYSTEMS, INC.**
 **CONSOLIDATED
          STATEMENT OF STOCKHOLDERS' EQUITY**


COMMON
                  STOCK
              
              ADDITIONAL
                PAID-IN
              
              RETAINED
                EARNINGSShares
              
              Amount
              
              CAPITAL
              
              (DEFICIT)
              
              TOTALBalance,
                  September 30, 2004
              
              
              10,197,996
              
              
              1,020
              
              
              2,469,626
              
              
              331,865
              
              
              2,802,511Common
                  stock issued for legal services at $0.10 per share
              
              
              50,000
              
              
              5
              
              
              4,995
              
              
              -
              
              
              5,000Options
                  issued for legal services
              
              
              -
              
              
              -
              
              
              8,000
              
              
              -
              
              
              8,000Options
                  issued as compensation
              
              
              -
              
              
              -
              
              
              29,440
              
              
              -
              
              
              29,440Net
                  loss for the year ended September 30, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              (976,760
              )
              
              (976,760
              )Balance,
                  September 30, 2005
              
              
              10,247,996
              
              
              1,025
              
              
              2,512,061
              
              
              (644,895
              )
              
              1,868,191Common
                  stock issued in exchange for elimination ofinter-company
                  debt
              
              
              1,709,303
              
              
              171
              
              
              1,094,306
              
              
              -
              
              
              1,094,477Common
                  stock issued for compensation
              
              
              40,000
              
              
              4
              
              
              19,996
              
              
              -
              
              
              20,000Common
                  stock issued for exercise of options at $0.25 per share
              
              
              33,375
              
              
              3
              
              
              8,341
              
              
              -
              
              
              8,344Options
                  issued as compensation
              
              
              -
              
              
              -
              
              
              38,607
              
              
              -
              
              
              38,607Net
                  loss for the year ended September 30, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              (147,021
              )
              
              (147,021
              )12,030,674
              
              $
              1,203
              
              $
              3,673,311
              
              $
              (791,916
              )
              $
              2,882,598




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
                  30,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (147,021
              )
              $
              (976,760
              )Adjustments
                  to reconcile net income (loss)to
                  net cash provided by operating activities:Depreciation
                  and amortization
              
              
              144,113
              
              
              173,180Amortization
                  of capitalized software
              
              
              269,109
              
              
              296,551Bad
                  debt expenses
              
              
              12,111
              
              
              171,230Gain
                  on settlement of debt
              
              
              -
              
              
              (75,000
              )Gain
                  on sale of assets
              
              
              (30,276
              )
              
              -Changes
                  in deferred tax assets and liabilities
              
              
              (45,786
              )
              
              (456,228
              )Common
                  stock issued for compensation
              
              
              20,000
              
              
              13,000Options
                  issued for compensation
              
              
              38,607
              
              
              29,440Changes
                  in assets and liabilities:Accounts
                  and contracts receivable
              
              
              382,277
              
              
              369,597Employee
                  receivable
              
              
              -
              
              
              22,222Related
                  party receivables, net
              
              
              -
              
              
              3,894Prepaid
                  expenses
              
              
              (13,243
              )
              
              (37,054
              )Other
                  current assets
              
              
              154,264
              
              
              (301,880
              )Accounts
                  payable
              
              
              (35,490
              )
              
              (60,049
              )Accrued
                  payroll and related expenses
              
              
              (83,579
              )
              
              84,429Long-term
                  receivable contracts
              
              
              124,167
              
              
              145,000Other
                  current liabilities
              
              
              (119,899
              )
              
              22,085Unearned
                  revenue
              
              
              (24,021
              )
              
              14,090Net
                  cash provided (used) by operating activities
              
              
              669,354
              
              
              (562,253
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of property, equipment and intangible assets
              
              
              (36,835
              )
              
              (93,127
              )Acquisition
                  of software
              
              
              (105,913
              )
              
              (266,450
              )Net
                  cash used by investing activities
              
              
              (142,748
              )
              
              (359,577
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from stock issuances
              
              
              8,344
              
              
              -Payments
                  on notes payable, related party
              
              
              (547,587
              )
              
              (325,000
              )Payments
                  on other long-term liabilities
              
              
              (12,340
              )
              
              -Proceeds
                  from long-term debt
              
              
              175,000
              
              
              -Proceeds
                  from related party financing transactions including line of
                  credit
              
              
              -
              
              
              1,214,001Net
                  cash provided (used) by financing activities
              
              
              (376,583
              )
              
              889,001Net
                  increase (decrease) in cash
              
              
              150,023
              
              
              (32,829
              )Cash
                  at beginning of period
              
              
              16,622
              
              
              49,451Cash
                  at end of period
              
              $
              166,645
              
              $
              16,622SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid
              
              $
              84,435
              
              $
              56,208Income
                  taxes paid
              
              $
              -
              
              $
              -NON-CASH
                  TRANSACTIONS:Common
                  stock issued for related party debt
              
              $
              1,094,477
              
              $
              -Note
                  receivable for sale of equipment and intangible assets
              
              $
              45,000
              
              $
              -Capital
                  lease for equipment
              
              $
              46,483
              
              $
              -Leasehold
                  improvements financed
              
              $
              100,000
              
              $
              -




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




F-6




**NOTE
      1** - **BUSINESS
      ORGANIZATION**





Nature
      of Operations


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





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





**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.





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, 2006 and 2005,
      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, 2006 and 2005 was $12,111 and $171,230,
      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
      $36,471 and $40,773 for the years ended September 30, 2006 and 2005,
      respectively.





F-7





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,
      2006
      and 2005, the Company did not have any cash equivalents.





Compensated
      Absences


The
      Company leases all of its employees from HRnovations, Inc., which is co-owned
      and managed by a member of Vivid’s board of directors. The Company, whose
      primary shareholder is 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, 2006 and 2005 of
      $63,443 and $28,947, 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.





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, 2006 and 2005, 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 Stockholders by the weighted average
      common shares outstanding for the period.





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, 2006 and 2005.




F-8




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 is a line of credit in place
      which was executed by Nuvotec, Vivid’s major shareholder, the Company, as a
      subsidiary guaranteeing this debt which is owed to a third party, in fact has
      a
      guarantee which is excluded from the disclosure requirements of the
      Interpretation, and is not required to be recognized as a liability for the
      guarantee.





The
      Company’s major shareholder has a line of credit with Key Bank. As renewed on
      March 15, 2005, the line has a maturity date of December 31, 2006, a maximum
      credit facility of $1,000,000 and an initial annual interest rate of 7.5%.
      The
      rate is a variable rate tied to the bank’s prime rate. At September 30, 2006 and
      2005, outstanding borrowings under this line were $1,000,000, of which $670,702
      and $1,000,000, respectively, were attributable to the Company. The borrowings
      under this line at September 30, 2006 and 2005 attributable to Vivid are
      recorded as a short-term related party payable. Vivid provides an unlimited
      guarantee for the amount owing on the line of credit and offers its assets
      as
      collateral as described in an executed commercial security agreement. The
      amounts of interest paid related to this line of credit are contained in the
      Company’s consolidated statements of cash flows for all periods presented.





Interest
      expense is accrued monthly on the portion of inter-company debt that is related
      to the net draws by Vivid on the line of credit. Inter-company transactions
      typically represent current obligations paid on Vivid’s behalf by Nuvotec, or
      advanced to the Vivid operation for its own operating needs through the line
      of
      credit. The inter-company line of credit payable account at month end is subject
      to interest accrual/pass-through for that indebtedness as per the interest
      charged by Key Bank on the line of credit.




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.




F-9




The
      Company does not believe any adjustments are needed to the carrying value of
      its
      assets at September 30, 2006 and 2005.





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, 2006, no impairment was deemed necessary for
      the
      Company’s goodwill.





A
      noncompetition agreement, customer list, contracts in place and technology
      software are included in intangible assets on the balance sheet. These items
      represent a portion of the acquisition cost of ImageWorks Media Group, Inc.
      in
      2004. The noncompetition agreement is being amortized on the straight-line
      method over a three-year period. For the years ended September 30, 2006 and
      2005, related amortization expense was $100,000 and $100,000, respectively.





Intangible
      assets also include software and related materials, copyrights, trademarks,
      patent applications and database assets and are amortized over their useful
      lives.





Management
      Services Provided by Nuvotec


In
      Vivid’s consolidated statements of income, “Other Operating Expenses” contains
      amounts that represent allocations of central overhead expenses, including
      legal
      and contracts, finance (including accounting and reporting, receivables and
      collection activities, payables and cash management, budgeting, etc.), executive
      and administrative expenses that are applied to the Vivid operation. The
      majority of the allocated expenses represent 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 with time
      charged to Vivid tasks. These tasks and costs are analyzed on a recurring basis
      to adjust the amount of the allocation of central overhead costs to Vivid and
      are as follows:





Year
      Ending September 30, 2006:   $86,803


Year
      Ending September 30, 2005: $160,000





The
      reduced amount in allocated overhead for the year ending September 30, 2006
      is
      attributable to attenuated Nuvotec overhead resources.




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,
      Inc., and ImageWorks Media Group, Inc.





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.




F-10




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 receives the benefit
      of losses resulting from the federal income tax returns filed on a consolidated
      basis by its majority shareholder, Nuvotec, Inc.





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 15.





Recent
      Accounting Pronouncements


In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157, “Fair Value Measurements” (hereinafter
“SFAS No. 157”), which defines fair value, establishes a framework for measuring
      fair value in generally accepted accounting principles (GAAP), and expands
      disclosures about fair value measurements. Where applicable, SFAS No. 157
      simplifies and codifies related guidance within GAAP and does not require any
      new fair value measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. Earlier adoption is encouraged. The Company does
      not
      expect the adoption of SFAS No. 157 to have a significant effect on its
      financial position or results of operations.





In
      June
      2006, the Financial Accounting Standards Board issued FASB Interpretation No.
      48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109” (hereinafter “FIN 48”), which prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      FIN
      48 also provides guidance on de-recognition, classification, interest and
      penalties, accounting in interim periods, disclosure and transition. FIN 48
      is
      effective for fiscal years beginning after December 15, 2006. The Company does
      not expect the adoption of FIN 48 to have an immediate material impact on its
      financial reporting, and the Company is currently evaluating the impact, if
      any,
      the adoption of FIN 48 will have on its disclosure requirements.





In
      March
      2006, the Financial Accounting Standards Board issued Statement of Financial
      Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an
      amendment of FASB Statement No. 140.” This statement requires an entity to
      recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset by entering into a servicing contract
      in
      any of the following situations: a transfer of the servicer’s financial assets
      that meets the requirements for sale accounting; a transfer of the servicer’s
      financial assets to a qualifying special-purpose entity in a guaranteed mortgage
      securitization in which the transferor retains all of the resulting securities
      and classifies them as either available-for-sale securities or trading
      securities; or an acquisition or assumption of an obligation to service a
      financial asset that does not relate to financial assets of the servicer or
      its
      consolidated affiliates. The statement also requires all separately recognized
      servicing assets and servicing liabilities to be initially measured at fair
      value, if practicable and permits an entity to choose either the amortization
      or
      fair value method for subsequent measurement of each class of servicing assets
      and liabilities. The statement further permits, at its initial adoption, a
      one-time reclassification of available for sale securities to trading securities
      by entities with recognized servicing rights, without calling into question
      the
      treatment of other available for sale securities under Statement 115, provided
      that the available for sale securities are identified in some manner as
      offsetting the entity’s exposure to changes in fair value of servicing assets or
      servicing liabilities that a servicer elects to subsequently measure at fair
      value and requires separate presentation of servicing assets and servicing
      liabilities subsequently measured at fair value in the statement of financial
      position and additional disclosures for all separately recognized servicing
      assets and servicing liabilities. This statement is effective for fiscal years
      beginning after September 15, 2006, with early adoption permitted as of the
      beginning of an entity’s fiscal year. Management believes the adoption of this
      statement will have no impact on the Company’s financial condition or results of
      operations.




F-11




In
      February 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial
      Instruments, an Amendment of FASB Standards No. 133 and 140” (hereinafter “SFAS
      No. 155”). This statement established the accounting for certain derivatives
      embedded in other instruments. It simplifies accounting for certain hybrid
      financial instruments by permitting fair value remeasurement for any hybrid
      instrument that contains an embedded derivative that otherwise would require
      bifurcation under SFAS No. 133 as well as eliminating a restriction on the
      passive derivative instruments that a qualifying special-purpose entity (“SPE”)
      may hold under SFAS No. 140. This statement allows a public entity to
      irrevocably elect to initially and subsequently measure a hybrid instrument
      that
      would be required to be separated into a host contract and derivative in its
      entirety at fair value (with changes in fair value recognized in earnings)
      so
      long as that instrument is not designated as a hedging instrument pursuant
      to
      the statement. SFAS No. 140 previously prohibited
      a qualifying special-purpose entity from holding a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. This
      statement is effective for fiscal years beginning after September 15, 2006,
      with
      early adoption permitted as of the beginning of an entity’s fiscal year.
      Management believes the adoption of this statement will have no impact on the
      Company’s financial condition or results of operations.





In
      May
      2005, the Financial Accounting Standards Board issued Statement of Financial
      Accounting Standards (“SFAS No. 154”), “Accounting Changes and Error
      Corrections,” which replaces Accounting Principles Board Opinion No. 20,
“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim
      Financial Statements -- An Amendment of APB Opinion No. 28”. SFAS No. 154
      provides guidance on accounting for and reporting changes in accounting
      principle and error corrections. SFAS No. 154 requires that changes in
      accounting principle be applied retrospectively to prior period financial
      statements and is effective for fiscal years beginning after December 15, 2005.
      The adoption of SFAS 154 did not have a material impact on the Company’s
      consolidated financial position, results of operations, or cash
      flows.





F-12





Reclassifications


Certain
      prior year amounts in the accompanying financial statements have been
      reclassified to conform to the fiscal 2006 presentation. The reclassifications
      have no effect on net assets, net revenues, or net earnings.





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 development and training. 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 renewed, effective July 1, 2004 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-13




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, 2006
            
            September
                30,2005Software
                development costs
            
            $
            3,467,456
            
            $
            3,367,614Accumulated
                amortization
            
            
            (1,982,418
            )
            
            (1,713,309
            )$
            1,485,038
            
            $
            1,654,305





The
      Company amortizes its existing software products over a period of five years.
      For the years ended September 30, 2006 and 2005, $269,109 and $296,551 of
      amortization expense were recorded, respectively.





**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, 2006 and September 30, 2005,
      no subscription contracts were paid in advance. In accordance with EITF 01-14,
      the Company’s reimbursable costs are recorded as gross revenue, with the actual
      costs recorded as a direct cost.





The
      Company’s internet sales are less than 0.5% of total revenue. 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-14




The
      Company does not offer warranties or returns.





**NOTE
      5 - RELATED PARTY TRANSACTIONS**





At
      September 30, 2006 and 2005, the current related party payables consisted of
      $670,702 and $1,000,000, respectively, of borrowing from Nuvotec, Inc.’s line of
      credit and current amounts due to the former owners of ImageWorks of $75,000
      in
      cash or stock (as described more fully in Note 2). The long-term related party
      payable consists of borrowing from Nuvotec of $109,178 and $1,328,145. The
      amounts due to the former owners of ImageWorks were $350,000 and $425,000,
      respectively.





The
      majority owner of the Company has been providing financial resources for the
      Company which are recorded as an inter-company payable as draws are made. The
      boards of directors of the Company and the majority owner have 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, 2006 the
      Company converted $1,094,477 in related party long-term debt due to Nuvotec,
      USA, Inc., into 1,709,303 shares of common stock.





Related
      party management fees are discussed in Note 2 and related party leasing
      activities are discussed in Note 10.





**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, 2006 and 2005 amounted to $51,625 and **** $37,557,
      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 2006 or 2005.





**NOTE
      7 - NOTES AND LOANS PAYABLE**





The
      Company’s long-term liabilities at September 30, 2006 and 2005 are as follows:





2006
            
            2005Note
                payable to Benton-Franklin Economic Development District,due
                in monthly installments of $2,560, payable at 10.5% interestper
                annum, maturing September 1, 2015, uncollateralized
            
            $
            175,000
            
            $
            -Agreement
                with third party lessor for building improvementsdue
                in monthly installments of $1,200, payable at 7.75%
                interestper
                annum, due December 1, 2010 with additional five year
            
            
            95,179
            
            
            -option
                which, if not exercised, results in a lump sum paymentof
                $50,000 as payment to fully amortize the leaseholdimprovements,
                collateralizedNote
                payable, to FoodSafety.com, due in monthly installments of
              $3,3441,
                  payable at 4.8% per annum, maturing in July, 2009,
                uncollateralized,
                    related party
            
            
            109,178
            
            
            145,178Notes
                payable to related party, uncollateralized
            
            
            425,000
            
            
            1,718,967Capital
                lease obligation for phone system, due in monthly
              installments
                  of $775, payable at 11% interest per annum,
                due
                    February 28, 2011, collateralized
            
            
            40,291
            
            
            -844,648
            
            
            1,864,145Less:
                Current portionNotes
                payable
            
            
            25,795
            
            
            -Notes
                payable, related party
            
            
            111,853
            
            
            111,000$
            707,000
            
            $
            1,753,145




F-15




**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, 2006, no preferred stock has been issued by the
      Company.





The
      Company has committed 100,000 shares of common stock with a value of $25,000
      to
      the former owners of ImageWorks relating to the acquisition of
      ImageWorks.





During
      the fiscal year ended September 30, 2006 the Company converted $1,094,477 in
      related party long-term debt due to Nuvotec, USA, Inc., into 1,709,303 shares
      of
      common stock. See Note 5.





During
      the fiscal year ended September 30, 2006, 40,000 shares were issued to a related
      party for services and were recorded at fair market value for $20,000. Also
      during the fiscal year, options were exercised at $0.25 in exchange for 33,375
      shares of stock for $8,344 in cash.





During
      2005, 50,000 common shares were issued for the exercise of options previously
      issued legal services at a price of $0.10 per share for a total cost of
      $5,000.





**NOTE
      9 - STOCK OPTIONS AND WARRANTS**





Vivid
      Learning Systems, Inc. 2003 Stock Option Plan


On
      November 25, 2003, the Company adopted the Vivid Learning Systems, Inc. 2003
      Stock Option Plan (“The Plan”) with an option pool of 2,400,000 common stock
      shares for the granting of non-qualified stock options and incentive stock
      options to employees, non-employee directors, and consultants. Each option
      expires 10 years from the grant date or 30 days after termination of employment
      with the Company or 12 months after the optionee’s death or disability. The
      option price, vesting terms, and exercise period are determined by the Company’s
      board of directors at the date of grant. This plan was approved by the
      stockholders in January 2004.




F-16




During
      the year ended September 30, 2005, 318,792 options vested which had been issued
      in 2004, and had a fair value of $25,503.





During
      the year ended September 30, 2005 additional options totaling 87,500 were issued
      of which 21,875 had vested and had a fair value of $3,937.





During
      the year ended September 30, 2006, 36,666 options vested which had been issued
      in 2004, and had a fair value of $5,830.





Options
      issued in 2004 and 2005 were originally valued at approximately $0.16 per option
      using the Black-Scholes Option Price Calculation. The following assumptions
      were
      made in estimating the fair value: risk-free interest is 3%, volatility is
      0.3
      and expected life is 3 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. The fair value
      of
      each option granted is estimated on the grant date using the Black-Scholes
      Option Price Calculation. The
      following assumptions were made in estimating the fair value: risk-free interest
      is 4.75%, volatility is 1.0136 and expected life is 3 to 5 years.





The
      following is a summary of stock option activity:





Equity
                compensation plans approved by Stockholders
            
            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
            
            
            570,940
            
            $
            0.33
            
            
            1,745,685Total
            
            
            570,940
            
            
            
            
            
            1,745,685





Number
                of Shares
            
            Weighted
                Average Exercise PriceOutstanding
                at October 1, 2004
            
            
            866,334
            
            $
            0.24Granted
            
            
            87,500
            
            
            0.25Exercised
            
            
            (50,000
            )
            
            0.10Expired
                or terminated
            
            
            (399,500
            )
            
            0.25Outstanding
                at September 30, 2005
            
            
            504,334
            
            $
            0.25Options
                exercisable at September 30, 2005
            
            
            138,584
            
            $
            0.25Weighted
                average fair value of options granted during 2005
            
            $
            0.18Outstanding
                at October 1, 2005
            
            
            504,334
            
            $
            0.25Granted
            
            
            153,606
            
            
            0.54Exercised
            
            
            (33,375
            )
            
            0.25Expired
                or terminated
            
            
            (53,625
            )
            
            0.25Outstanding
                at September 30, 2006
            
            
            570,940
            
            $
            0.33Options
                exercisable at September 30, 2006
            
            
            365,189
            
            $
            0.31Weighted
                average fair value of options granted during 2006
            
            $
            0.54Total
                compensation costs related to non-vested stock options as of September
                30,
                2006
            
            
            
            
            $
            36,000Weighted
                average period of nonvested stock options as of September 30, 2006
            
            
            
            
            
            2.00
                years




F-17




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 100,000 remain outstanding as
      of
      September 30, 2006. The warrants have an exercise price of $3.00 and a term
      of
      four years. The following assumptions were made in estimating the fair value:
      risk-free interest is 4.75%, volatility is 1.0136 and expected life is 4 years.
      The warrants had no estimated fair market value at issuance.





In
      May
      2005, 80,000 warrants were issued and remain outstanding as of September 30,
      2006. 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, 2006 was $182.





**NOTE
      10 - LEASE COMMITMENTS**





The
      Company rents office space on an annual basis from Nuvotec through December
      31,
      2006 and, thereafter, on a month to month basis and is 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. The Company paid $70,448
      and $121,381 for rent, excise tax and maintenance of this property for the
      years
      ended September 30, 2006 and 2005, respectively **.**





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:





2007
            
            $
            163,4312008
            
            $
            153,0002009
            
            $
            114,2502010
            
            $
            60,0002011
            
            $
            15,000





**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, 2006 and 2005, services provided
      to these contractors aggregated $1,036,023 and $873,278, **** representing
      25% and 24% of total revenue, respectively. At September 30, 2006 and 2005,
      amounts due from these contractors are included in accounts receivable in the
      amounts of $54,614 and $82,05 8,
      respectively.




F-18




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
              Ending
                9/30/06
            
            Fiscal
                Year
              Ending
                9/30/05Revenues—Fluor
              Hanford
            
            $
            785,316
            
            $
            817,962Accounts
                Receivable
              Fluor
                Hanford
            
            $
            27,077
            
            $
            81,272





**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, 2006 and 2005, the
      Company incurred $62,490 and $18,806 in royalty obligations, respectively,
      which
      are recorded in marketing expense. At September 30, 2006 and 2005, the Company
      accrued $0 and $11,719, respectively, in royalty obligations which are recorded
      in other current liabilities on the balance sheet.





**NOTE
      13 - PROPERTY AND EQUIPMENT**





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




September
                30,2006
            
            
            September
                30, 2005Computers
                and equipment
            
            $
            1,060,240
            
            $
            1,103,359Furniture
                and fixtures
            
            
            141,209
            
            
            120,488Leasehold
                Improvements
            
            
            117,202
            
            
            -1,318,651
            
            
            1,223,847Less
                accumulated depreciation
            
            
            (862,828
            )
            
            (892,570
            )Property
                and equipment, net
            
            $
            455,823
            
            $
            331,277





Depreciation
      expense for the years ended September 30, 2006 and 2005 was $44,113 and $73,180,
      respectively.





**NOTE
      14 - ACQUISITIONS**





On
      March
      14, 2005, Vivid Learning Systems, Inc. entered into an asset purchase agreement
      with TrueActive Software, Inc., (“seller”) a Washington corporation. Pursuant to
      the agreement, the Company purchased from the seller intellectual property
      with
      respect to certain software and other assets including seller’s customer
      database, accounts receivable, inventory and marketing materials. The
      consideration for the purchase of assets consisted of $120,000 in cash, an
      interest free $120,000 one year promissory note with principal payments payable
      monthly beginning May, 2005, four year warrants to purchase 80,000 shares of
      the
      Company’s common stock at an exercise price of $1.00 per share vesting over two
      years, and a two year employment agreement with the president of the seller.
      The
      agreement also provided for royalties of 8% of net sales of certain software
      products purchased and 4% of net sales on derivative software products for
      a
      period of three years.




F-19




Effective
      July 1, 2005, Vivid transferred to Nuvotec (its majority shareholder) the
      TrueActive Software assets it was holding in addition to the attendant
      liabilities incurred from the original asset acquisition in March 2005. The
      asset transfer, made at Vivid’s original cost, was part of a corporate
      restructuring. The balance of the liability transferred to Nuvotec was
      $70,000.





**NOTE
      15 - INCOME TAXES**





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





September
                30,
              2006
            
            September
                30,
              2005Amount
            
            Percent
            
            Amount
            
            PercentRecorded
                tax provision
            
            $
            (65,645
            )
            
            34
            
            $
            (498,066
            )
            
            34Amortization
                book totax
                difference
            
            
            (300
            )
            
            nil
            
            
            (2,173
            )
            
            nilStock
                and options effect
            
            
            17,944
            
            
            nil
            
            
            10,010
            
            
            nilOther
                permanent adjustments
            
            
            2,000
            
            
            nil
            
            
            2,089
            
            
            nilTotal
                current tax
              expense
                (benefit)
            
            $
            (46,001
            )
            
            34
            
            $
            (488,140
            )
            
            34





The
      current tax benefit, computed at the federal statutory rate of 34%, is allocated
      to the majority shareholder, Nuvotec, Inc. and 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, 2005 and 2004 are as
      follows:




September
                30,2006
            
            
            September
                30,2005Deferred
                tax asset:Net
                operating loss carryforwards
            
            $
            534,141
            
            $
            488,140Temporary
                difference in
              depreciation
                methods
            
            
            (46,218
            )
            
            (38,069
            )Stock
                options
            
            
            17,944
            
            
            10,010Total
                deferred tax asset
            
            $
            505,867
            
            $
            460,081




**NOTE
      16 -** **SEGMENT
      INFORMATION**





The
      Company has two operating segments at September 30, 2006: training subscriptions
      and custom products and services.




F-20




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
      derives 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,
      2006 and 2005 is as follows:




September
                30, 2006
            
            
            September
                  30,2005Revenues:Training
                subscriptions
            
            $
            2,542,296
            
            $
            2,023,889Custom
                products and services
            
            
            1,599,308
            
            
            1,562,270Total
                Revenues
            
            $
            4,141,604
            
            $
            3,586,159Income
                (loss) before income taxes:Training
                subscriptions
            
            
            1,945,422
            
            
            1,296,321Custom
                products and services
            
            
            854,176
            
            
            731,142Corporate
            
            
            (2,992,620
            )
            
            (3,492,363
            )Income
                (loss) before income taxes
            
            $
            (193,022
            )
            $
            (1,464,900
            )






September
                30, 2006
            
            
            September
                30, 2005Identifiable
                assets:Training
                subscriptions
            
            $
            1,485,038
            
            $
            1,654,305Custom
                products and services
            
            
            379,047
            
            
            226,661Corporate
            
            
            2,871,703
            
            
            3,452,199Total
                Identifiable Assets
            
            $
            4,735,788
            
            $
            5,333,165Depreciation
                and amortization:Training
                subscriptions
            
            $
            269,109
            
            $
            296,551Custom
                products and services
            
            
            112,397
            
            
            115,979Corporate
            
            
            31,716
            
            
            57,201Total
                Depreciationand
                Amortization
            
            $
            413,222
            
            $
            469,731




**NOTE
      17 - SUBSEQUENT EVENTS**





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
      their Engineering and Technical Services (“ETS”) business unit. The Company
      assumed the outstanding liabilities of ETS as payment.




On
      October 20, 2006 the Company converted $670,702 in related party short-term
      debt
      due to Nuvotec USA, Inc., into 1,341,404 shares of common stock. (See Note
      5).





F-21