**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 ANNUAL
        REPORT TO SECTION 13 OR SECTION 15(d) OF THE
 SECURITIES
        EXCHANGE ACT OF 1934
 
 For
        the
        Fiscal Year ended:  September 30, 2005
 
 Commission
        File Number: 333-116255
 
 **VIVID
        LEARNING SYSTEMS, INC.**
 (Exact
        name of Registrant as specified in its charter)
 
 **DELAWARE**
              **42-1623500**(State
                  or other jurisdiction of
                incorporation
                  or organization)
              (I.R.S.
                  Employer Identification No.)
 
 **723
                  The Parkway**
                **Richland,
                  Washington 99352**(Address
                  of principal executive offices, including zip
                  code)
 
 **(509)
                  943-5319**(Registrant's
                  telephone number, including area
                  code)
 
 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
 
 Indicate
        by check mark whether the Registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. YES [X]  NO [  ]
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not 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. [  ]
 
 The
        Registrant’s revenues for the year ended September 30, 2005 were
        $3,586,159.
 
 The
        aggregate market value of the Registrant’s common stock held by non-affiliates
        of the Registrant as of December 27, 2005 (based on the closing sale price
        of
        U.S. $0.60 per share of the Registrant’s common stock, as reported on the Over
        the Counter Bulletin Board on that date) was approximately U.S. $1,230,000
        (based on approximately 2,050,000 shares).  Common stock held by each
        officer and director and by each person known to the Registrant 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 Registrant’s common stock outstanding as of December 28,
        2005 was 11,997,299.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
 None.
  Transitional
        Small Business Disclosure Format (Check one): YES[  ]  NO
        [X]
 
 2
 **TABLE
                    OF CONTENTS****PART
                    1**FORWARD-LOOKING
                    STATEMENTS
                
                4ITEM
                    1.
                
                DESCRIPTION
                    OF BUSINESS
                
                4ITEM
                    2.
                
                DESCRIPTION
                    OF PROPERTY
                
                10ITEM
                    3.
                
                LEGAL
                    PROCEEDINGS
                
                11ITEM
                    4.
                
                SUBMISSION
                    OF MATTERS TO A VOTE OF SECURITY HOLDERS
                
                11**PART
                    II**ITEM
                    5.
                
                MARKET
                    FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                    ISSUER
                    PURCHASES OF EQUITY SECURITIES
                
                11ITEM
                    6.
                
                MANAGEMENT'S
                    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                    OPERATIONS
                
                13ITEM
                    7.
                
                FINANCIAL
                    STATEMENTS
                
                23ITEM
                    8.
                
                CHANGES
                    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE
                
                24ITEM
                    8A.
                
                CONTROLS
                    AND PROCEDURES
                
                24ITEM
                    8B.
                
                OTHER
                    INFORMATION
                
                24**PART
                    III**ITEM
                    9.
                
                DIRECTORS,
                    EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
                
                24ITEM
                    10.
                
                EXECUTIVE
                    COMPENSATION
                
                27ITEM
                    11.
                
                SECURITY
                    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND REALTED
                    STOCKHOLDER MATTERS
                
                28ITEM
                    12.
                
                CERTAIN
                    RELATIONSHIPS AND RELATED TRANSACTIONS
                
                30ITEM
                    13.
                
                EXHIBITS
                
                32ITEM
                    14.
                
                PRINCIPAL
                    ACCOUNTANT FEES AND SERVICES
                
                34
  3
  **** **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.
         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 the
        forward-looking statements, which speak only as of the date of this report.
         We undertake no obligation to publicly release any revisions to the
        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 80%
        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".
 
 **History
        of Parent Company Nuvotec USA, Inc.**
 
 Approximately
        80% 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.
  4
  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 and plasma technology
        commercialization efforts focused on commercial waste treatment. Nuvotec
        USA,
        Inc. was formed in August 2004 by the merger of Nuvotec, Inc. and Pacific
        EcoSolutions, Inc. (PEcoS).
 
 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 shareholders 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 shareholders 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 shareholders.
 
 **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.
  5
  **Vivid's
        Products**
 
 Vivid
        produces, markets and delivers web-based compliance training programs designed
        to help companies meet mandated local, 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: The Occupational Health and Safety Act
        (OSHA), Employment Law/Awareness Training based on federal employment laws;
        The
        Joint Commission on the Accreditation of Healthcare Organizations (JCAHO);
        The
        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 DOT
        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 third party LMS's.
 
 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 a $50 billion-a-year industry that is projected to grow to $90
        billion in the next five years, and almost all of that growth will come from
        e-learning applications utilizing the Internet according to Chief Learning
        Officer magazine. 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 US Dept. of Labor, the American
        Society for Training and Development and Richard K. Miller and Associates.
  According
        to the U.S Dept. of Labor, companies in the U.S currently spend between 1.5-2.0%
        of payroll on training. Companies are currently under-training in the compliance
        training area. It is anticipated that the compelling cost savings derived
        from
        online vs. traditional training methods will be used to provide more training
        for the same dollar.
  **Sales
        and Marketing**
  The
        Company employs both a direct sales strategy and a channel sales strategy
        concurrently. Vivid sells its products and services directly through an in-house
        sales team (Vivid employees) and through channel sales partners which include
        independent resellers, value-added resellers, associations and consultants.
        The
        members of Vivid’s in-house sales team are comprised of Industry Managers and
        Account Representatives. The Industry Managers have sales and management
        responsibilities in different vertical industries and are responsible for
        managing the Account Representatives, direct sales and 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.
  6
  Through
        reseller agreements and associations, Vivid’s products and services are marketed
        nationally, in Canada and 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; Pathlore Software
        Corporation; Ziemens Medical 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 22% of revenues in fiscal year 2005, and 14% of revenues in
        fiscal
        year 2004. The contract with Fluor Hanford expired September 30, 2005 and
        was
        renewed for three (3) years, with the first extension year funded and funding
        for the other two years subject to annual government budgets.
 
 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 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 Department of Energy contractors on the Hanford site.
        Vivid maintains and services two local training centers and provides
        authenticators to proctor the training centers.
 
 Element
        K, a major reseller, was Vivid's second largest customer in fiscal year 2005
        and
        accounted for approximately 10% of revenues through it significant customer
        base
        throughout the U.S.
  Vivid's
        second largest customer in 2004 was the Pennsylvania State System of Higher
        Education Foundation,
        Inc., which accounted for approximately 15% of revenues in fiscal year 2004
        but
        only 1% in 2005. This contract was for the development of online regulatory
        and
        compliance training programs to be used annually by targeted industries in
        Pennsylvania. This contract is set to expire on June 30, 2006 and has not
        been
        formally terminated. However, it now appears that the contract informally
        terminated in or about June of 2005. Vivid has not received any revenue from
        this contract since January of 2005 and does not expect to receive any further
        revenue from this contract.
 
 Vivid's
        primary market focus is in the following industries: general manufacturing;
        healthcare; utility mining and food services.
 
 1.
        In the
        general manufacturing industry, Vivid currently markets and delivers the
        following on line training programs to help companies meet applicable federal
        and or state and local regulations: Occupational Health and Safety
        Administration (OSHA) training; DOT 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.
  7
 
 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, Health Insurance Portability and Accountability Act (HIPAA) training
        as well as 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.
  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 equipment 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
        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, 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 2005 Vivid made one acquisition.
 
 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.
 
 8
 
 **Employees**
  Vivid
        currently has 34 full-time employees and 10 part-time employees. Nine full-time
        employees are in sales, 17 full-time employees are in production, 8 full-time
        employees are administrative and sales support, and 8 are part-time
        authenticators (test proctors), 1 part-time in administrative, and 1 part-time
        in production. Vivid plans to add two or more additional employees in fiscal
        year 2006. None of the employees are subject to any collective bargaining
        agreements.  There
        are
        no employment agreements.
 
 The
        Company leases all of its employees from Human Resources Novations, Inc.,
        a
        professional employer organization. Under this arrangement, Human Resources
        Novations provides payroll services, employee benefits, and human resource
        expertise to the Company’s management and employees.
  Under
        the
        terms of the contract with Human Resources Novations, Inc., the Company pays
        for
        the actual costs of gross personnel earnings, benefits, and federal and state
        payroll taxes, an administrative 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, Human Resources Novations, 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 (3) 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 that 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, GoTrain, Coastal, QuickCompliance and
        FirstNet Learning.
 
 **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.
 
 9
 
 **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), the Joint Commission on the Accreditation of Healthcare
        Organizations (JCAHO), the 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
        (FDA) guidelines, surface miner training based on the Mining Safety and Health
        Administration regulations, and training to address some of the Department
        of
        Transportation (DOT) requirements.
 
 A
        tightening or loosening of these regulations and their enforcement by state
        and
        federal lawmakers may have either a negative or positive impact on Vivid’s
        ability to sell these training programs. An example of a positive impact
        on
        Vivid’s training revenue was the recent introduction of stronger training
        requirements instituted by MSHA. An example of a negative impact was the
        current
        administrations 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 is at 723 The Parkway, Richland, Washington. Our training
        center is located at 2345 Stevens Road, Richland, Washington. Our video
        production facilities are located at 5710 Bedford, Pasco,
        Washington.
  The
        Company's corporate office at 723 The Parkway is space that the Company's
        parent
        corporation (its largest shareholder) Nuvotec USA, Inc. leases. The Company
        currently does not pay 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. Nuvotec's lease requires monthly
        payments of $12,865.
  The
        Company leases its training center at 2345 Stevens Road from Nuvotec, Vivid's
        parent corporation, 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 space leased by Nuvotec. The Company paid $121,381
        and
        $63,267 for rent, excise tax and maintenance of this property for the fiscal
        years ended September 30, 2005 and 2004, respectively. On December 31, 2002,
        Nuvotec entered into a lease with the Port of Benton, a municipal corporation,
        for 16,500 square feet of office space and for 23,000 square feet of warehouse
        space (used by Thermal Conversion Corp, a wholly-owned subsidiary of Nuvotec)
        at
        2345 Stevens Road, Richland, Washington. Nuvotec's original lease runs for
        three
        years with an option to extend for five successive terms of three years each.
        The rent through December 31, 2005 for the above space is $12,127 per month.
        In
        addition, Nuvotec is responsible for payment of 12.84% excise tax and
        maintenance of the property. At one time Nuvotec paid less than the full
        amount
        of contracted rent because of a rent abatement program offered by the Community
        Economic Revitalization Board; however that program is no longer in effect.
        Nuvotec paid $194,910 in rent on this lease in 2005 and $115,861 in 2004,
        net of
        the rent abatement. Nuvotec has negotiated a new lease that will take effect
        January 1, 2006. The lease is a one year lease with three one year options.
        The
        monthly rent is $8,647, plus excise tax and maintenance.
  10
  The
        Company leases its video production facilities at 5710 Bedford 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.
 
 **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 percent of the Company's current assets.
  **ITEM
        4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
        HOLDERS**
 
 No
        matters were submitted to a vote of security holders during the 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”.
 The following table sets forth, for the fiscal quarters indicated, the
        high and low bid prices per share of our common stock as reported on the
        OTCBB.
 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, 2005September
                  30, 2005
              
              $
              0.53
              
              $
              0.40June
                  30, 2005
              
              
              NA
              
              
              NAMarch
                  30, 2005
              
              
              NA
              
              
              NA
 
 Source:
         OTCBB and Pink Sheets, Inc.
 
 On
        December 8, 2005, the closing bid price for our common stock was
        $0.55.
 
 SHAREHOLDERS
 
 As
        of
        December 21, 2005, there were 74 shareholders of record of the Company’s common
        stock.
  11
  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, 2005,
        concerning outstanding options to purchase common stock granted to participants
        in all of the Company’s equity compensation plans and the number of shares of
        common stock remaining available for issuance under such equity compensation
        plans.
 
 EQUITY
        COMPENSATION PLAN INFORMATION
 
 Plan
                  Category
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))(a)
              (b)
              (c)Equity
                  compensation plans approved by security holders
              504,334
                  (1)
              $0.25
              1,845,666Equity
                  compensation plans not approved by security holdersTotal
              504,334
              $0.25
              1,845,666
  (1)
        Represents stock options issued pursuant to the Company’s 2003 Non-Statutory
        Stock Option Plan.
 
 RECENT
        SALES OF UNREGISTERED SECURITIES
 
 On
        March
        14, 2005, Vivid entered into an Asset Purchase Agreement with TrueActive
        Software, Inc., a Washington corporation ("TrueActive"). The consideration
        for
        the purchase of the assets included, among other things, 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.
  12
  Nuvotec
        has been providing financial resources for the Company recorded as an
        inter-company payable 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 November 16, 2005, inter-company
        payables in the amount of $375,000 were reduced by Nuvotec in exchange for
        750,000 shares of Vivid common stock. The exchange ratio was based on the
        then
        current per share trading price for Vivid common stock of $0.50 per share.
        On
        December 20, 2005, inter-company payables in the amount of $719,477 were
        reduced
        by Nuvotec in exchange for 959,303 shares of Vivid common stock. The exchange
        ratio was based on the then current average per share trading price for Vivid
        common stock of $0.75 per share.
 
 In
        October 2005, our CEO Christopher L. Britton was issued 40,000 shares of
        our
        common stock as part of his compensation package.
 
 The
        issuances of securities described above were deemed to be exempt from
        registration under 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 enough 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 have not been registered under the
        Securities Act and cannot 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, 2005.
  **ITEM
        6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS**
 
 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.
  13
  **Overview**
 
 Vivid
        revenues fell by 22% over the past year. The reduction in revenues is
        attributable to a 39% reduction in training subscription revenues largely
        attributable to the loss of a contract with the Pennsylvania State System
        of
        Higher Education Foundation, Inc. Vivid’s gross profit also fell from 72% in
        fiscal year 2004 to 57% of revenues in fiscal year 2005, because of a larger
        proportionate share of revenue being attributable to lower margin custom
        products and services revenues.
 
 **Critical
        Accounting Policies**
 
 The
        preparation of our consolidated financial statements in conformity with
        accounting principles generally accepted in the United States requires us
        to
        make estimates and assumptions that affect the amounts reported in the financial
        statements and accompanying notes. The estimates and assumptions are evaluated
        on an ongoing basis and are based on historical experience and on various
        other
        factors that are believed to be reasonable. Accounts significantly impacted
        by
        estimates and assumptions include, but are not limited to, fixed asset lives,
        recovery of long-lived assets and income taxes. If we had made different
        estimates or assumptions, our results of operations would have been affected.
 
 We
        believe that the following items, although not exclusive, represent our more
        critical accounting policies and estimates used in the preparation of our
        consolidated financial statements.
 
 Below
        is
        a recap of the Company’s major accounting policies. Also, refer to the audited
        financial statements of Vivid for a more detailed listing of critical accounting
        policies.
 
 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, 2005 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.
  14
  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 two
        years. The Company pays these partners a referral fee, or a commission, of
        between five and fifty percent of net revenue depending upon their annual
        sales
        levels and other criteria. None of these U.S.-based contracts is exclusive,
        or
        restricts the Company from selling directly or through other channel partners
        into any markets. The Company does have one contract in place with a European
        reseller that is country-specific, exclusive, and has a duration of two years.
        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 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 Human Resource Novations,
        Inc., a professional employer organization. Leased employees are entitled
        to
        paid personal time, which is accrued in the accounts as a current expense
        and
        liability, dependent upon the length of service.
 
 Software
        Development Costs—Costs incurred for the internal development of software
        training content and enhancements, after technological feasibility has been
        established for the related content, are capitalized and stated at the lower
        of
        cost or net realizable value. Amortization is provided based on the
        straight-line method over the remaining economic life of the software training
        content, 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. 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.
  15
  **RESULTS
        OF OPERATIONS**
  Our
        fiscal year ends September 30. Our operating results for the years ended
        September 30, 2005 and 2004 are presented below.
 
 Year
                  Ended
                September
                  30, 2005
              
              Year
                  Ended
                September
                  30, 2004REVENUES
              
              $
              3,586,159
              
              $
              4,588,184COST
                  OF REVENUES
              
              
              1,558,696
              
              
              1,270,309GROSS
                  PROFIT
              
              
              2,027,463
              
              
              3,317,875EXPENSESMarketing
                  & related labor expenses
              
              
              941,039
              
              
              1,264,073Bad
                  debt expense
              
              
              171,230
              
              
              73,138Reseller
                  commissions
              
              
              250,962
              
              
              371,375Depreciation
                  & amortization
              
              
              173,180
              
              
              84,774Wages
                  and contract labor
              
              
              915,713
              
              
              426,729Other
                  Operating expenses
              
              
              1,062,313
              
              
              647,634TOTAL
                  OPERATING EXPENSES
              
              
              3,514,437
              
              
              2,867,723INCOME
                  FROM OPERATIONS
              
              $
              (1,486,974
              )
              $
              450,152OTHER
                  INCOME EXPENSEGain
                  on settlement of debt
              
              
              75,000Other
                  income
              
              
              2,713Interest
                  income
              
              
              569
              
              
              1,548Interest
                  expense
              
              
              (56,208
              )
              
              (12,736
              )TOTAL
                  OTHER INCOME (EXPENSE)
              
              
              22,074
              
              
              (11,188
              )INCOME
                  (LOSS) BEFORE INCOME TAXES
              
              
              (1,464,900
              )
              
              438,964INCOME
                  TAX BENEFIT (EXPENSE)
              
              
              488,140
              
              
              (153,567
              )NET
                  INCOME (LOSS)
              
              $
              (976,760
              )
              $
              285,397BASIC
                  NET INCOME (LOSS) PER SHARE
              
              
              (0.10
              )
              
              0.03DILUTED
                  NET INCOME (LOSS) PER SHARE
              
              
              (0.10
              )
              
              0.03WEIGHED
                  AVERAGE NUMBER OF COMMON STOCK SHARES OUTSTANDING:BASIC
              
              
              10,247,996
              
              
              8,990,220DILUTED
              
              
              10,247,996
              
              
              9,602,965
  16
  **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, 2005 and 2004 are as follows.
 
 Training
                  Subscriptions
              
              **Sept.
                  30, 2005**
                **(year
                  ended)**
              
              **Percent
                  of Revenue**
              
              **Sept.
                  30, 2004**
                **(year
                  ended)**
              
              **Percent
                  of Revenue**
              
              **Percent
                  Increase (Decrease)**Revenues
              
              
              2,023,889
              
              
              100
              %
              
              3,305,089
              
              
              100.0
              %
              
              (38.7
              )%Cost
                  of Revenues
              
              
              338,854
              
              
              16.7
              %
              
              306,160
              
              
              9.3
              %
              
              10.7
              %Gross
                  Profit
              
              
              1,685,035
              
              
              83.3
              %
              
              2,998,929
              
              
              90.7
              %
              
              (43.8
              )%
 
 Custom
                  Products and Services
              
              **Sept.
                  30, 2005**
                **(year
                  ended)**
              
              **Percent
                  of Revenue**
              
              **Sept.
                  30, 2004**
                **(year
                  ended)**
              
              **Percent
                  of Revenue**
              
              **Percent
                  Increase (Decrease)**Revenues
              
              
              1,562,270
              
              
              100
              %
              
              1,283,095
              
              
              100.0
              %
              
              21.8
              %Cost
                  of Revenues
              
              
              1,219,842
              
              
              78.1
              %
              
              964,149
              
              
              75.1
              %
              
              21
              %Gross
                  Profit
              
              
              342,428
              
              
              21.9
              %
              
              318,946
              
              
              24.9
              %
              
              (7.4
              )%
 
 **Comparison
        of year ended September 30, 2005 to September 30, 2004**
 
 Total
        Revenues. Total revenues decreased by $1,002,025, or 22%, to $3,586,159 in
        2005
        from $4,588,184 in 2004. The decrease was due in part to a reduction in training
        subscription revenues largely attributable to the loss of the contract with
        the
        Pennsylvania State System of Higher Education Foundation, Inc. Training
        Subscription revenues earned are subject to minor amounts of direct production
        expenses and, therefore, generate high gross margins. Total gross profit
        as a
        percentage decreased to 57% for the year ended September 30, 2005 compared
        to
        72% for year ended September 30, 2004.  This decrease was largely due to a
        more significant portion of the overall revenue being attributable to the
        lower
        margin custom products and services segment of the business.
 
 Training
        Subscription revenues decreased by $1,281,200, or 39%, to $2,023,889 for
        the
        fiscal year ended September 30, 2005 compared to $3,305,089 for the fiscal
        year
        ended September 30, 2004. Training Subscriptions accounted for 56% and 72%
        of
        total revenues respectively in fiscal year 2005 and fiscal year 2004. The
        decrease in Training Subscription revenues was due to loss of the revenue
        from
        the Pennsylvania State System of Higher Education Foundation, Inc., which
        was
        our second largest customer in 2004. Also some smaller customers chose not
        to
        renew their subscription contracts.
  17
  Custom
        Products and Services generated a lower gross profit because such revenue
        is
        matched to specific labor costs for the contractual task in order to generate
        the revenue for the custom project. The revenue derived from Training
        Subscriptions is based on content that has already been built previously
        with
        only minor customization costs required at times as an additional cost to
        deliver the content to a specific customer. Training Subscription gross profits
        were 83% in fiscal year 2005 and 91% in fiscal year 2004.
  Vivid
        launched two new content libraries during fiscal year 2005. One new library
        was
        Food Manager Training. The other new library launched late in fiscal year
        2005
        was Bereavement Training. These two new libraries are part of the Training
        Subscriptions operating segment.
 
 Custom
        Products and Services revenues increased by $279,175, or 22%, to $1,562,270
        for
        the fiscal year ended September 30, 2005 compared to $1,283,095 for the fiscal
        year ended September 30, 2004. The increase in Custom Products and Services
        was
        due to the inclusion in Vivid’s consolidated financial statements of the full
        year impact of subsidiary, ImageWorks acquired in fiscal year 2004. Gross
        profits generated from Custom Products and Services for fiscal year ending
        September 30, 2005 were $342,428 and 22% of revenues compared to $318,946
        and
        25% for fiscal year ended September 30, 2004. This minor decrease in the
        percentage of gross profit margin was largely due to the full year impact
        of
        newly acquired subsidiary, ImageWorks.
 
 Custom
        Products and Services accounted for 44% and 32% of total revenues respectively
        in fiscal year 2005 and fiscal year 2004. The increase is attributable to
        a
        reduction in overall revenues of the training subscriptions segment of the
        business.
 
 **Cost
        of Revenues**
 
 Cost
        of
        revenues increased by $288,387, or 23%, to $1,558,696 in 2005 from $1,270,309
        in
        2004 primarily due to a larger proportionate share of lower margin custom
        products and services revenues as compared to training subscription revenues
        in
        comparing fiscal year 2005 to fiscal year 2004. Much of the increase in custom
        products and services direct expenses in fiscal year 2005 is attributable
        to the
        custom products and services type of the revenues generated by the newly
        acquired subsidiary, ImageWorks, and technical assistance support expenses
        incurred in the delivery of custom projects. Cost of revenues as a percentage
        of
        sales increased to 43% in 2005 from 28% in 2004; this cost increase was largely
        due to the lower margin Custom Products and Services work generated from
        ImageWorks. Training Subscription revenues earned are subject to minor amounts
        of direct production expenses and, therefore, generate high gross margins.
        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 Vivid production group required to build software content and/or complete
        the tasks required by contracts/services from specific
        customers/clients.
 
 Training
        subscription cost of revenues increased by 11% to $338,854 in fiscal year
        2005
        from $306,160 in fiscal year 2004. This increase is due to higher expenses
        incurred in the delivery of training subscription contracts sold.
 
 Custom
        products and services cost of revenues increased by 22% to $1,219,842 in
        fiscal
        year 2005 from $964,149 in fiscal year 2004. The increase is partially due
        to
        the full year costs of revenue attributable to the ImageWorks operation of
        $407,964 in fiscal year 2005. Also, significant expenses were incurred in
        building the infrastructure of the custom products and services operating
        segment, which had the effect of increasing the direct costs attributable
        to
        custom products and services revenues in fiscal year 2005. These infrastructure
        expenses included increased salaries of newly acquired production personnel
        and
        technical assistance support for custom projects.
  18
  The
        elements of labor that comprise the Vivid 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 decreased by $323,034, or 26%, to $941,039
        in 2005 from $1,264,073 in 2004. The decrease was due in part to a  reduction
        in force of internal sales resources and the corresponding decrease in travel,
        advertising and trade show budgets. Also, sales commissions of $125,379 were
        significantly lower in fiscal year 2005 than $196,371 in 2004 due to lower
        sales
        and a restructuring of the compensation plan related to sales
        commissions.
 
 **Reseller
        Commissions.** Reseller
        commissions decreased $120,413 to $250,962 in 2005 from $371,375 in 2004.
        This
        expense reduction was due to a reduction in training subscription revenues
        generated from sales resources external to the Company.
 
 **Bad
        debt expense.** Bad debt
        expense rose to $171,230 in fiscal year 2005 from $73,138 in fiscal year
        2004.
        This increase was primarily due to the write off of revenue that had been
        due
        from the Pennsylvania State System of Higher Education Foundation,
        Inc.
 
 **Depreciation
        and Amortization.** Depreciation and amortization increased by $88,406, or 104%, to $173,180
        in 2005
        from $84,774 in 2004. The increase was primarily due to the inclusion of
        a full
        year’s depreciation from the fixed assets of newly acquired subsidiary,
        ImageWorks, and the amortization of related ImageWorks intangibles acquired
        in
        fiscal year 2004.
 
 **Wages
        and Contract Labor.** Wages
        and contract labor increased by $488,984, or 115%, to $915,713 in 2005 from
        $426,724 in 2004 due to increased administrative labor support in the management
        of newly acquired ImageWorks and the hiring of a Chief Technology Officer
        to
        oversee the administration of Vivid’s production capabilities expansion. The
        costs included in “wages and contract labor” are administrative labor costs
        unrelated to the direct costs of building software content, or fulfilling
        the
        tasks required by a custom project contract. Such labor includes administrative
        and clerical support, general management, and other labor overhead type
        activities, including payroll taxes and benefits.
 
 **Other
        Operating Expenses.** Other
        operating expenses increased by $414,679, or 64%, to $1,062,313 in 2005 from
        $647,634 in 2004. These expenses primarily consist of administrative overhead.
        The main categories of increase are professional fees, which is related to
        increasing auditing, board and legal fees associated with becoming a publicly
        traded entity, rents, which is due mainly to the expiration of rent abatement
        from the underlying landlord, Port of Benton, and insurance, which is due
        to new
        premiums for directors and officers liability coverage, and an overall increase
        in liability coverage requirements as a result of becoming a publicly reporting
        company.
  19
  **Interest
        Expense.** Interest
        expense increased to $56,208 in 2005 compared to $12,736 in 2004. The interest
        expense increase is from full utilization of a line of credit, via the Company's
        parent Nuvotec, currently with Key Bank.
 
 **Income
        Tax Benefit (Expense).** Income
        tax expenses decreased by $641,707 or 418%, to a benefit of $488,140 in 2005
        from an expense of $153,567 in 2004 primarily due to a decrease in Income
        Before
        Income Taxes from $438,964 in 2004 to a loss of $1,464,900 in 2005.
 
 **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 which we find 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 10 years. Other than the loss
        of
        revenue from the Pennsylvania State System of Higher Education Foundation,
        Inc.
        in 2005, the Vivid management team has not experienced any infrequent events,
        transactions or significant economic conditions that materially impact the
        amount of revenue.
 
 **Liquidity
        and Capital Resources**
  We
        have
        funded our liquidity and capital requirements in recent years through cash
        flow
        from operations, the private sale of equity securities in 2004 and an ongoing
        line of credit that our major shareholder Nuvotec has obtained from Key Bank.
        Cash available at September 30, 2005 was $16,622 compared to $49,451 cash
        available at September 30, 2004. Cash available does not include the line
        of
        credit referenced below.
  In
        March
        2004 the Company raised $496,999, less issuance costs of $74,200, in a private
        sale of its equity securities.
 
 As
        of
        September 30, 2005, the Company’s major shareholder has a line of credit with
        Key Bank with a maximum credit facility of $1,000,000. The interest rate
        is one
        half percent above Key Bank's prime rate. The Company has an underlying
        intercompany agreement with the major shareholder to make draws as required
        for
        operations on the line of credit. All borrowings under this line at September
        30, 2005 are attributable to the Company and are recorded as a short-term
        related party payable. The Company has drawn down $1,000,000 of this line
        of
        credit and $0 remains available on the line of credit. This line of credit
        with
        Key Bank replaced the Company's line of credit with Columbia Trust Bank held
        in
        2004. This line of credit agreement is between Key Bank and Nuvotec USA,
        Inc.,
        Vivid's parent corporation. Vivid is one of the corporate guarantors on the
        line, as is Nuvotec. Both Nuvotec and Vivid have separate checking accounts
        at
        Key Bank. As Vivid requires working capital, it draws down on the line and
        such
        draw downs are placed in Vivid's account, but since it has no formal line
        of
        credit agreement with the bank, the draw down is recorded by the bank as
        a
        Nuvotec draw down. Therefore, Vivid is making its draw downs based upon a
        written agreement between Vivid and Nuvotec. The internal agreement between
        Vivid and Nuvotec regarding draw-downs on the credit line is documented in
        a
        written agreement executed by the management of the two companies. Vivid’s usage
        requirement of the credit line for its operation is separately accounted
        for
        (draw downs and repayments), and interest expense on its usage are reflected
        accordingly in intercompany accounts on the books of Vivid and
        Nuvotec.
  20
  **Net
        Cash Provided by Operating Activities.** During
        the years ended September 30, 2005 and 2004, net cash used and provided by
        operating activities was $462,253 and $178,859 respectively. Net cash provided
        by operating activities decreased by $641,112 primarily due to the net loss
        in
        fiscal year 2005.
 
 **Net
        Cash Used in Investing Activities.**
 Net
        cash
        used in the year ended September 30, 2005 was $359,577, of which $93,127
        was
        used for the acquisition of fixed assets and $266,450 was used for the
        acquisition of software.
 
 Net
        cash
        used in investing activities in the year ended September 30, 2004 was
        $1,121,275, of which $519,451 was used for the acquisition of software for
        an
        expanding course content library, and $601,824 was used for the acquisition
        of
        computer hardware, office equipment, and intangibles, primarily the acquisition
        of ImageWorks.
 
 **Net
        Cash Provided by Financing Activities.**
 
 For
        the
        year ended September 30, 2005, net cash provided by financing activities
        was
        $789,001. Financing activities for the year ended September 30, 2005 primarily
        consisted of a line of credit through Key Bank, and funding of operations
        through inter-company payable advances by the major shareholder of the Company.
        Vivid's major shareholder Nuvotec has this line of credit and renewed it
        on
        March 15, 2005. The line of credit has a maturity date of March 15, 2006,
        a
        maximum credit amount of $1,000,000. The interest rate is one half percent
        above
        Key Bank's prime rate. The interest rate is a variable and tied to Key Bank's
        prime rate.
 
 For
        the
        year ended September 30, 2004, net cash provided by financing activities
        was
        $789,001. Financing activities for the year ended September 30, 2004 primarily
        consisted of a private offering of our common stock at $.25 per share which
        resulted in proceeds of $422,799. This sale took place in March of 2004.
        Also at
        the end of March 2004 our line of credit switched from Columbia Trust Bank
        to
        Key Bank. The Columbia Trust Bank line was paid off by Key Bank by March
        31,
        2004, but the new line of credit note with Key Bank did not begin until April
        8,
        2004.
  The
        net
        draw increase in the line of credit as of September 30, 2005 as compared
        to
        September 30, 2004 was $227,975. The draw on the line of credit was fully
        utilized during most of the year ended September 30, 2005 as compared to
        the
        year ended September 30, 2004 and, therefore, the amount of interest expense
        was
        significantly higher. The draw requirement was increased due to the financing
        of
        receivables related to expanding operations during the year ended September
        30,
        2005 compared to September 30, 2004. During the year ended September 30,
        2005
        the assets of TrueActive Software were acquired. The acquisition was financed
        from operations and draws from the major shareholder. During the year ended
        September 30, 2004 ImageWorks was acquired. The acquisition was partially
        financed from the proceeds of the private placement mentioned above, which
        also
        was conducted during the year ended September 30, 2004.
  Cash
        available at September 30, 2005 was $16,622 compared to $49,451 at September
        30,
        2004.
 
 **Accounts
        and Contracts Receivable.** The
        decrease in net receivables as of September 30, 2005 compared to the balance
        as
        of September 30, 2004 was $373,491. The decrease in receivables is attributable
        primarily to a decrease in revenues of $1,002,025, or 22%, between the two
        periods. This is largely due to the loss of the contract with the Pennsylvania
        State System of Higher Education Foundation, Inc. which informally terminated
        in
        or about June 2005. 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. In fiscal year 2005 the write-off was 4.8%.
  21
  **Future
        Needs.** We
        believe that our anticipated cash flow from operations and our line of credit,
        will be sufficient to satisfy our capital 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
        including funding of the options of the HGET contract, customer retention,
        new
        product development, expanded marketing requirements, and future acquisitions.
        Changes in these factors, or other unexpected events may cause us to seek
        additional financing sooner than anticipated. Financing may not be available
        on
        acceptable terms, or at all, and our failure to raise capital could have
        a
        material adverse effect on our growth plans and our financial condition and
        results of operations.
  **Other
        Material Events.** Vivid’s
        management is not aware of any current or anticipated material events that
        are
        reasonably likely to have a material impact on future operations or liquidity
        other than the loss of the State of Pennsylvania business, discussed elsewhere,
        and the acquisition of ImageWorks Media Group, Inc. discussed below. Other
        possible negative material events include downward pricing pressure, a marked
        decline in the subscription renewal rate, a marked decline in the Vivid revenue
        growth rate, a loosening or rollback in the regulatory environment, unforeseen
        technologies which render the Vivid program less competitive and the inability
        to raise capital to adequately fund our growth strategy.
 
 On
        August
        31, 2005 Vivid completed negotiations and executed an extension to its Hanford
        General Employee Training (“HGET”) contract with Fluor Hanford, Vivid's largest
        customer and a primary management contractor for Project Hanford, a U.S.
        Department of Energy site. The contract award is for three (3) years, with
        the
        first extension year funded and funding for the other two years subject to
        annual government budgets. Vivid has held the contract for the HGET scope
        of
        work since 1995, wherein Vivid is responsible for producing, updating, and
        delivering the computer and Hanford LAN-based HGET program to Fluor Hanford
        contractors and other U.S. Department of Energy contractors on the Hanford
        Site.
 
 On
        March
        14, 2005, Vivid entered into an Asset Purchase Agreement (the "Agreement")
        with
        TrueActive Software, Inc., a Washington corporation. 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 price 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)
        warrants with a four year term 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; and 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.
  22
  In
        May
        2004 Vivid purchased ImageWorks Media Group, Inc. through a combination of
        up
        front cash, cash payments over fourteen months, stock options and warrants.
        The
        cash impact to Vivid liquidity of the purchase price of this acquisition
        is
        material in the short-term. Contractual cash payments for the purchase totaling
        $650,000 were made within the first 14 months of the purchase. In the long-term
        an additional $600,000 in contingent cash payments in lieu of stock/warrants
        may
        be required, which may impact the current cash position of the Company. In
        February 2005 Vivid made an additional payment of $75,000 as the sellers
        elected
        to receive a cash payment in lieu of exercising warrants.
 
 **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’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;
  •  As
        noted
        above, the Company has guaranteed the market price of common stock to be
        issued
        in connection with the acquisition of ImageWorks at a strike price of $3
        per
        share. This transaction represents 100,000 shares, which is slightly less
        than
        1% of the currently issued outstanding shares of the Company. The potential
        cash-out on the warrants is discussed above. If the warrants are exercised
        then
        200,000 additional shares could be issued, which presently represent
        approximately 2% of the issued outstanding shares of the Company. Future
        equity
        raises will dilute the overall impact on the Company of the issuance of common
        stock associated with this transaction and the potential impact on the exercise
        of warrants linked to this transaction.
  •   There
        are
        no capital leases and related capital lease obligations in the
        Company.
  •  Future
        minimum lease payments for the Company total $51,636 for operations in fiscal
        year 2006 at the 2345 Stevens Drive, Richland, WA location and $54,000 for
        operations in fiscal year 2006 at the Bedford property (January 2006 move-in);
        and $48,000 allocated for office space for the years 2005-2008 at the
        administrative office location of 723 The Parkway, Richland, WA. The Company
        also leases office space for its subsidiary ImageWorks with minimum lease
        payments of $426,250 due in fiscal years 2005-2008. Nuvotec has negotiated
        a new
        lease that will take effect January 1, 2006. The lease is a one year lease
        with
        three one year options. The monthly rent is $8,647, plus excise tax and
        maintenance.
 
 **Material
        Commitments for Capital Expenditures.** There
        presently exist no material commitments to outside vendors for capital
        expenditures. As part of the general replacement budget, $100,000 is budgeted
        for fiscal year 2006 in general purpose replenishment of fully depreciated
        hardware and software. The anticipated funding source for this budget item
        will
        be the cash flows generated by operations.
 
 **ITEM
        7.  FINANCIAL STATEMENTS**
 
 The
        financial statements and report of independent registered certified public
        accounting firm are included herein immediately following the signature page
        to
        this report.  See Item 13 for a list of the financial statements
        included.
 
 23
 
 **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 2005.
 
 **ITEM
        8A.  CONTROLS AND PROCEDURES**
 
 Our
        current principal executive officer and principal financial officer evaluated
        the effectiveness of the Company’s disclosure controls and procedures (as
        defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
        of
        1934, as amended) as of the end of the period covered by this report. Based
        on
        this 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
        Securities and Exchange Act of 1954, as amended, is recorded, processed,
        summarized and reported within the time periods specified in the SEC’s rules and
        forms.
 
 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 AND CONTROL
        PERSONS**
 
 **Directors
        and Officers**
 
 The
        following are Vivid's directors and executive officers. The terms of the
        directors are staggered, with 1, 2, or 3 years remaining on their terms.
        The
        terms of all officers expire at the next annual meeting of the board of
        directors and upon the election of the successors of such officers.
 
 Name
              
              Age
              
              PositionChristopher
                  L. Britton
              
              
              57
              
              
              CEO
                  and Vice ChairmanMatthew
                  J. Hammer
              
              
              40
              
              
              Chief
                  Operating OfficerRobert
                  M. Blodgett
              
              
              55
              
              
              Chief
                  Financial Officer and TreasurerSandra
                  I. Muller
              
              
              49
              
              
              Corporate
                  Secretary and General CounselRobert
                  L. Ferguson
              
              
              73
              
              
              Chairman
                  of the Board of DirectorsWilliam
                  N. Lampson
              
              
              56
              
              
              DirectorAndrew
                  Thoresen
              
              
              61
              
              
              DirectorRobert
                  J. Turner
              
              
              59
              
              
              DirectorSteven
                  Katz
              
              
              57
              
              
              Director
  24
  **Christopher
        L. Britton** has
        served as Vivid's Chief Executive Officer and as Vice-Chairman of the Board
        Directors since October, 2005. Mr. Britton has over 30 years of business
        experience as a Chief Executive Officer, Chief Operating Officer, and Chief
        Financial Officer of entrepreneurial companies and as a partner in an
        international public accounting firm. Mr. Britton served as the COO and CEO
        for
        Doyle Technology Consultants, Inc., a systems design and integration company
        from 2001 to 2005. He was a founder and President of Parallax Management
        Group,
        a consulting company offering services to development stage companies from
        1991
        to 2001, and a co-founder and CFO of Relational Benefits Technology a
        development stage software company Mr. Britton also was a partner at the
        international public accounting and management consulting firm of Deloitte
&
Touche from 1971to 1991. Mr. Britton is a Certified Public Accountant with
        a BA
        degree in Accounting and an MBA degree from the University of
        Washington.
 
 **Matthew
        J. Hammer** has
        served as Vivid's Chief Operating Officer since July, 2005. Mr. Hammer
        co-founded ImageWorks, a media development company, in 1994 and has served
        as
        its President since that time. In 2004, ImageWorks was purchased by Vivid
        Learning Systems. Mr. Hammer’s primary responsibility for Vivid and ImageWorks
        are business development, project management, marketing, and client services.
        Mr. Hammer has a BA degree in Marketing and Business Administration from
        Washington State University.
  **Robert
        M. Blodgett** has
        served as Vivid's Chief Financial Officer and Treasurer since October 1996.
        Mr.
        Blodgett has served as Nuvotec's Chief Financial Officer and Treasurer since
        December 1998. From 1988 to 1995 Mr. Blodgett served as corporate secretary,
        treasurer and international vice president of finance and administration
        with
        Columbus Line USA, Inc., a Hamburg, Germany based ocean freight carrier of
        wines, meats and produce which required temperature controlled systems and
        dry
        containers. From 1982 to 1988 he was a partner in the accounting firm of
        Blodgett, Mickelsen & Naef, CPAs. He earned his B.S. Accounting degree from
        the Brigham Young University. Mr. Blodgett became a Certified Public Accountant
        in the State of Washington in 1980. Mr. Blodgett will spend about fifteen
        hours
        per week serving Vivid.
  **Sandra
        I. Muller** has
        served as Secretary and Corporate Counsel of Vivid and Nuvotec since January,
        1999. Ms. Muller has served as Secretary and Corporate Counsel with Technical
        Resources International, Inc. (TRI), a Nuvotec subsidiary since 1995 to the
        present. TRI provides consulting services in the nuclear energy, environmental
        clean up, and strategic management areas. She served as Senior Contract
        Specialist for Science Applications International Corporation from 1992 to
        1995.
        Ms. Muller served as Senior Contract Specialist for Battelle, Pacific Northwest
        National Laboratories, a U.S. Department of Energy Laboratory, in Richland,
        Washington from 1987 to 1992. Ms. Muller earned her J.D. from Willamette
        University College of Law and earned her B.A.E. degree from Arizona State
        University. Ms. Muller will spend about fifteen hours per week serving
        Vivid.
 
 **Robert
        L. Ferguson** has
        served as Chairman of the Board of Directors since 2003. Mr. Ferguson has
        served
        as CEO and Chairman of the Board of directors of Nuvotec, Inc. since 1998,
        and
        now of the August 2004 formed Nuvotec USA, Inc. Mr. Ferguson has over 40
        years
        of management and technical experience in the government and private sectors.
        He
        served as Chairman of the Board of Technical Resources International, Inc.
        from
        1995 to 1998; which provided consulting services in the nuclear energy and
        environmental clean up areas. Mr. Ferguson served as corporate VP for Science
        Applications International Corporation from 1991 to 1995. Mr. Ferguson was
        the
        president of R.L. Ferguson & Associates, Inc. from 1985 to 1991, which
        provided management and technical services to government and industry. He
        served
        as the Chairman of the Board for UNC Nuclear Industries, Inc. from 1983 to
        1985;
        which operated the Department of Energy nuclear reactor and fuel fabrication
        facilities at Hanford, Washington. He served as CEO for Washington Public
        Power
        Supply System from 1980 to 1983, which included the activation of one nuclear
        power plant, the deactivation of two nuclear power plants and the termination
        of
        two other nuclear power plants. He served in various roles for the U.S.
        Department of Energy from 1960 to 1980, including Deputy Assistant Secretary
        of
        the Nuclear Reactor Programs. Mr. Ferguson was a founder of Columbia Trust
        Bank,
        and has been a director since 1996. Mr. Ferguson earned his B.S. in Physics
        from
        Gonzaga University.
  25
  **William
        N. Lampson** has
        served as a Director since September 2004. Since 1980 Mr. Lampson has been
        President and CEO of Lampson International, LLC and affiliate companies in
        the
        heavy hauling, rigging, and manufacturing business. In addition, he has served
        as Vice Chairman of the Board of Nuvotec USA, Inc. (the Company's parent
        company) since 2004, the Chairman of the Board of Columbia Trust Bank since
        1996, and owner and director of Columbia Basin Racquet Club since 1990 and
        owner
        and director of Life Quest Health Systems since 1998. Mr. Lampson graduated
        from
        Gonzaga University with a degree in Business Administration.
 
 **Andrew
        Thoresen** has
        served as a Director since October 2003. Mr. Thoresen has been a co-owner
        and
        Chief Financial Officer of Human Resource Novations, Inc. since 1993. Mr.
        Thoresen was the CFO and co-owner of R.L. Ferguson & Associates, Inc. from
        1985 to 1993, which provided management and technical services to government
        and
        industry. He served as the Financial Administrator and Assistant to the Chairman
        of the Board for UNC Nuclear Industries, Inc. from 1983 to 1985; which operated
        the Department of Energy nuclear reactor and fuel fabrication facilities
        at
        Hanford, Washington. He served in various management roles for the Washington
        Public Power Supply System from 1974 to 1983. He was employed as an accountant
        at Ernst & Ernst from 1969 to 1974. Mr. Thoresen earned his B.A. degree in
        Accounting from the University of Washington.
 
 **Robert
        J. Turner** has
        served as a Director and Chair of the Audit Committee for Vivid since February
        2004. Since 1979 Mr. Turner has been a Partner with the law firm of Fraser
        Milner Casgrain LLP (or its predecessor firms) in Edmonton, Alberta, Canada,
        and
        has served as Vice Chairman of the firm since 1999. Mr. Turner serves on
        the
        Board of Directors for Epcor Preferred Equity, Inc., a public company.
        Additionally, Mr. Turner serves on the Board of Directors for Millar Western
        Forest Products Ltd, which although the shares of the company are not publicly
        traded, the bonds of the company are and they are thus an SEC registrant.
        Mr.
        Turner earned his B.Comm from the University of Lethbridge and University
        of
        Calgary, and earned his LL.B. from the University of Alberta.
 
 **Steven
        Katz** has
        served as a Director since December 2003. From 1982 to the present, Mr. Katz
        has
        been President of Steven Katz & Associates, Inc., a management consulting
        firm specializing in corporate development and technology licensing. From
        January 2000 to October 2001, he was President, Chief Operating Officer and
        a
        Director of Senesco Technologies, Inc., a publicly held company listed on
        the
        American Stock Exchange, engaged in the identification and development of
        proprietary gene technology. Since June 2001 he has been the President and
        Chairman of MAC Worldwide, Inc, a public company that designs fashion wear.
        He
        is presently a member of the boards of directors of the following additional
        publicly-held companies: Biophan Technologies, Inc. (a company developing
        an
        MRI-resistant pacemaker and other related products), a director since 2001;
        USA
        Technologies, Inc. (a company with technology in credit card processing and
        automated vending systems), a director since May, 1999; and Health Systems
        Solutions, Inc. (a company in the home health care industry), a director
        since
        2003. Mr. Katz received a B.S. degree in Accounting from the City College
        of New York.
  26
  **ITEM
        10. EXECUTIVE COMPENSATION**
 
 ANNUAL
        COMPENSATION
 
 The
        following executive compensation disclosure reflects all compensation awarded
        to, earned by or paid to the Named Executive Officers, as defined below,
        for the
        fiscal years ended September 30, 2005, 2004 and 2003. The named executive
        officers (the “Named Executive Officers”) are Vivid Learning Systems, Inc.’s
        President, Chief Financial Officer and Corporate Secretary and the other
        executive officers of Vivid Learning Systems who each received in excess
        of
        $100,000 in total annual salary and bonus. Compensation is shown in the
        following table:
 
 Summary
        Compensation Table
 
 Annual
                  CompensationName
                  and Principal Position
              
              Fiscal
                  Year
              
              Salary
                  ($)
              
              Other
                  Annual Compensation ($)Kevin
                  A. Smith
                Former
                  President, CEO and Director
              
              
              2005
              
              $
              83,876
              
              $
              30,000***2004
              
              
              125,0002003
              
              
              96,076
              
              
              25,000*Robert
                  M. Blodgett
                CFO
                  and Treasurer
              
              
              2005
              
              
              0**
              
              
              02004
              
              
              0**
              
              
              02003Sandra
                  Muller
                Corporate
                  Secretary and General Counsel
              
              
              2005
              
              
              0**
              
              
              02004
              
              
              0**
              
              
              02003
  *
        $25,000
        in common stock of Nuvotec, Inc.
 **
        Part
        of the salaries is reflected in the monthly management fee charged the Company
        by Nuvotec, Inc.
 ***Severance.
 
 EMPLOYMENT
        CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
        ARRANGEMENTS
 
 Kevin
        Smith resigned as President, CEO and Director of the Company on July 6,
        2005.
 
 Mark
        Henderson resigned as a Director of the Company on April 8, 2005.
 
 27
 
 **Stock
        Option Grants**
  Individual
        grants of Vivid stock options to Executive Officers and Directors during
        the
        fiscal years ended September 30, 2005, 2004 or 2003 are as follows:
 YEAR
                NAME
                NUMBER
                GRANT
                    DATE2005
                Robert
                    Ferguson
                15,000
                7/1/052005
                Robert
                    Blodgett
                7,500
                7/1/052005
                Sandra
                    Muller
                7,500
                7/1/052004
                Steven
                    Katz
                5,000
                2/20/042004
                Robert
                    Turner
                5,000
                2/20/042004
                Andrew
                    Thoresen
                5,000
                2/20/042004
                Kevin
                    Smith
                200,000
                3/1/04
                  [terminated,
                    options
                  returned
                    to pool]2004
                Robert
                    Ferguson
                50,000
                3/1/042004
                Robert
                    Blodgett
                16,667
                3/1/042004
                Sandra
                    Muller
                16,667
                3/1/042004
                William
                    Lampson
                5,000
                7/15/042003
                None
                None
                None
 
 **2003
        Stock Option Plan**
  The
        Vivid
        Stock Option Plan has an approved pool of 2,400,000 shares. As of December
        28,
        2005, 527,584 options have been issued. The options are on a vesting
        schedule.
  **ITEM
        11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
        MANAGEMENT**
 
 The
        following table sets forth information regarding the beneficial ownership
        of our
        common stock as of December 28, 2005. The information in this table provides
        the
        ownership information for:
 
 a.  each
        person known by us to be the beneficial owner of more than 5% of our common
        stock;
 b.  each
        of
        our directors;
 c.  each
        of
        our executive officers; and
 d.  our
        executive officers, directors and director nominees as a group.
  Beneficial
        ownership has been determined in accordance with Rule 13d-3 of the 1934 Exchange
        Act and includes voting or investment power with respect to the shares. Unless
        otherwise indicated, the persons named in the table below have sole voting
        and
        investment power with respect to the number of shares indicated as beneficially
        owned by them. Common stock beneficially owned and percentage ownership is
        based
        on 11,997,299 shares outstanding. There are currently 173,334 outstanding
        options to purchase any common stock held by the persons named below, but
        no
        warrants to purchase any common stock.
  28
  Unless
        otherwise indicated, the address of each beneficial owner is c/o Vivid Learning
        Systems, Inc., 723 The Parkway, Richland, Washington 99352.
  **Name
                  and Address of Beneficial Owner**
              **Executive
                  Office Held (if any)**
              **Amount
                  of Common Stock Beneficially Owned**
              **Percent
                  of Class**
                **of
                  Common Stock**Christopher
                  L. Britton
              CEO
                  and Vice-Chairman (as of October 1, 2005)
              40,000
              *Kevin
                  A. Smith
                1136
                  Pinto Loop,
                Richland,
                  Washington 99352
              Former
                  President, CEO and Director (until July 6, 2005)
              100,000
              *Matthew
                  Hammer
              Chief
                  Operating Officer
              50,000Robert
                  M. Blodgett**
              Chief
                  Financial Officer and Treasurer
              2,000
              *Sandra
                  Muller***
              Corporate
                  Secretary and General Counsel
              2,000
              *Robert
                  L. Ferguson****
              Chairman
                  of the Board of Directors
              2,000
              *Andrew
                  Thoresen*****
              Director
              4,000
              *Robert
                  Turner
              Director
              0
              N/AWilliam
                  N. Lampson******
              Director
              40,000
              *Steven
                  Katz
              Director
              10,000
              *All
                  Current Executive Officers and Directors as a Group
                  (9 persons)
              
              150,000
              1.2
 
 *
        Less
        than 1%.
 
 **
        Mr.
        Blodgett owns approximately 1% of the common stock of Nuvotec USA, Inc.,
        which
        owns 80% of Vivid.
 
 ***
        Ms.
        Muller owns approximately 2.5% of the common stock of Nuvotec USA, Inc.,
        which
        owns 80% of Vivid.
 
 ****
        Mr.
        Ferguson owns approximately 15.3% of the common stock of Nuvotec USA, Inc.,
        which owns 80% of Vivid.
 
 *****
        Mr.
        Thoresen owns 0.3% of the common stock of Nuvotec USA, Inc., which owns 80%
        of
        Vivid.
 
 ******
        Mr. Lampson holds these 40,000 shares through Riggers Manufacturing Company,
        Inc., an entity he controls. He also owns approximately 15.7% of the common
        stock of Nuvotec USA, Inc., which owns 80% of Vivid.
 
 The
        balance of Nuvotec shares is held by 280 shareholders all of whom each own
        less
        than 5% of the outstanding shares. The Nuvotec Board of Directors has the
        power to vote the shares held by Nuvotec. The Nuvotec directors are: Robert
        L. Ferguson, Chairman, Robert Turner, Steven Katz, Andrew Thoresen and William
        Lampson.
 
 29
  **ITEM
        12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 **Nuvotec
        USA, Inc. Parent Company**
 Nuvotec
        USA, Inc., a Delaware corporation owns approximately 80% of the outstanding
        shares of Vivid. Robert L. Ferguson, Chairman of our Board of Directors holds
        approximately 15.3% of Nuvotec's common stock (with preferred stock on an
        as
        converted basis); and Sandra I. Muller, our Corporate Secretary and Corporate
        Counsel holds 2.5% of Nuvotec's common stock (with preferred stock on an
        as
        converted basis); and Robert M. Blodgett, our CFO, holds approximately 1%
        of
        Nuvotec's common stock (with preferred on an as converted basis). In accordance
        with the Nuvotec, Inc. Amended and Restated Articles of Incorporation, the
        Nuvotec, Inc. preferred stock carries conversion rights into common stock.
        The
        terms of the conversion are influenced by the issuance of additional stock.
        Such
        an event as anticipated by the Nuvotec, Inc. Amended and Restated Articles
        of
        Incorporation has occurred; thus, because of the price that additional stock
        was
        sold, one share of preferred converts to three shares of common.
 
 As
        of
        September 30, 2005, the Company has a payable due to Nuvotec of $2,364,145.
        Of
        this amount $1,000,000 is for the Company's draw down on the line of credit
        with
        Key Bank, such line of credit is discussed in more detail below. The balance
        due
        Nuvotec of $1,364,145 is for management fees and expenses. A total of $1,094,777
        has been eliminated via an exchange of common stock with the major shareholder
        effective December 8, 2005.
 
 The
        Company's corporate office at 723 The Parkway, Richland, Washington is space
        that the Company's parent corporation (its largest shareholder) Nuvotec USA,
        Inc. leases. The Company currently does not pay 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. Nuvotec's
        lease requires monthly payments of $12,865.
 
 The
        Company leases its training center at 2345 Stevens Road, 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 office space leased by Nuvotec. The Company
        paid $121,381 for rent, excise tax and maintenance of this property for the
        year
        ended September 30, 2005. On December 31, 2002, Nuvotec entered into a lease
        with the Port of Benton, a municipal corporation, for 16,500 square feet
        of
        office space and for 23,000 square feet of warehouse space (used for Nuvotec’s
        test facility and calibration lab) at 2345 Stevens Road, Richland, Washington.
        Nuvotec's original lease had a three year term with an option to extend for
        five
        successive terms of three years each. The original rent for the above space
        is
        $12,127 per month. On December 5, 2005, Nuvotec signed a re-negotiated lease
        wherein 4,445 square feet of office space and 21,125 square feet of warehouse
        space has been leased for a one year term with an option to extend for three
        successive terms of one year each. The rent beginning January 1, 2006 will
        be
        $8,467.23. In addition, Nuvotec is responsible for payment of 12.84% excise
        tax
        and maintenance of the property. At one time Nuvotec paid less than the full
        amount of contracted rent because of a rent abatement program offered by
        the
        Community Economic Revitalization Board; however that program has expired.
        Nuvotec paid $115,861 in rent on this lease in 2004 and $80,730 in 2003,
        net of
        the rent abatement.
 
 Additionally
        Nuvotec has been providing financial resources for the Company recorded as
        an
        inter-company payable 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 November 16, 2005, inter-company
        payables in the amount of $375,000 were reduced by Nuvotec in exchange for
        750,000 shares of Vivid common stock. The exchange ratio was based on the
        then
        current per share trading price for Vivid common stock of $0.50 per share.
        On
        December 8, 2005, inter-company payables in the amount of $719,477 were reduced
        by Nuvotec in exchange for 959,303 shares of Vivid common stock. The exchange
        ratio was based on the then current average per share trading price for Vivid
        common stock of $0.75 per share.
  30
  **Line
        of Credit with Key Bank**
 Vivid
        has
        access to a $1,000,000 line of credit. The line of credit with Key Bank is
        a
        formal agreement between the bank and Nuvotec USA, Inc., Vivid's parent
        corporation (Vivid is one of the corporate guarantors on the line, as is
        Nuvotec.) Both Nuvotec and Vivid have separate checking accounts at Key Bank.
        As
        Vivid requires working capital draws on the line such draws are placed in
        their
        account, but since it has no formal line of credit agreement with the bank,
        the
        draw is recorded by the bank as a Nuvotec draw. Therefore, Vivid is making
        its
        draws based upon an internal agreement between Vivid and Nuvotec. Such Vivid
        draws and paydowns are recorded in intercompany accounts on the books of
        Vivid
        and Nuvotec. This line of credit with Key Bank replaces a line of credit
        with
        Columbia Trust Bank held in 2004.
 
 **Fluor
        Hanford, Inc. Ownership in Columbia Basin Ventures**
 On
        August
        31, 2005 Vivid completed negotiations and executed an extension to its Hanford
        General Employee Training (“HGET”) contract with Fluor Hanford, Inc., which is
        Vivid's largest customer and a primary management contractor for Project
        Hanford, a U.S. Department of Energy site. The contract award is for three
        (3)
        years, with the first extension year funded and funding for the other two
        years
        subject to annual government budgets. This contract has a minimum value of
        $562,019 and a maximum value of $1,662,609. Vivid has held the contract for
        the
        HGET scope of work since 1995, wherein Vivid is responsible for producing,
        updating, and delivering the computer and Hanford LAN-based HGET training
        programs to the employees of Fluor Hanford and its contractors and other
        U.S.
        Department of Energy contractors on the Hanford Site. Fluor Hanford, Inc.
        has an
        ownership interest in Columbia Basin Ventures which owns approximately 1%
        of the
        outstanding common stock of Nuvotec. Nuvotec owns approximately 80% of
        Vivid.
 
 **Stock
        Option Issued to Legal Counsel**
 On
        December 23, 2003 Vivid issued a stock option for 50,000 shares of common
        stock
        at an exercise price of $0.10 to Jackson Steinem, Inc., whose beneficial
        owner
        is Adam S. Gottbetter of Gottbetter & Partners, LLP, our former legal
        counsel. This stock option was exercised in 2005.
 
 **Management
        Fees to Nuvotec, Inc.**
 For
        the
        fiscal year ended September 30, 2005 approximately $160,000 in management
        fees
        were paid or accrued to Nuvotec (the Company's parent corporation). For the
        fiscal year ended September 30, 2004 $170,000 in management fees were paid
        or
        accrued to Nuvotec.
 
 **ImageWorks
        Payable**
 The
        Company owed a payable to the former owners of ImageWorks of $350,000 as
        part of
        the Share Exchange Agreement with ImageWorks Media Group, Inc. dated May
        1,
        2004. As of September 30, 2005 this obligation has been paid in
        full.
  Additionally,
        as part of the Share Exchange Agreement with ImageWorks Media Group, Inc.,
        in
        January 2005, Mr. Hammer and Mr. Bauer notified the Company that they had
        chosen
        the cash payment of $75,000 ($37,500 to each of them) over the Warrants that
        were exercisable into 50,000 shares of Vivid's Common Stock on December 31,
        2004. Therefore, the Company paid to each Mr. Hammer and Mr. Bauer $37,500
        on
        February 28, 2005.
  31
  **Lease
        of Employees from Human Resources Novations, Inc.**
 The
        Company leases all of its employees from Human Resources Novations, Inc.
        One of
        our directors, Andrew Thoresen has been a co-owner and Chief Financial Officer
        of Human Resource Novations, Inc. since 1993. The amounts of Vivid payroll
        administered by Human Resources Novations for the past two years and the
        fees
        incurred by Vivid to Human Resources Novations for this service are as follows:
        the fiscal year 2005 payroll costs were $2,695,753, and payroll fees to Human
        Resources Novations were $50,472; and for fiscal year 2004 payroll costs
        were
        $1,989,469, and payroll fees to Human Resources Novations were
        $43,450.
 
 We
        believe that the terms of the above transactions are commercially reasonable
        and
        no less favorable to us than we could have obtained from an unaffiliated
        third
        party on an arm’s length basis. To the extent we may enter into any agreements
        with related parties in the future, the board of directors has determined
        that
        such agreements must be on similar terms. Further, all future transactions
        with
        affiliates of the Company are to be on terms no less favorable than could
        be
        obtained from an unaffiliated third party and must be approved by a majority
        of
        the directors including the majority of disinterested directors.
  **ITEM
        13.  EXHIBITS**
  The
        following exhibits filed as a part of this Form 10-KSB include both exhibits
        submitted with this Report and those incorporated by reference to other
        filings:
  Exhibit
                      Number
                  Description3.1
                  Certificate
                      of Incorporation, Applied Tecknowledgey, Inc., Washington,
                      March 2,
                      1995*3.2
                  Articles
                      of Amendment of Applied Tecknowledgey, Inc., Washington, April
                      3,
                      1997*3.3
                  Amended
                      and Restated Articles of Incorporation of Vivid Concepts, Inc.,
                      Washington, September 2, 1997*3.4
                  Certificate
                      of Amendment, Vivid Concepts, Inc., Washington, February 23,
                      2000*3.5
                  Certificate
                      of Incorporation of Vivid Learning Systems, Inc., Delaware,
                      December 23,
                      2003*3.6
                  Amended
                      and Restated Articles of Incorporation of Vivid Learning Systems,
                      Inc.,
                      Washington, December 24, 2003*3.7
                  Bylaws
                      of Applied Tecknowledgey, Inc., Washington, May 24,
                      1995*3.8
                  Amended
                      and Restated Bylaws of Vivid Learning Systems, Inc., Washington,
                      November
                      25, 2003*3.9
                  Bylaws
                      of Vivid Learning Systems, Inc., Delaware, December
                      2003*4.1
                  Specimen
                      Certificate of Common Stock*4.2
                  Warrant
                      issued to Matthew 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**
  32
  10.6
                  Management
                      Contract with Nuvotec, Inc.****10.7
                  Contract
                      with Fluor Hanford, Inc.***10.8
                  Contract
                      with Pennsylvania State System of Higher Education
                    Foundation,
                      Inc., dated August 18, 2004***10.9
                  Asset
                      Purchase Agreement with FoodSafety, Inc.****10.10
                  Share
                      Exchange Agreement ImageWorks Media Group, Inc.****10.11
                  Agreement
                      between Vivid Learning Systems, Inc. and Nuvotec USA, Inc.,
                      regarding Line
                      of Credit *****10.12
                  Asset
                      Purchase Agreement with TrueActive Software, Inc. , which includes
                      as
                      Exhibit B the Employment Agreement with Richard Eaton, president
                      of
                      TrueActive Software, Inc. (filed herewith)10.13
                  Conveyance,
                      Bill of Sale and Assignment Agreement between Vivid Learning
                      Systems, Inc.
                      and TrueActive Software, Inc. (filed herewith)10.14
                  Promissory
                      Note issued to TrueActive Software, Inc. (filed
                      herewith)10.15
                  Letter
                      from Nuvotec USA, Inc. assuming from Vivid Learning Systems,
                      Inc. the
                      obligations to TrueActive Software, Inc., dated September 26,
                      2005 (filed
                      herewith)10.16
                  Agreement
                      between Vivid Learning Systems, Inc. and Nuvotec USA, Inc.
                      regarding Line
                      of Credit with Key Bank (filed herewith)14
                  Code
                      of Ethics (filed herewith)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 in Registration Statement on Form SB-2 Filed with the Securities and
        Exchange Commission, Registration Statement No. 333-116255, on June 8,
        2004.
 
 **Previously
        filed in Registration Statement on Form SB-2 Filed with the Securities and
        Exchange Commission, Registration Statement No. 333-116255, on August 12,
        2004.
 
 ***
        Previously filed in 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 in Registration Statement on Form SB-2 Filed with the
        Securities and Exchange Commission, Registration Statement No. 333-116255,
        on
        December 23, 2004.
  *****
        Previously filed in Registration Statement on Form SB-2 Filed with the
        Securities and Exchange Commission, Registration Statement No. 333-116255,
        on
        January 14, 2005.
  33
 
 (b)
        Vivid
        filed the following reports on Form 8-K during the last quarter of fiscal
        year
        ended September 30, 2005:
 
 On
        July
        11, 2005, Vivid filed a Form 8-K to announce that Kevin Smith had resigned
        as
        CEO, president and a director, and that Matthew Hammer would assume the
        positions of president and COO.
 
 On
        July
        18, 2005, Vivid filed a Form 8-K to announce that 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, with
        an
        effective date of July 1, 2005.
 
 On
        September 1, 2005, Vivid filed a Form 8-K to announce that it completed
        negotiations to extend its Hanford General Employee Training contract with
        Fluor
        Hanford, one of Registrant’s largest customers and a primary management
        contractor for Project Hanford, a U.S. Department of Energy site. The contract
        award is for three (3) years, with the first extension year funded and funding
        for the other two years subject to annual government budgets.
 
 On
        September 30, 2005, Vivid filed a Form 8-K to announce that Christopher L.
        Britton will assume the position of Chief Executive Officer and Vice-Chairman
        effective October 1, 2005.
   **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 2005
        and
        2004 were $61,200 and $51,400 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 2005 and 2004 were
        $21,500
        and $24,400, respectively.
 
 (3)
         Tax Fees
 
 The
        aggregate fees billed for professional services rendered by Williams &
Webster, P.S. for tax related services for fiscal years 2005 and 2004 were
        $3,800 and $2900, respectively.
 
 (4)
         All Other Fees
 
 Vivid
        did
        not incur any other fees other than audit fees and audit related fees during
        the
        fiscal years 2005 and 2004.
 
 (5)
         Audit Committee Policies and Procedures
  34
  Vivid
        does have an Audit Committee. 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 2005 and 2004.
 
 (6)
         Audit Work Attributed to Persons Other than Williams & Webster, P.S.'s
        Full-time, Permanent Employees.
 
 Not
        applicable.
 
 35
  **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, 2005
              By:
              /s/ Christopher
                L. BrittonName:
                 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
                
                Christopher
                  L. Britton
              Chief
                  Executive Officer and Vice-Chairman
              December
                  28, 2005/s/
                  Robert Blodgett
                Robert
                  Blodgett
              Treasurer
                  , Chief Financial and Accounting Officer
              December
                  28, 2005/s/Sandra
                  Muller
                Sandra
                  Muller
              Secretary,
                  Corporate Counsel
              December
                  28, 2005Board
                  of Directors/s/
                  Robert Ferguson
                Robert
                  Ferguson
              Chairman
              December
                  28, 2005/s/
                  Andrew Thoresen
                Andrew
                  Thoresen
              Director
              December
                  28, 2005/s/
                  Robert Turner
                Robert
                  Turner
              Director
              December
                  28, 2005/s/
                  William N. Lampson
                William
                  N. Lampson
              Director
              December
                  28, 2005/s/
                  Steven Katz
                Steven
                  Katz
              Director
              December
                  28, 2005
 
 36
 
 **VIVID
        LEARNING SYSTEMS, INC.**
 
 **Consolidated
        Financial Statements and**
 **Report
        of Independent Registered Certified Public Accounting Firm**
 **September
        30, 2005 and 2004**
 
 
 **INDEX
        TO FINANCIAL STATEMENTS**
  
 Report
                  of Independent Registered Public Accounting Firm, Williams & Webster,
                  P.S.
              F-1Consolidated
                  Balance Sheets at September 30, 2005 and September 30,
                  2004
              F-2Consolidated
                  Statements of Income for the years ended September 30, 2005, and
                  September
                  30, 2004
              F-3Consolidated
                  Statement of Stockholders’ Equity for the years ended September 30, 2005,
                  and September 30, 2004
              F-4Consolidated
                  Statements of Cash Flows for the for the years ended September
                  30, 2005,
                  and September 30, 2004
              F-5Notes
                  to Consolidated Financial Statements
              F-6-28
 
 37
 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, 2005 and 2004, 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, 2005 and 2004 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
          27, 2005
  F-1
  **VIVID
              LEARNING SYSTEMS, INC.** **CONSOLIDATED
                BALANCE SHEETS**
 September
                              30,
                          
                          September
                              30,2005
                          
                          2004**ASSETS**CURRENT
                              ASSETSCash
                          
                          $
                          16,622
                          
                          $
                          49,451Accounts
                              and contracts receivable
                          
                          
                          1,028,197
                          
                          
                          1,420,031Accounts
                              and contracts receivable, Fluor Hanford
                          
                          
                          81,272
                          
                          
                          59,035Accounts
                              receivable, related party
                          
                          
                          -
                          
                          
                          3,894Employee
                              advances
                          
                          
                          -
                          
                          
                          22,222Prepaid
                              expenses
                          
                          
                          105,867
                          
                          
                          68,813Other
                              current assets
                          
                          
                          374,059
                          
                          
                          72,179TOTAL
                              CURRENT ASSETS
                          
                          
                          1,606,017
                          
                          
                          1,695,625PROPERTY,
                              PLANT AND EQUIPMENTProperty
                              and equipment
                          
                          
                          1,223,847
                          
                          
                          1,135,030Less:
                              Accumulated depreciation and amortization
                          
                          
                          (892,570
                          )
                          
                          (764,914
                          )TOTAL
                              PROPERTY, PLANT AND EQUIPMENT
                          
                          
                          331,277
                          
                          
                          370,116OTHER
                              ASSETSSoftware,
                              net of amortization
                          
                          
                          1,654,305
                          
                          
                          1,684,406Intangibles,
                              net of amortization
                          
                          
                          537,943
                          
                          
                          763,160Goodwill
                          
                          
                          375,000
                          
                          
                          375,000Long-term
                              contracts receivable
                          
                          
                          368,542
                          
                          
                          513,542Deferred
                              tax asset
                          
                          
                          460,081
                          
                          
                          3,853TOTAL
                              OTHER ASSETS
                          
                          
                          3,395,871
                          
                          
                          3,339,961**TOTAL
                              ASSETS**
                          
                          $
                          5,333,165
                          
                          $
                          5,405,702**LIABILITIES
                              AND STOCKHOLDERS' EQUITY**CURRENT
                              LIABILITIESAccounts
                              payable
                          
                          $
                          129,539
                          
                          $
                          189,588Payable
                              to related party
                          
                          
                          1,000,000
                          
                          
                          823,430Accrued
                              contract labor
                          
                          
                          243,879
                          
                          
                          159,450Other
                              current liabilities
                          
                          
                          183,035
                          
                          
                          271,950Unearned
                              revenue
                          
                          
                          44,376
                          
                          
                          30,286Notes
                              payable, related parties
                          
                          
                          75,000
                          
                          
                          250,000Current
                              portion of long-term liabilities
                          
                          
                          36,000
                          
                          
                          30,000TOTAL
                              CURRENT LIABILITIES
                          
                          
                          1,711,829
                          
                          
                          1,754,704LONG-TERM
                              LIABILITIESRelated
                              party notes payable
                          
                          
                          1,753,145
                          
                          
                          848,487TOTAL
                              LONG-TERM LIABILITIES
                          
                          
                          1,753,145
                          
                          
                          848,487TOTAL
                              LIABILITIES
                          
                          
                          3,464,974
                          
                          
                          2,603,191COMMITMENTS
                              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, 10,247,996 and 10,197,996shares
                              issued and outstanding, respectively
                          
                          
                          1,025
                          
                          
                          1,020Additional
                              paid-in capital
                          
                          
                          2,512,061
                          
                          
                          2,469,626Retained
                              earnings (deficit)
                          
                          
                          (644,895
                          )
                          
                          331,865TOTAL
                              STOCKHOLDERS' EQUITY
                          
                          
                          1,868,191
                          
                          
                          2,802,511**TOTAL
                              LIABILITIES AND STOCKHOLDERS' EQUITY**
                          
                          $
                          5,333,165
                          
                          $
                          5,405,702
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
  F-2
  **VIVID
            LEARNING SYSTEMS, INC.**
 **CONSOLIDATED
            STATEMENTS OF INCOME**
 
 Fiscal
                              Year Ended
                          
                          Fiscal
                              Year EndedSeptember
                              30, 2005
                          
                          September
                              30, 2004
 REVENUESTraining
                            subscriptions
                        
                        $
                        1,423,787
                        
                        $
                        2,735,637Training
                            subscriptions, Fluor Hanford
                        
                        
                        600,102
                        
                        
                        569,452Custom
                            products and services
                        
                        
                        1,344,410
                        
                        
                        1,199,583Custom
                            products and services, Fluor Hanford
                        
                        
                        217,860
                        
                        
                        83,5123,586,159
                        
                        
                        4,588,184COST
                            OF REVENUESTraining
                            subscriptions
                        
                        
                        338,854
                        
                        
                        306,160Custom
                            products and services
                        
                        
                        1,219,842
                        
                        
                        964,1491,558,696
                        
                        
                        1,270,309GROSS
                            PROFIT
                        
                        
                        2,027,463
                        
                        
                        3,317,875EXPENSESMarketing
                            and related labor expenses
                        
                        
                        941,039
                        
                        
                        1,264,073Bad
                            debt expense
                        
                        
                        171,230
                        
                        
                        73,138Reseller
                            commissions
                        
                        
                        250,962
                        
                        
                        371,375Depreciation
                            and amortization
                        
                        
                        173,180
                        
                        
                        84,774Wages
                            and contract labor
                        
                        
                        915,713
                        
                        
                        426,729Other
                            operating expenses
                        
                        
                        1,062,313
                        
                        
                        647,634TOTAL
                            OPERATING EXPENSES
                        
                        
                        3,514,437
                        
                        
                        2,867,723INCOME
                            (LOSS) FROM OPERATIONS
                        
                        
                        (1,486,974
                        )
                        
                        450,152OTHER
                            INCOME (EXPENSE)Gain
                            on settlement of debt
                        
                        
                        75,000
                        
                        
                        -Other
                            income
                        
                        
                        2,713
                        
                        
                        -Interest
                            income
                        
                        
                        569
                        
                        
                        1,548Interest
                            expense
                        
                        
                        (56,208
                        )
                        
                        (12,736
                        )TOTAL
                            OTHER INCOME (EXPENSE)
                        
                        
                        22,074
                        
                        
                        (11,188
                        )INCOME
                            (LOSS) BEFORE INCOME TAXES
                        
                        
                        (1,464,900
                        )
                        
                        438,964INCOME
                            TAX BENEFIT (EXPENSE)
                        
                        
                        488,140
                        
                        
                        (153,567
                        )NET
                            INCOME (LOSS)
                        
                        $
                        (976,760
                        )
                        $
                        285,397BASIC
                            NET INCOME (LOSS) PER COMMON SHARE
                        
                        $
                        (0.10
                        )
                        $
                        0.03DILUTED
                            NET INCOME (LOSS) PER COMMON SHARE
                        
                        $
                        (0.10
                        )
                        $
                        0.03WEIGHTED
                            AVERAGE NUMBER OF SHARES:BASIC
                        
                        
                        10,247,996
                        
                        
                        8,990,220DILUTED
                        
                        
                        10,247,996
                        
                        
                        9,602,965
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
 F-3
  **VIVID
            LEARNING SYSTEMS, INC.** **CONSOLIDATED
              STATEMENT OF STOCKHOLDERS' EQUITY**
 ADDITIONAL
                      
                      RETAINEDCOMMON
                          STOCK
                      
                      PAID-IN
                      
                      EARNINGSShares
                      
                      Amount
                      
                      CAPITAL
                      
                      (DEFICIT)
                      
                      TOTALBalance,
                          September 30, 2003
                      
                      
                      8,100,000
                      
                      $
                      810
                      
                      $
                      2,019,537
                      
                      $
                      46,468
                      
                      $
                      2,066,815Common
                          stock issued in private placementat
                          $0.25 per share less issuance costs of $74,200
                      
                      
                      1,987,996
                      
                      
                      199
                      
                      
                      422,600
                      
                      
                      -
                      
                      
                      422,799Issuance
                          of common stock as a gift at $0.25 per share
                      
                      
                      10,000
                      
                      
                      1
                      
                      
                      2,499
                      
                      
                      -
                      
                      
                      2,500Common
                          stock issued in acquisition of ImageWorks
                      
                      
                      100,000
                      
                      
                      10
                      
                      
                      24,990
                      
                      
                      -
                      
                      
                      25,000Net
                          income for the year ended September 30, 2004
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      285,397
                      
                      
                      285,397Balance,
                          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
                      )10,247,996
                      
                      $
                      1,025
                      
                      $
                      2,512,061
                      
                      $
                      (644,895
                      )
                      $
                      1,868,191
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
 F-4
 **VIVID
            LEARNING SYSTEMS, INC.**
 **CONSOLIDATED
            STATEMENTS OF CASH FLOWS**
 Fiscal
                              Year Ended
                          
                          Fiscal
                              Year EndedSeptember
                              30,
                              2005
                          
                          September
                              30,
                            2004
 **CASH
                            FLOWS FROM OPERATING ACTIVITIES:**Net
                            income (loss)
                        
                        $
                        (976,760
                        )
                        $
                        285,397Adjustments
                            to reconcile net income (loss)to
                            net cash provided by operating activities:Depreciation
                            and amortization
                        
                        
                        273,180
                        
                        
                        84,774Amortization
                            of capitalized software
                        
                        
                        296,551
                        
                        
                        273,935Bad
                            debt expense
                        
                        
                        171,230
                        
                        
                        -Gain
                            on settlement of debt
                        
                        
                        (75,000
                        )
                        
                        -Deferred
                            tax asset
                        
                        
                        (456,228
                        )
                        
                        153,567Stock
                            issued as a gift
                        
                        
                        -
                        
                        
                        2,500Stock
                            and options issued for services
                        
                        
                        13,000
                        
                        
                        -Options
                            issued for compensation
                        
                        
                        29,440
                        
                        
                        **-**Changes
                            in assets and liabilities:Accounts
                            and contracts receivable
                        
                        
                        369,597
                        
                        
                        (1,437,269
                        )Employee
                            receivable
                        
                        
                        22,222
                        
                        
                        -Related
                            party receivables, net
                        
                        
                        3,894
                        
                        
                        -Prepaid
                            expenses
                        
                        
                        (37,054
                        )
                        
                        6,656Other
                            current assets
                        
                        
                        (301,880
                        )
                        
                        73,013Accounts
                            payable
                        
                        
                        (60,049
                        )
                        
                        84,530Accrued
                            payroll and related expenses
                        
                        
                        84,429
                        
                        
                        89,961Long-term
                            receivable contracts
                        
                        
                        145,000
                        
                        
                        513,542Other
                            current liabilities
                        
                        
                        22,085
                        
                        
                        48,253Unearned
                            revenue
                        
                        
                        14,090
                        
                        
                        -Net
                            cash provided (used) by operating activities
                        
                        
                        (462,253
                        )
                        
                        178,859**CASH
                            FLOWS FROM INVESTING ACTIVITIES:**Acquisition
                            of property, equipment and intangible assets
                        
                        
                        (93,127
                        )
                        
                        (601,824
                        )Acquisition
                            of software
                        
                        
                        (266,450
                        )
                        
                        (519,451
                        )Net
                            cash used by investing activities
                        
                        
                        (359,577
                        )
                        
                        (1,121,275
                        )**CASH
                            FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                            from stock issuances
                        
                        
                        -
                        
                        
                        422,799Payments
                            on notes payable, related party
                        
                        
                        (325,000
                        )
                        
                        -Proceeds
                            from related party financing transactions including line
                            of
                            credit
                        
                        
                        1,114,001
                        
                        
                        557,456Net
                            cash provided (used) by financing activities
                        
                        
                        789,001
                        
                        
                        980,255Net
                            increase (decrease) in cash
                        
                        
                        (32,829
                        )
                        
                        37,839Cash
                            at beginning of period
                        
                        
                        49,451
                        
                        
                        11,612Cash
                            at end of period
                        
                        $
                        16,622
                        
                        $
                        49,451SUPPLEMENTAL
                            CASH FLOW INFORMATION:Interest
                            paid
                        
                        $
                        56,208
                        
                        $
                        12,736Income
                            taxes paid
                        
                        $
                        -
                        
                        $
                        -NON-CASH
                            TRANSACTIONS:Stock
                            and options issued for services
                        
                        $
                        13,000
                        
                        $
                        -Options
                            issued as compensation
                        
                        $
                        29,440
                        
                        $
                        -Note
                            issued for property, equipment and intangibles acquired
                            inacquisition
                            of ImageWorks and FoodSafety assets
                        
                        $
                        -
                        
                        $
                        350,000Stock
                            committed in acquisition
                        
                        $
                        -
                        
                        $
                        25,000Additional
                            value assigned to stock committed in acquisition
                        
                        $
                        -
                        
                        $
                        275,000Warrants
                            committed in acquisition
                        
                        $
                        -
                        
                        $
                        300,000Issuance
                            of common stock as a gift
                        
                        $
                        -
                        
                        $
                        2,500Penalty
                            shares committed in acquisition of FoodSafety assets
                        
                        $
                        -
                        
                        $
                        50,000Beneficial
                            conversion feature of stock/options committedin
                            acquisition of FoodSafety assets
                        
                        $
                        -
                        
                        $
                        75,000
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
 F-5
 **VIVID
            LEARNING SYSTEMS, INC.**
 **NOTES
            TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
            30, 2005**
  
 **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., the sole shareholder in Vivid Washington,
              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”). The common
              stock of the Delaware company was held 100% by Nuvotec, Inc., until
              an
              additional 1,987,996 of the Company’s common stock was issued in a private
              placement to approximately seventy individual shareholders at September
              30,
              2004.
 
 Vivid
              Washington develops and provides computer-based training products and
              services,
              which are marketed nationally. The aforementioned reorganization caused
              no
              change in the accounting in the financial statements of Vivid Washington
              as
              Vivid Washington continues to be the operating company and the financial
              information provided is the historical financial information of Vivid
              Washington. Vivid Delaware and its subsidiaries have a year end of
              September
              30.
 
 FoodSafety.com,
              Inc.
 In
              November 2003, the Company, in conjunction with its majority shareholder,
              Nuvotec, Inc., acquired the assets of FoodSafety.com, Inc., a Delaware
              corporation. The assets principally consisted of the URL, intellectual
              property,
              exclusive commercialization rights and the commitment by FoodSafety.com,
              Inc. to
              deliver a food worker course and a food manager certification course.
              In
              exchange for the assets, Nuvotec, Inc. paid FoodSafety.com, Inc. a
              total of
              $80,000 in cash and $100,000 in value of Vivid Learning Systems, Inc.
              stock or
              options. For additional information on this transaction and related
              consideration given, see Note 13.
 
 ImageWorks
              Media Group, Inc .
 Effective
              May 1, 2004, the Company purchased ImageWorks Media Group, Inc., (hereinafter,
              “ImageWorks”), a privately held Washington company. In consideration for all of
              the common stock of ImageWorks, the Company paid $300,000 in cash,
              issued a note
              for $350,000 payable in 14 monthly installments, agreed to issue 100,000
              shares
              of common stock with a fair market value of $25,000, and agreed to
              issue 200,000
              common stock warrants with an exercise price of $3.00 and a term of
              four years.
              At the date of acquisition, ImageWorks became a wholly owned subsidiary
              of Vivid
              Delaware. The financial statements at September 30, 2004 include the
              ImageWorks
              results of operations from May 1, 2004 to September 30, 2004. See Note
              13.
  F-6
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 **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.
 
 In
              December 2002, the Financial Accounting Standards Board issued Statement
              of
              Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation
              - Transition and Disclosure” (hereinafter “SFAS No. 148”). SFAS No. 148 amends
              SFAS No. 123, “Accounting for Stock-Based Compensation, (hereinafter “SFAS No.
              123”)” to provide alternative methods of transition for a voluntary change
              to
              the fair value based method of accounting for stock-based employee
              compensation.
              In addition, the statement amends the disclosure requirements of SFAS
              No. 123 to
              require prominent disclosure in both annual and interim financial statements
              about the method of accounting for stock-based employee compensation
              and the
              effect of the method used on reported results. The provisions of the
              statement
              are effective for financial statements for fiscal years ending after
              December
              15, **** 2002.
              The
              Company currently reports stock issued to employees under the rules
              of SFAS No.
              123. Accordingly, there is no change in disclosure requirements due
              to SFAS No.
              148.
 
 In
              December 2004, the Financial Accounting Standards Board revised SFAS
              No. 123 and
              issued SFAS No. 123R. The Company’s accounting for stock options and
              warrants is not affected by the issuance of SFAS No. 123R.
 
 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, 2005 and
              2004, all
              Company receivables are considered collectible and no additional valuation
              allowance is deemed necessary.
 
 The
              Company does not accrue interest on trade receivables. A trade receivable
              is not
              considered past due after 90 days, because most receivables result
              from
              contracted services with large, established customers, including the
              federal
              government.
  F-7
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 The
              Company’s bad debt expense for the years ended September 30, 2005 and 2004
              was
              $171,230 and $73,138, respectively.
 
 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
              $40,773 and $64,149 for the years ended September 30, 2005 and 2004,
              respectively.
 
 Cash
              and Cash Equivalents
 The
              Company considers all highly liquid investments with a maturity of
              three months
              or less at the date of acquisition to be cash equivalents. At September
              30, 2005
              and 2004, the Company did not have any cash equivalents.
 
 Compensated
              Absences
 The
              Company leases all of its employees from Human Resources Novations,
              Inc., which
              is co-owned and managed by a member of Vivid’s board of directors. The Company,
              whose primary shareholder is Nuvotec, Inc., is part of a multi-employer
              plan,
              which is administered by Human Resources Novations, Inc. Accruals of
              compensated
              absences at September 30, 2005 and 2004 of $28,947 and $56,535, respectively,
              are reflected in the Company’s balance sheets and included in the captioned
              liability “accrued contract labor.” Leased employees are entitled to paid
              personal time dependent upon the length of service.
 
 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.
  F-8
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
  As
              of
              September 30, 2005 and 2004, 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 available to common shareholders by the weighted average
              common
              shares outstanding for the period. Diluted earnings per share reflect
              the
              potential dilution of securities that could share in the earnings of
              an entity.
              There were 504,334 common stock equivalents outstanding at September
              30, 2005.
 
 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, 2005 and 2004.
 
 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 March 15, 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, 2005 and 2004,
              outstanding borrowings under this line totaled $1,000,000 and $772,025,
              respectively. All borrowings under this line at September 30, 2005
              are
              attributable to Vivid and 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.
  F-9
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 Interest
              expense is accrued monthly on the portion of intercompany debt that
              is related
              to the net draws by Vivid on the line of credit. Intercompany 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. For example, the **** rent
              incurred **** by
              Vivid
              at its operations location is paid on its behalf by Nuvotec, because
              the lease
              arrangement is between the Port of Benton (lessor/landlord) and Nuvotec
              (lessee). A net increase in the Vivid intercompany accounts payable
              to Nuvotec
              (typically approximately $30,000 per month) is reclassified and closed,
              together
              with Vivid’s direct draws on the line, into the intercompany line of credit
              payable account at month end, and 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.
 
 In
              September 2001, the Financial Accounting Standards Board issued Statement
              of
              Financial Accounting Standards No. 143, “Accounting for Asset Retirement
              Obligations” (hereinafter “SFAS No. 143”). SFAS No. 143 establishes guidelines
              related to the retirement of tangible long-lived assets of the Company
              and the
              associated retirement costs. This statement requires that the fair
              value of a
              liability for an asset retirement obligation be recognized in the period
              in
              which it is incurred if a reasonable estimate of fair value can be
              made. The
              associated asset retirement costs are capitalized as part of the carrying
              amount
              of the long-lived assets. The Company adopted SFAS No. 143 and does
              not believe
              that the adoption has had a material impact on the financial statements
              of the
              Company.
 
 The
              Company does not believe any adjustments are needed to the carrying
              value of its
              assets at September 30, 2005 and 2004.
 
 F-10
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 Intangible
              Assets
 In
              September 2001, the Financial Accounting Standards Board issued Statement
              of
              Financial Accounting Standards No. 141, "Business Combinations" (hereinafter
              “SFAS No. 141”) and Statement of Financial Accounting
              Standard No. 142, "Goodwill and Other Intangible Assets" (hereinafter
“SFAS No. 142”). SFAS No. 141 provides for the elimination of the
              pooling-of-interest method of accounting for business combinations
              with an
              acquisition date of July 1, 2001 or later. SFAS No. 142 prohibits the
              amortization of goodwill and other intangible assets with indefinite
              lives and
              requires periodic reassessment of the underlying value of such assets
              for
              impairment. SFAS No. 142 is effective for fiscal years beginning after
              December 15, 2001. On September 30, 2004, the Company adopted
              SFAS No. 142. Application of the nonamortization provision of SFAS No.
              142 is expected to result in no change to the Company’s results of
              operations.
  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. The Company reviews quarterly 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, 2005 no impairment was deemed necessary for the Company’s
              goodwill.
 
 A
              noncompetition agreement and a customer list are included in intangible
              assets
              on the Company’s balance sheet. These items represent a portion of the
              acquisition cost of ProTrain (in 2001) and are being amortized on the
              straight-line method over a five-year period. For the years ended September
              30,
              2005 and 2004, related amortization expense was $3,000 and $3,555,
              respectively.
              See Note 17.
 
 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 year ended September 30, 2005,
              related
              amortization expense was $100,000. See Note 13.
 
 Software
              and related materials are included in software and copyrights, trademarks,
              patent applications and database are included in intangible assets.
              These items
              represent the acquisition cost of the assets purchased from FoodSafety.com,
              Inc.
              in 2004. See Note 13.
 
 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
              rent,
              director fees, central office overhead expense accounts, 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. Most
              of the
              allocated expenses represent labor related costs, including costs of
              two Nuvotec
              executives, applied to the Vivid operation. All identifiable direct
              costs of
              administration are booked directly to the Vivid operation. Detailed
              electronic
              time sheets 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. The allocation amounts of the above
              administrative expenses from Nuvotec, Inc. to the Vivid operation are
              included
              in “Other Operating Expenses” for the periods listed and are as
              follows:
  F-11
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 Year
              Ending September 30, 2005: $160,000
 Year
              Ending September 30, 2004: $170,000
 
 The
              reduced amount in allocated overhead for the year ending September
              30, 2005 is
              attributable to attenuated Nuvotec overhead resources.
 
 Management
              services incurred by the Company and rendered by Nuvotec, Inc. include
              legal,
              contracts, finance, accounting and executive administration. The management
              fee
              established contractually between Vivid and Nuvotec for these services
              is
              reviewed at least annually. The method used to determine the amount
              was based
              upon the historical documentation of the time (hours) charged for these
              tasks by
              Nuvotec administrative personnel times the hourly rate of direct labor
              costs for
              those personnel.
 
 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. 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.
              See Note
              12.
 
 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 14.
 
 F-12
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 Recent
              Accounting Pronouncements
 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 Company does not expect SFAS No. 154 to have a material impact
              on our
              consolidated financial position, results of operations, or cash
              flows.
 
 In
              December 2004, the Financial Accounting Standards Board issued Statement
              of
              Financial Accounting Standards No. 153. This statement addresses the
              measurement
              of exchanges of nonmonetary assets. The guidance in APB Opinion No.
              29,
“Accounting for Nonmonetary Transactions,” is based on the principle that
              exchanges of nonmonetary assets should be measured based on the fair
              value of
              the assets exchanged. The guidance in that opinion, however, included
              certain
              exceptions to that principle. This statement amends Opinion 29 to eliminate
              the
              exception for nonmonetary exchanges of similar productive assets and
              replaces it
              with a general exception for exchanges of nonmonetary assets that do
              not have
              commercial substance. A nonmonetary exchange has commercial substance
              if the
              future cash flows of the entity are expected to change significantly
              as a result
              of the exchange. This statement is effective for financial statements
              for fiscal
              years beginning after June 15, 2005. Earlier application is permitted
              for
              nonmonetary asset exchanges incurred during fiscal years beginning
              after the
              date of this statement is issued. Management believes the adoption
              of this
              statement will have no impact on the financial statements of the Company.
 
 In
              December 2004, the Financial Accounting Standards Board issued a revision
              to
              Statement of Financial Accounting Standards No. 123R, “Accounting for Stock
              Based Compensation.” This statement supercedes APB Opinion No. 25, “Accounting
              for Stock Issued to Employees,” and its related implementation guidance. This
              statement establishes standards for the accounting for transactions
              in which an
              entity exchanges its equity instruments for goods or services. It also
              addresses
              transactions in which an entity incurs liabilities in exchange for
              goods or
              services that are based on the fair value of the entity’s equity instruments or
              that may be settled by the issuance of those equity instruments. This
              statement
              focuses primarily on accounting for transactions in which an entity
              obtains
              employee services in share-based payment transactions. This statement
              does not
              change the accounting guidance for share based payment transactions
              with parties
              other than employees provided in Statement of Financial Accounting
              Standards No.
              123. This statement does not address the accounting for employee share
              ownership
              plans, which are subject to AICPA Statement of Position 93-6, “Employers’
Accounting for Employee Stock Ownership Plans.” The Company does not believe
              that its financial statements will be affected by the adoption of this
              statement
              because of its previous adoption of SFAS No. 123.
  F-13
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 In
              November 2004, the Financial Accounting Standards Board issued
              Statement of Financial Accounting Standards No. 151, “Inventory Costs— an
              amendment of ARB No. 43, Chapter 4”. This statement amends the
              guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the
              accounting for abnormal amounts of idle facility expense, freight,
              handling
              costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
              Chapter 4, previously stated that “. . . under some circumstances, items
              such as idle facility expense, excessive spoilage, double freight,
              and
              rehandling costs may be so abnormal as to require treatment as current
              period
              charges. . . .” This statement requires that those items be recognized as
              current-period charges regardless of whether they meet the criterion
              of “so
              abnormal.” In addition, this statement requires that allocation of fixed
              production overheads to the costs of conversion be based on the normal
              capacity
              of the production facilities. This statement is effective for inventory
              costs
              incurred during fiscal years beginning after June 15, 2005. Management does
              not believe the adoption of this statement will have any immediate
              material
              impact on the Company.
 
 In
              May
              2003, the Financial Accounting Standards Board issued Statement of
              Financial
              Accounting Standards No. 150, “Accounting for Certain Financial Instruments with
              Characteristics of Both Liabilities and Equity” (hereinafter “SFAS No. 150”).
              SFAS No. 150 establishes standards for classifying and measuring certain
              financial instruments with characteristics of both liabilities and
              equity and
              requires that those instruments be classified as liabilities in statements
              of
              financial position. Previously, many of those instruments were classified
              as
              equity. SFAS No. 150 is effective for financial instruments entered
              into or
              modified after May 31, 2003 and otherwise is effective at the beginning
              of the
              first interim period beginning after September 15, 2003. The Company
              has adopted
              SFAS No. 150, and has recorded certain equity instruments as
              liabilities. See Note
              13.
 
 Reclassifications
 Certain
              prior year amounts in the accompanying financial statements have been
              reclassified to conform to the fiscal 2005 presentation. The reclassifications
              principally consists of reclassification of the fair market value of
              all
              outstanding options and warrants as paid-in-capital instead of a separate
              caption on the balance sheets and statement of stockholders’ equity. These
              reclassifications have resulted in no changes to the Company’s accumulated
              deficit or net losses presented
 
 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
 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,
              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. 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.
  F-14
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 None
              of
              these U.S.-based contracts is exclusive, or restricts the Company from
              selling
              directly or through other channel partners into any markets. The Company
              does
              have one contract in place with a European reseller that is country-specific,
              exclusive, and has a duration of 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 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 two additional years, a
              material
              reseller agreement with Element K of Rochester, New York.
 
 Royalty
              Expenses
 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 via time sheets, 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 is
              determined by comparing the unamortized cost of each developed software
              lesson
              content and the remaining available market (quantified by dollars)
              for that
              content in the industry in which Vivid is selling the content. The
              unamortized
              software development cost is then aggregated by lesson content 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
              amount charged to amortization expense for the year ending September
              30, 2005
              was $296,551. The amount written down to net realizable value during
              this period
              was zero. The amount charged to amortization expense for the year ending
              September 30, 2004 was $273,935. The amount written down to net realizable
              value
              during this period was zero.
  F-15
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 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, 2005
                    
                    September
                        30,
                      2004Software
                        development costs
                    
                    $
                    3,367,614
                    
                    $
                    3,101,164Accumulated
                        amortization
                    
                    
                    (1,713,309
                    )
                    
                    (1,416,758
                    )$
                    1,654,305
                    
                    $
                    1,684,406
 
 The
              Company amortizes its existing software products over a period of five
              years.
              For the years ended September 30, 2005 and 2004, $296,551 and $273,935
              of
              amortization expense were recorded, respectively.
 
 **NOTE
              4 - REVENUE AND COST RECOGNITION**
 
 The
              Company’s sales contracts are 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 and title
              passes
              upon shipment. 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, 2005 and September 30, 2004, 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.
  F-16
  **VIVID
                  LEARNING SYSTEMS, INC.**
 **NOTES
                  TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                  30, 2005**
  
  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.
 The
                    Company does not offer warranties or returns.
 Royalty
              Expenses
 Reseller
              commissions or royalty payments are recorded as an expense if the Company
              bears
              the primary responsibility for the fulfillment of the underlying customer’s
              order and for the acceptance by the customer of the training services
              sold. Such
              costs paid to resellers are recorded as a reduction to the underlying
              selling
              price if the reseller is the primary obligor to the customer in the
              transaction.
 
 **NOTE
              5 - RELATED PARTY TRANSACTIONS**
 
 The
              Company was awarded a three-year contract renewal with a minimum value
              of
              $1,622,609 with Fluor Hanford, Inc., a Nuvotec, Inc. shareholder, for
              the period
              from October 2005 to September 30, 2008. The Company provides computer-based
              training monthly for the employees of Fluor Hanford, Inc. and its contractors.
              The accounts receivable due from Fluor Hanford at September 30, 2005
              and
              September 30, 2004 was $81,272 and $59,035, respectively. Revenue from
              Fluor
              Hanford for the years ended September 30, 2005 and 2004 was $782,221
              and
              $652,964, respectively.
 
 At
              September 30, 2005, the recorded current related party payable consisted
              of
              $1,000,000 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 $1,364,145 and amounts due to the former owners of
              ImageWorks of
              $425,000.
 
 At
              September 30, 2004, the recorded related party payable consisted of
              $772,025 of
              borrowing from the aforementioned line of credit and $51,405 of management
              fees
              allocated and expenses paid on behalf of Vivid, by the majority shareholder,
              Nuvotec, Inc. The long-term related party payable consists of $545,000
              due to
              the former owners of ImageWorks and $303,487 of tax liability due to
              Nuvotec
              USA, Inc.
 
 As
              of
              September 30, 2005, the Company owed $1,364,145 to its parent, Nuvotec
              USA, Inc.
              These advances have been determined to be long-term in nature and Nuvotec
              has
              agreed not to demand repayment within the next fiscal year. The companies
              are negotiating the terms of these borrowings and are expecting to
              set the
              relative interest rate at the Federal applicable rate.
  F-17
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
 The
                majority owner of the Company has been providing the Company financial
                resources 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. On November 16, 2005, inter-company payables
                in the
                amount of $375,000 were satisfied by the majority shareholder in
                exchange for
                750,000 shares of Company common stock. The exchange ratio was based
                on the then
                current per share trading price for Company common stock of $0.50
                per share. On
                December 8, 2005, inter-company payables in the amount of $719,477
                were
                satisfied by the majority shareholder in exchange for 959,303 shares
                of Company
                common stock. The exchange ratio was based on the then current per
                share trading
                price for Company common stock of $0.75 per share.
  Related
              party management fees are discussed in Note 2 and related party leasing
              activities are discussed in Note 9.
 
 **NOTE
              6 - PROFIT-SHARING AND PENSION PLANS**
 
 The
              Company participates in Nuvotec, Inc.’s profit-sharing plan covering all
              eligible employees over the age of 21 with 1,000 hours of service in
              a 12-month
              eligibility computation period. 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 contributions
              in
              2005 or 2004.
 
 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
              for
              the years ended September 30, 2005 and 2004 amounted to $37,557 and **** $43,189,
              respectively.
 
 **NOTE
              7 - 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, 2005, no preferred stock has been issued by the
              Company.
 
 On
              December 23, 2003, the Company’s board of directors increased the maximum number
              of authorized common stock shares of the Company to 200,000,000 and
              authorized a
              forward split of the Company’s common stock, such that the major shareholder,
              Nuvotec, Inc. had 8,100,000 (restated) shares at September 30, 2003.
 
 During
              the year ended September 30, 2004 the Company completed a private placement
              of
              1,987,996 common stock shares at $0.25 per share for total proceeds
              of $496,999
              less costs to issue of $74,200. In addition, the Company issued 10,000
              shares of
              common stock for $2,500 as a gift to an employee’s family member. The Company
              has committed 100,000 shares of common stock with a value of $25,000
              for the
              acquisition of ImageWorks. See Note 13.
  F-18
  **VIVID
                LEARNING SYSTEMS, INC.**
 **NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                30, 2005**
  During
              2005, 50,000 common shares were issued for the exercise of options
              previously
              issued for legal services at a price of $0.10 per share for a total
              cost of
              $5,000.
 
 **NOTE
              8 - 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.
 
 During
              2004, the Company issued to executives a total of 866,334 common stock
              options,
              exercisable at $0.25 per share for four years and vesting at a rate
              of 25% per
              year. No expense was recorded at September 30, 2004 because none of
              the options
              were vested and the benefit period began October 1, 2004.
 
 During
              the year ended September 30, 2005, 318,792 options which had been issued
              in
              2004, became vested. Accordingly, the Company recorded this expense
              at the
              options' fair value of $25,503.
 
 During
              the year ended September 30, 2005, additional options totaling 87,500
              were
              issued. Of these options, 21,875 vested and were recorded at
              their fair value of $3,937. Also during 2005, 50,000 options were exercised
              and
              399,500 options which were originally issued in 2004, expired or were
              terminated.
 
 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%, volatility is 0.3, and expected life is 3 to 4 years.
 
 The
              following is a summary of stock option activity:
 
 Equity
                        compensation plans not approved by shareholders
                    
                    Number
                        of shares to be issued upon exercise of outstanding
                        options
                    
                    Weighted-average
                        exercise price of outstanding options
                    
                    Number
                        of shares remaining available for future issuance under equity
                        compensation plans2003
                        Stock Option Plan
                    
                    
                    504,334
                    
                    $
                    0.25
                    
                    
                    1,845,666Total
                    
                    
                    504,334
                    
                    
                    
                    
                    
                    1,845,666
 
 F-19
  **VIVID
                  LEARNING SYSTEMS, INC.**
 **NOTES
                  TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                  30, 2005**
 Number
                        of Shares
                    
                    Weighted
                        Average Exercise PriceOutstanding
                        at October 1, 2003
                    
                    
                    -
                    
                    $
                    -Granted
                    
                    
                    866,334
                    
                    
                    0.24Exercised
                    
                    
                    -
                    
                    
                    -Outstanding
                        at September 30, 2004
                    
                    
                    866,334
                    
                    $
                    0.24Options
                        exercisable at September 30, 2004
                    
                    
                    -
                    
                    $
                    -Weighted
                        average fair value of options granted during 2004
                    
                    
                    
                    
                    
                    0.24Outstanding
                        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
                    
                    $
                    0.18Total
                        compensation costs related to non-vested stock options as
                        of September 30,
                        2005
                    
                    
                    
                    
                    $
                    32,138Weighted
                        average period of nonvested stock options as of September
                        30, 2005
                    
                    
                    
                    
                    
                    2.25
                        years
 
 Common
              Stock Warrants
 Pursuant
              to the acquisition of ImageWorks, 200,000 warrants to purchase the
              Company’s
              common stock were granted in May 2004. 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%, volatility is
              0.3, and
              expected life is 4 years. The warrants had no estimated fair market
              value at
              issuance.
 
 **NOTE
              9 - LEASE COMMITMENTS**
 
 On
              December 31, 2002, Vivid’s major shareholder, Nuvotec entered into a lease with
              the Port of Benton (hereinafter “the Port”), a municipal corporation, for 16,500
              square feet of office space and for 23,000 square feet of warehouse
              space (used
              by TCC, another Nuvotec subsidiary). The lease runs for three years
              with an
              option to extend for five successive terms of three years each.
 
 The
              rent
              for the above space is $12,127 per month. In addition, Nuvotec is responsible
              for payment of 12.84% excise tax and maintenance of the property. Nuvotec
              currently pays less than the full amount of contracted rent because
              of a rent
              abatement program offered by the Community Economic Revitalization
              Board.
              Nuvotec paid $194,910 in rent on this lease in 2005 and $115,861 in
              rent on this
              lease in 2004, net of the rent abatement.
  F-20
  **VIVID
                    LEARNING SYSTEMS, INC.**
 **NOTES
                    TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                    30, 2005**
 The
              Company rents office space from Nuvotec on a annual 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 $121,381 and $65,755 for rent, excise tax and maintenance of this
              property
              for the years ended September 30, 2005 and 2004, 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. Minimum
              rental
              payments over the term of the lease are as follows for the fiscal years
              ended
              September 30:
 
 2006
                    
                    $
                    93,0002007
                    
                    $
                    93,0002008
                    
                    $
                    93,0002009
                    
                    $
                    54,250
 
 
 **NOTE
              10 - 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, 2005 and 2004, services
              provided
              to these contractors aggregated $873,278 and $940,970, **** representing
              24% and 21% of total revenue, respectively. At September 30, 2005 and
              2004,
              amounts due from these contractors are included in accounts receivable
              in the
              amounts of $82,058 and $65,009, respectively.
 
 The
              Company’s concentration risks for customer accounts receivable and revenues
              greater than 10% of the total account balances for the respective periods
              are as
              follows:
 
 Fiscal
                        YearEnding
                        9/30/05
                    
                    Fiscal
                        YearEnding
                        9/30/04Revenues—Fluor
                      Hanford
                    
                    $
                    782,221
                    
                    $
                    652,964Revenues—ERG
                      (State
                        of PA)
                    
                    $
                    30,355
                    
                    $
                    788,943Accounts
                        Receivable
                      Fluor
                        Hanford
                    
                    $
                    82,058
                    
                    $
                    59,035Accounts
                        Receivable
                      ERG
                        (State of PA)
                    
                    $
                    125,000
                    
                    $
                    316,710
 
 F-21
  **VIVID
                    LEARNING SYSTEMS, INC.**
 **NOTES
                    TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                    30, 2005**
 
 **NOTE
              11 - 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, 2005 and
              2004, the
              Company incurred $18,806 and $67,627 in royalty obligations, respectively,
              which
              are recorded in marketing expense. At September 30, 2005 and 2004,
              the Company
              accrued $11,719 and $11,202, respectively, in royalty obligations which
              are
              recorded in other current liabilities on the balance sheet. See Note
              13
              regarding ImageWorks Media Group, Inc.
 
 
 **NOTE
              12 - PROPERTY AND EQUIPMENT**
 
 Property
              and equipment are stated at cost. Depreciation is provided using the
              straight-line method over the estimated useful lives of the assets.
              The useful
              lives of property, plant and equipment for purposes of computing depreciation
              are three to ten years.
 
 The
              following is a summary of property, equipment, and accumulated
              depreciation:
 September
                          30,2005
                      
                      September
                          30, 2004Computers
                          and equipment
                      
                      $
                      1,103,359
                      
                      $
                      1,014,542Furniture
                          and fixtures
                      
                      
                      120,488
                      
                      
                      120,4881,223,847
                      
                      
                      1,135,030Less
                          accumulated depreciation
                      
                      
                      (892,570
                      )
                      
                      (764,914
                      )Property
                          and equipment, net
                      
                      $
                      331,277
                      
                      $
                      370,116
  Depreciation
              expense for the years ended September 30, 2005 and 2004 was $127,656
              and
              $81,219, respectively. 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.
 
 **NOTE
              13 - 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-22
  **VIVID
                      LEARNING SYSTEMS, INC.**
 **NOTES
                      TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                      30, 2005**
 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.
 
 FoodSafety.com,
              Inc.
 In
              November 2003, the Company, in conjunction with its majority shareholder,
              Nuvotec, Inc., acquired the assets of FoodSafety.com, Inc., (hereinafter
              “FoodSafety”), a Delaware corporation. In connection with this transaction which
              was not a merger, the Company acquired assets but not a business. Accordingly,
              FoodSafety, did not become a subsidiary. The assets acquired principally
              consisted of the URL, intellectual property, exclusive commercialization
              rights
              and the commitment by FoodSafety.com, Inc. to deliver a food worker
              course and a
              food manager certification course. In exchange for the assets of FoodSafety,
              the
              Company paid **,** on
              behalf
              of Nuvotec, a total of $80,000 in cash and was originally obligated
              to issue
              $100,000 in stock or options. In 2005, the agreement was modified and
              the
              Company agreed to pay a $150,000 note to the owner of FoodSafety.com,
              Inc. in
              exchange for the right to the securities. At September 30, 2005, the
              balance
              owed on this note is $144,307 and has been recorded as part of the **“** related
              party payable” in the long-term liability section on the Company’s balance
              sheet. The underlying note for this transaction is held by the Company’s parent,
              Nuvotec, USA, Inc.
 
 In
              addition to the aforementioned note assumption, the Company agreed
              to pay the
              seller stock and/or options and related premiums. This portion of the
              acquisition was originally recorded as a liability for $225,000. During
              2005,
              the Company negotiated a cash settlement of $150,000 for all contingent
              stock,
              options and premiums which resulted in $75,000 gain on the settlement
              of
              debt.
 
 The
              Company also executed a one-year consulting agreement with the owner
              of
              FoodSafety for monthly payments in the amount of $8,333 in addition
              to a royalty
              fee of 5% on subscription sales based on net revenue. This agreement
              expired
              during December 2004.
 
 ImageWorks
              Media Group, Inc.
 Effective
              May 1, 2004, the Company purchased ImageWorks Media Group, Inc., (hereinafter,
              “ImageWorks”), a privately held Washington company. In consideration for all of
              the common stock of ImageWorks, the Company paid $300,000 in cash,
              issued a note
              for $350,000 payable in 14 monthly installments, agreed to issue 100,000
              shares
              of common stock with a fair market value of $25,000, and agreed to
              issue 200,000
              common stock warrants. The warrants have an exercise price of $3.00,
              a term of
              four years, and are more fully described in Note 8. The value of the
              stock was
              determined by the last cash sale before the transaction of Vivid’s common stock,
              which was $0.25 per share. At September 30, 2004, the unissued common
              stock
              ($25,000) has been recorded as equity on the Company’s balance sheet. The
              100,000 shares of common stock are subject to a buyback. **** If
              the
              Vivid common stock received in this transaction does not have a public
              market
              value of $3 per common share by May 24, 2008, then the former shareholders
              of
              ImageWorks have the option to require the Company to buy back the common
              stock
              at $3 per share. The net contingency of $275,000 has been included
              in “other
              long-term liabilities”. In **** accordance
              with SFAS No. 141, the buyback contingencies increased the transaction
              cost and
              the additional value associated with the buyback contingencies of $375,000
              has
              been recorded as goodwill.
  F-23
  **VIVID
                      LEARNING SYSTEMS, INC.**
 **NOTES
                      TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                      30, 2005**
 The
              warrants issued in connection with this transaction are to be converted
              at the
              rate of 50,000 shares per year beginning December 31, 2004. If the
              warrant
              holders choose not to exercise the warrants in any given year, Vivid
              is
              obligated to cancel that year’s installment and provide a cash payment to the
              holders of $75,000. During the year ended September 30, 2005, the Company
              paid
              the founders $75,000 in cash in accordance with their election. The
              total
              minimum guaranty to the holders is $300,000 in cash if the related
              warrants are
              not exercised. This guaranty has been recorded on the balance sheet
              as “other
              long-term liabilities”.
 
 Also,
              as
              part of the share exchange agreement with ImageWorks Media Group, Inc.,
              the
              ImageWorks founders also received 200,000 Vivid common stock warrants
              with a
              strike price of $3.00, exercisable over four years, 50,000 warrants
              exercisable
              per year beginning in December 31, 2004. If the founders do not exercise
              their
              warrants that come due each December 31, then Vivid will cancel that
              year's
              warrants installment and instead pay $75,000 to the founders for that
              year’s
              installment. During the year ended September 30, 2005, the Company
              paid the
              founders $75,000 in cash in accordance with their election.
 
 The
              acquisition of ImageWorks was accounted for using the purchase method
              of
              accounting. The purchase price was allocated to the tangible and intangible
              net
              assets acquired on the basis of management’s evaluation of their respective fair
              values on the acquisition date as follows:
 
 The
              net
              purchase price of ImageWorks was $1,250,000. There were no liabilities
              assumed.
  F-24
  **VIVID
                      LEARNING SYSTEMS, INC.**
 **NOTES
                      TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                      30, 2005**
 The
                        purchase price was allocated as follows:Net
                        property, plant and equipment based uponreplacement
                        value
                    
                    $
                    238,057Non-compete
                        agreements with prior owners of ImageWorks based on salary
                    
                    
                    300,000Existing
                        customer list based on sales from January 2004 through April
                        2004
                    
                    
                    200,000Existing
                        contract in place based on dollar value
                    
                    
                    75,000Goodwill
                    
                    
                    375,000Software
                        and technology
                    
                    
                    61,943$
                    1,250,000
 
 Upon
              acquisition, ImageWorks became a wholly owned subsidiary of Vivid Delaware.
              The
              results of ImageWorks operations, commencing with the date of its acquisition,
              are included in the accompanying September 30, 2005 and 2004 financial
              statements.
 
 **NOTE
              14 - INCOME TAXES**
 
 Significant
              components of the provision (benefit) for income taxes are as
              follows:
 
 September
                        30,
                      2005
                    
                    September
                        30,
                      2004Amount
                    
                    Percent
                    
                    Amount
                    
                    PercentRecorded
                        tax provision
                    
                    $
                    (498,066
                    )
                    
                    34
                    
                    $
                    154,322
                    
                    
                    34Amortization
                        book totax
                        difference
                    
                    
                    (2,173
                    )
                    
                    nil
                    
                    
                    (755
                    )
                    
                    nilStock
                        options effect other
                    
                    
                    10,010
                    
                    
                    nil
                    
                    
                    -
                    
                    
                    -Other
                        permanent adjustments
                    
                    
                    2,089
                    
                    
                    nil
                    
                    
                    -
                    
                    
                    -Total
                        current taxexpense
                        (benefit)
                    
                    $
                    (488,140
                    )
                    
                    34
                    
                    $
                    153,567
                    
                    
                    34
 
 The
              current tax expense, 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. The tax benefit of Nuvotec’s net
              operating losses is passed on to Vivid using a prorating method based
              on
              benefits received within the group.
  F-25
  **VIVID
                        LEARNING SYSTEMS, INC.**
 **NOTES
                        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                        30, 2005**
  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,
                        2005
                      
                      September
                          30,
                        2004Deferred
                          tax asset:Net
                          operating loss carryforwards
                      
                      $
                      488,140
                      
                      $
                      -Temporary
                          difference indepreciation
                          methods
                      
                      
                      (38,069)
                      
                      
                      3,853Stock
                          options
                      
                      
                      10,010
                      
                      
                      -Total
                          deferred tax asset
                      
                      $
                      460,081
                      
                      $
                      3,853
  The
              Company’s income tax reporting was included with that of the consolidated
              Nuvotec, Inc. group, which has federal net operating loss carryforwards
              of
              approximately $2,200,000 which expire in the years 2020 through 2024.
              The
              decrease in the net operating loss carryforward from September 30,
              2003 to 2004
              was approximately $800,000 and from September 30, 2004 to 2005 net
              operating
              losses increased by approximately $1,400,000 principally due to the
              Company
              realizing losses from operations.
  In
              connection with Vivid’s income being reported as part of a consolidated tax
              return, $488,140 of federal income tax benefit for net operating losses
              is
              provided by the Company to Nuvotec at September 30, 2005 and $303,487
              of federal
              income tax benefit is provided by Nuvotec at September 30, 2004 against
              Vivid’s
              income of that year and the prior year.
 
 **NOTE
              15 -** **SEGMENT
              INFORMATION**
 
 The
              Company adopted Statement of Financial Accounting Standards No. 131,
              "Disclosures about Segments of an Enterprise and Related Information,"
              (hereinafter “SFAS No. 131”) **** during
              the year ended September 30, 2002. SFAS No. 131 established standards
              for
              reporting information about operating segments in annual financial
              statements
              and requires selected information about operating segments in interim
              financial
              reports issued to stockholders. It also established standards for related
              disclosures about products and services and geographic areas. Operating
              segments
              are defined as components of an enterprise about which separate financial
              information is available, evaluated regularly by the chief operating
              decision
              makers, or a decision making group, in deciding how to allocate resources
              and in
              assessing performance. The Company has three operating segments at
              September 30,
              2005: training subscriptions; custom products and services; ImageWorks-related
              revenues.
  F-26
  **VIVID
                          LEARNING SYSTEMS, INC.**
 **NOTES
                          TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                          30, 2005**
  Segment
              information (after intercompany eliminations) for the years ended September
              30,
              2005 and 2004 is as follows:
  September
                          30,
                      
                      September
                          30,2005
                      
                      2004Revenues:Training
                          subscriptions
                      
                      $
                      2,023,889
                      
                      $
                      3,137,990Custom
                          products and services
                      
                      
                      589,150
                      
                      
                      1,032,638ImageWorks
                      
                      
                      973,120
                      
                      
                      417,556Total
                          Revenues
                      
                      $
                      3,586,159
                      
                      $
                      4,588,184Income
                          (loss) before income taxes:Training
                          subscriptions
                      
                      
                      1,685,034
                      
                      
                      2,803,275Custom
                          products and services
                      
                      
                      (222,727
                      )
                      
                      486,045ImageWorks
                      
                      
                      565,156
                      
                      
                      28,555Corporate
                      
                      
                      (3,492,363
                      )
                      
                      (2,878,911
                      )Income
                          (loss) before income taxes
                      
                      $
                      1,464,900
                      )
                      $
                      438,964
 
 
 September
                          30,
                      
                      September
                          30,2005
                      
                      2004Identifiable
                          assets:Training
                          subscriptions
                      
                      
                      -
                      
                      
                      -Custom
                          products and services
                      
                      
                      -
                      
                      
                      -ImageWorks
                      
                      
                      226,661
                      
                      
                      277,905Corporate
                      
                      $
                      5,106,504
                      
                      $
                      5,127,797Total
                          Identifiable Assets
                      
                      $
                      5,333,165
                      
                      $
                      5,405,702Depreciation
                          and amortization:Training
                          subscriptions
                      
                      
                      -
                      
                      
                      -Custom
                          products and services
                      
                      
                      -
                      
                      
                      -ImageWorks
                      
                      
                      115,979
                      
                      
                      21,798Corporate
                      
                      $
                      157,201
                      
                      $
                      62,976Total
                          Depreciationand
                          Amortization
                      
                      $
                      273,180
                      
                      $
                      84,774
  Separate
              management of each segment is required because each business unit is
              subject to
              different marketing, production, and technology strategies.
 
 Training
              subscriptions, the first reportable segment, derives revenues from
              the sale of
              computer-based safety training products and services throughout the
              United
              States. Custom products and services which is the second reportable
              segment,
              expects to derive its revenue from custom products and services designed
              specifically for the end user. ImageWorks, the third segment, derives
              its
              revenues from custom media products and services.
 
 F-27
  **VIVID
                            LEARNING SYSTEMS, INC.**
 **NOTES
                            TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **September
                            30, 2005**
 **NOTE
              16 - COMMITMENTS AND CONTINGENCIES**
 
 In
              2004,
              the Company became aware that one of its employees was complicit in
              course
              completion reporting irregularities with an employee of a Vivid customer
              to the
              customer’s detriment. Subsequent to this incident, the Company terminated its
              aforementioned employee and determined that there was no overstatement
              of
              Vivid’s reported revenues.
 
 As
              a
              result of the Vivid employee’s actions, the Company’s customer refused to pay
              the full amount of its outstanding receivable. After negotiating with
              Vivid a
              settlement in December 2005, the customer agreed to pay Vivid $125,000
              as full
              payment of the receivable and to cease any related litigation. In connection
              with the settlement, Vivid recorded a bad debt expense of $171,230.
 
 See
              Note
              13 **-** Acquisitions.
 
 
 **NOTE
              17 - SUBSEQUENT EVENTS**
 
 Effective
              October 1, 2005, the assets of Protrain, a division of the Company,
              including
              computers, equipment and a customer list were sold to a former employee
              for a
              $45,000 note payable to the Company over three years commencing January
              1, 2006
              with payments of $1,349 monthly including interest at 5% per annum.
 
 During
              November and December 2005, 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).
 
 F-28