**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      Fiscal Year ended September 30, 2007





Commission
      File Number: 333-116255





**VIVID
      LEARNING SYSTEMS, INC.**


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





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





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





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





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





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





Check
      whether the Issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
      such
      shorter period that the registrant was required to file such reports), and
      (2)
      has been subject to such filing requirements for the past 90 days.  
YES xNO o





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





Indicate
      by check mark whether the Issuer is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act)   YES oNO x





State
      Issuer’s revenues for its most recent fiscal year: $6,056,202.










The
      aggregate market value of the Issuer’s common stock held by non-affiliates of
      the Issuer as of December 18, 2007 (based on the closing sale price of U.S.
      $0.23 per share of the Issuer’s common stock, as reported on the Over the
      Counter Bulletin Board on that date) was approximately U.S. $501,744 (based
      on
      approximately 2,181,496 shares).  Common stock held by each officer and
      director and by each person known to the Issuer to own 5% or more of the
      outstanding common stock has been excluded in that those persons may be deemed
      to be affiliates. This determination of affiliate status is not necessarily
      a
      conclusive determination for other purposes.





The
      number of shares of the Issuer’s common stock outstanding as of December 18,
      2007 was 13,372,203.





DOCUMENTS
      INCORPORATED BY REFERENCE





Document
            
            Part
                of 10-KSBProxy
                Statement for the 2008 Annual Meeting of Stockholders
            
            Part
                III





Transitional
      Small Business Disclosure Format (Check one):   YES oNO x











**TABLE
      OF CONTENTS**


**PART
                  1**FORWARD-LOOKING
                STATEMENTS
              1ITEM
                  1.
              DESCRIPTION
                  OF BUSINESS
              1ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              7ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              7ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              7**PART
                  II**ITEM
                  5.
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
              8ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              10ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              19ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              19ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              19ITEM
                  8B.
              OTHER
                  INFORMATION
              19**PART
                  III**ITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
              19ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              20ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              20ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              20ITEM
                  13.
              EXHIBITS
              20ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              23FINANCIALS
              F-1
                  to F-22









**** **FORWARD-LOOKING
      STATEMENTS**





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





**PART
      I**




**ITEM
      1.  DESCRIPTION OF BUSINESS**





SUMMARY
      OF CORPORATE HISTORY




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





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





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





1





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





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





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





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





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





**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.





2




In
      2000,
      the Company began developing training libraries that could be delivered over
      the
      web. The Company changed its pricing model from one time product sales to annual
      subscriptions. The Company built a large web-enabled OSHA and utility safety
      library. Additionally, the Company purchased and enhanced a web based learning
      management system. The Company also established a national marketing presence
      through a combination of direct sales and marketing, signed on channel sales
      partners, worked with industry experts and consultants, exhibited at national
      trade shows, and advertised in national magazines. The Company now also applies
      this marketing mix and focus to the health care and food safety
      markets.





**Vivid's
      Products**





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




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




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




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





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





**Training
      Industry**





Corporate
      training is an $85 billion-a-year industry with a 25% growth from e-learning
      applications utilizing the Internet according to Bersin Associates, an industry
      analyst for the training industry. It is estimated that companies in the US
      spend nearly $3 billion dollars on regulatory training annually with more than
      $900 million being spent on training materials alone per the U.S. Department
      of
      Labor, the American Society for Training and Development, and Richard K. Miller
      and Associates.




3




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




**Sales
      and Marketing**




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




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




The
      Company's largest customer is Fluor Hanford, Inc. Fluor Hanford accounted for
      approximately 18% of revenues in fiscal year 2007, 19% of revenues in fiscal
      year 2006, and 22% of revenues in fiscal year 2005. The contract with Fluor
      Hanford expires September 30, 2008.





Fluor
      Hanford is the primary management contractor for Project Hanford and has the
      ultimate responsibility for the Project Hanford Management Contract to provide
      the U.S. Department of Energy with a prime contractor, principal subcontractors,
      as well as other subcontractors to manage and integrate a full range of work
      to
      support cleanup of the U.S. Department of Energy’s former nuclear production
      facilities at the Hanford Site in southeastern Washington State. Since 1995,
      Vivid has been responsible for producing, updating, and delivering the computer
      and Hanford LAN-based Hanford General Employee Training program to Fluor Hanford
      contractors and other U.S. Department of Energy contractors on the Hanford
      site.
      Vivid maintains and services two local training centers and provides
      authenticators to proctor the training centers.





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





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





4




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




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




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





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




6.
      In the
      food service industry, Vivid currently markets and delivers the following online
      training programs to help companies meet applicable federal and/or state
      regulations: Occupational Health and Safety Administration (OSHA) training;
      Food
      Safety training HACCP based on Food and Drug Administration (FDA) regulations;
      and, some employment law training. The markets for this training are food
      handlers and food managers at retail food stores.




**Acquisitions**





In
      fiscal
      years 2007 and 2006 Vivid made no acquisitions.





**Employees**




As
      of
      September 30, 2007, Vivid had 35 full-time employees and 7 part-time employees.
      Of those employees, 9 full-time employees are in sales, 21 full-time employees
      are in production, 5 full-time employees are administrative, and 5 are part-time
      authenticators (test proctors), and 2 part-time in production. Vivid plans
      to
      add 2 or more additional employees in fiscal year 2008. None of the employees
      are subject to any collective bargaining agreements.  There
      is
      one (1) employment agreement.





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




5




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





**Competition**





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





**Intellectual
      Property**




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





**Regulation**




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





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





6




**ITEM
      2.  DESCRIPTION OF PROPERTY**





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




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




The
      Company leases its training center at 2345 Stevens Drive in Richland, Washington
      from the Port of Benton, on an annual basis and is responsible for excise tax
      and maintenance expenses based upon its share of office space occupancy in
      relation to the total space leased. The Company paid $41,996 and $70,448 for
      rent, excise tax, and maintenance of this property for the fiscal years ended
      September 30, 2007 and September 30, 2006, respectively.




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





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





**ITEM
      3.  LEGAL PROCEEDINGS**





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







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





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





7





**PART
      II**




**ITEM
      5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





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





Year
                  Ending September 30, 2007
            
            High
            
            LowSeptember
                30, 2007
            
            $
            0.40
            
            $
            0.16June
                30, 2007
            
            $
            0.50
            
            $
            0.13March
                31, 2007
            
            $
            0.24
            
            $
            0.17December
                31, 2006
            
            $
            0.26
            
            $
            0.17





Source:
       Big Charts





On
      December 18, 2007, the closing bid price for our common stock was
      $0.23.





STOCKHOLDERS





As
      of
      December 4, 2007, there were 326 stockholders of record of the Company’s common
      stock.





DIVIDENDS





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





SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





The
      following table sets forth certain information, as of September 30, 2007,
      concerning outstanding options to purchase common stock granted to participants
      in all of the Company’s equity compensation plans and the number of shares of
      common stock remaining available for issuance under such equity compensation
      plans.





8





EQUITY
      COMPENSATION PLAN INFORMATION





Plan
                Category
            
            Number of securities to
                be issued upon exercise
                of outstanding options,
              warrants and rights
            
            Weighted-average
              exercise price of
              outstanding options,
              warrants and rights
            
            Number of securities
              remaining available for
              future issuance under
              equity compensation
              plans (excluding
              securities reflected in
              column (a))(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            
            515,898
            (1)
            $
            0.34
            
            
            1,800,602Equity
                compensation plans not approved by security holders
            
            
            N/A
            
            
            N/A
            
            
            N/ATotal
            
            
            515,898
            
            $
            0.34
            
            
            1,800,602




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





RECENT
      SALES OF UNREGISTERED SECURITIES





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





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





REPURCHASE
      OF SECURITIES





Vivid
      did
      not repurchase any shares of its common stock during the fiscal year ended
      September 30, 2007.




9




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





CAUTIONARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS





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





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





**Overview**





Vivid
      revenues grew by 46% over the past year. The increase in revenues is
      attributable in part to the acquisition of the former parent’s Engineering and
      Technical Services (“ETS”) business line, which provides software modeling,
      laboratory information management services, and temporary staff augmentation
      services, and is included in our Custom Products and Services business segment.
      Also, a 21% increase in training subscription revenues largely attributable
      to a
      high level of subscription renewals and an increase in new subscription based
      sales contributed to the growth. Vivid’s gross profit decreased from 68% in
      fiscal year 2006 to 60% of revenues in fiscal year 2007. The decrease in gross
      profit margin achieved on total revenues is mainly attributable to lower margins
      realized in staff augmentation services, software modeling, and laboratory
      information systems services, which technical services have been deemphasized
      and scaled back due to the poor margin realized from this type of non-core
      technical work.





**Critical
      Accounting Policies**





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





10




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





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, 2007 all
      Company receivables are considered collectible and no valuation allowance is
      deemed necessary.





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





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





Reseller
      Commissions—These commissions are recorded as an expense if the cumulative
      affirmative impact of indicators of gross revenue reporting, as outlined in
      EITF
      99-19, Indicators 7-14, are met by the Company in the transaction. The Company
      pays each of the channel partners a commission, or a referral fee, recorded
      as a
      selling expense, strictly on a success basis as a result of selling the
      Company’s products and services to third party customers. The Company has
      contractual arrangements with each of these partners that range from one to
      three years. The Company pays these partners a referral fee, or a commission,
      of
      between five and fifty percent of net revenue depending upon their annual sales
      levels and other criteria. None of these U.S.-based contracts is exclusive,
      or
      restricts the Company from selling directly or through other channel partners
      into any markets. Such expenses paid to resellers are recorded as a reduction
      to
      the underlying selling price if the cumulative affirmative impact of indicators
      of net revenue reporting, as outlined in EITF 99-19, Indicators 15-17 are
      present in the transaction. The Company does not provide any consideration
      to
      the resellers’ end-users other than negotiated price discounts for subscriptions
      based on the size of the contract. Contract size is defined by the number of
      employees (seats), number of lessons and length of the contract.





Royalty
      Expenses—Royalty payments are recorded as an expense if ownership of the
      training content does not reside with the Company in a licensing fee arrangement
      between the Company and the owner of the content.





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





11




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





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





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





Reclassifications—Certain
      prior year amounts in the accompanying financial statements have been
      reclassified to conform to the fiscal 2007 presentation. The reclassifications
      have no effect on net assets, net revenues, or net earnings.





Provision
      for Taxes—Current tax provisions represent the federal income tax the Company
      would have incurred on a separate, stand-alone basis. Income taxes are provided
      based upon the liability method of accounting pursuant to Statement of Financial
      Accounting Standards No. 109, “Accounting for Income Taxes.” Deferred income
      taxes are recorded to reflect the tax consequences in future years of
      differences between the tax basis of assets and liabilities and their financial
      reporting amounts at each year end.





12




**RESULTS
      OF OPERATIONS**




Our
      fiscal year ends September 30. Our operating results for the years ended
      September 30, 2007 and 2006 are presented below.




Year Ended
              September
              30, 2007
            
            Year Ended
              September
              30, 2006REVENUES
            
            $
            6,056,202
            
            $
            4,141,604COST
                OF REVENUES
            
            
            2,439,497
            
            
            1,342,006GROSS
                PROFIT
            
            
            3,616,705
            
            
            2,799,598EXPENSESMarketing
                & related labor expenses
            
            
            1,401,739
            
            
            1,068,252Bad
                debt expense
            
            
            12,426
            
            
            12,111Reseller
                commissions
            
            
            394,711
            
            
            307,380Depreciation
                & amortization
            
            
            738,769
            
            
            144,113Wages
                and contract labor
            
            
            896,969
            
            
            579,589Other
                Operating expenses
            
            
            1,100,695
            
            
            909,197TOTAL
                OPERATING EXPENSES
            
            
            4,545,309
            
            
            3,020,642INCOME
                FROM OPERATIONS
            
            $
            (928,604
            )
            $
            (221,044
            )OTHER
                INCOME EXPENSEGain
                (loss) on sale of equipment and intangible assets
            
            
            (1,733
            )
            
            30,276Other
                income
            
            
            -
            
            
            80,106Interest
                income
            
            
            1,307
            
            
            2,075Interest
                expense
            
            
            (49,105
            )
            
            (84,435
            )TOTAL
                OTHER INCOME (EXPENSE)
            
            
            (49,531
            )
            
            28,022INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            (978,135
            )
            
            (193,022
            )INCOME
                TAX BENEFIT (EXPENSE)
            
            
            332,566
            
            
            46,001NET
                INCOME (LOSS)
            
            $
            (645,569
            )
            $
            (147,021
            )BASIC
                NET INCOME (LOSS) PER SHARE
            
            
            (0.05
            )
            
            (0.01
            )DILUTED
                NET INCOME (LOSS) PER SHARE
            
            
            (0.05
            )
            
            (0.01
            )WEIGHED
                AVERAGE NUMBER OF COMMON STOCK SHARES OUTSTANDING:BASIC
            
            
            13,261,938
            
            
            11,147,261DILUTED
            
            
            13,261,938
            
            
            11,147,261





**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, 2007 and 2006 are as follows.





13





Training
                Subscriptions
            
            **Sept. 30, 2007**
              **(year ended)**
            
            **Percent of**
              **Revenue**
            
            **Sept. 30, 2006(year ended)**
            
            **Percent of**
              **Revenue**
            
            **Percent**
              **Increase**
              **(Decrease)**Revenues
            
            
            3,085,747
            
            
            100.0
            %
            
            2,542,296
            
            
            100.0
            %
            
            21.4
            %Cost
                of Revenues
            
            
            672,740
            
            
            21.8
            %
            
            596,874
            
            
            23.5
            %
            
            12.7
            %Gross
                Profit
            
            
            2,413,007
            
            
            78.2
            %
            
            1,945,422
            
            
            76.5
            %
            
            24.0
            %





Custom
                Products and Services
            
            **Sept. 30, 2007(year ended)**
            
            **Percent of**
              **Revenue**
            
            **Sept. 30, 2006**
              **(year ended)**
            
            **Percent of**
              **Revenue**
            
            **Percent**
              **Increase**
              **(Decrease)**Revenues
            
            
            2,970,455
            
            
            100
            %
            
            1,599,308
            
            
            100.0
            %
            
            85.7
            %Cost
                of Revenues
            
            
            1,766,757
            
            
            59.5
            %
            
            745,132
            
            
            46.6
            %
            
            137.1
            %Gross
                Profit
            
            
            1,203,698
            
            
            40.5
            %
            
            854,176
            
            
            53.4
            %
            
            40.9
            %





**Comparison
      of year ended September 30, 2007 to September 30, 2006**





**Total
      Revenues**


Total
      revenues increased by $1,914,598, or 46%, to $6,056,202 in 2007 from $4,141,604
      in 2006. The increase was mainly due to the acquisition of the former parent’s
      Engineering and Technical Services (“ETS”) business line, which provides
      software modeling, laboratory information management services, and temporary
      staff augmentation services included within our Custom Products and Services
      business segment . Another
      factor in the revenue growth was the 21% increase in revenues attributable
      to
      training subscription revenues. Training Subscription revenues earned are
      subject to minor amounts of direct production expenses and, therefore, generate
      high gross margins. Total gross profit as a percentage decreased to 60% for
      the
      year ended September 30, 2007 compared to 68% for the year ended September
      30,
      2006.  This decrease was largely due to lower margins realized in staff
      augmentation, software modeling, and laboratory information systems services,
      which technical services have been deemphasized and scaled back due to the
      poor
      margin realized from this type of non-core technical work.





Training
      Subscription revenues increased by $543,451, or 21%, to $3,085,747 for the
      fiscal year ended September 30, 2007 compared to $2,542,296 for the fiscal
      year
      ended September 30, 2006. Training Subscriptions accounted for 51% and 61%
      of
      total revenues respectively in fiscal year 2007 and fiscal year 2006. The
      increase in Training Subscription revenues was due to increasing renewal levels
      of existing subscriptions and the addition to the revenue base of new
      subscription customers. The decrease in Training Subscription revenues in fiscal
      year 2007 compared to fiscal year 2006 as a percentage of total revenues is
      from
      the new revenues totaling $1,337,644 added to the base generated by ETS.
      Excluding ETS revenues Training Subscription revenues accounted for 65% of
      core
      revenues in fiscal year 2007.




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




Custom
      Products and Services revenues increased by $1,371,147, or 86%, to $2,970,455
      for the fiscal year ended September 30, 2007 compared to $1,599,308 for the
      fiscal year ended September 30, 2006. The large increase is attributable to
      newly acquired software modeling, laboratory information systems, and staff
      augmentation custom work from customers within the commercial and federal
      sectors during fiscal year 2007. The revenues generated from these technical
      services totaled $1,337,644 in fiscal year 2007. Non-ETS Custom Products and
      Services revenues increased 2% to $1,632,811 in the current fiscal year compared
      to $1,599,308 in the previous fiscal year. The slight increase was mainly due
      to
      new custom projects consistent with the historical seasonality of this business
      segment. Gross profits generated from Custom Products and Services for fiscal
      year ending September 30, 2007 were $1,203,698 and 41% of revenues compared
      to
      $854,176 and 53% for the fiscal year ended September 30, 2006. The significant
      decrease in gross profits as a percentage of revenue in the Custom Products
      and
      Services segment is attributable to lower margins realized on the newly acquired
      staff augmentation services, software modeling, and laboratory information
      systems services.




14




Custom
      Products and Services accounted for 49% and 39% of total revenues respectively
      in fiscal year 2007 and fiscal year 2006. The increase is attributable to newly
      acquired ETS revenues within this segment.





**Cost
      of Revenues**


Cost
      of
      revenues increased by $1,097,491, or 82%, to $2,439,497 in 2007 from $1,342,006
      in 2006 primarily due to the direct costs associated with higher revenues
      generated from newly acquired ETS technical services. Cost of revenues as a
      percentage of sales increased to 40% in 2007 from 32% in 2006. The main costs
      included in cost of revenues are labor related costs, including salaries,
      payroll taxes and benefits. Labor related costs include the labor of the
      Company’s production groups required to build software content and/or complete
      the tasks required by contracts/services from specific
      customers/clients.





Training
      subscription cost of revenues increased by 13% to $672,740 in fiscal year 2007
      from $596,874 in fiscal year 2006. This increase is due to direct costs incurred
      from increased revenues generated from new subscriptions and a high percentage
      renewal rate of existing subscriptions.





Custom
      products and services cost of revenues increased by 137% to $1,766,757 in fiscal
      year 2007 from $745,132 in fiscal year 2006. The increase is due to the direct
      costs associated with significantly higher revenues in this business segment
      resulting from newly acquired ETS technical services.





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





**Marketing
      and Related Labor Expenses**


Marketing
      and related labor expenses increased by $333,487, or 31%, to $1,401,739 in
      2007
      from $1,068,252 in 2006. The increase is due to an increasing internal marketing
      investment in proposal activities pertaining to portal development, and new
      business development contract opportunities within the government and commercial
      sectors.





**Reseller
      Commissions**


Reseller
      commissions increased $87,331, or 28%, to $394,711 in 2007 from $307,380 in
      2006. The increase in the comparison of the two fiscal years is attributable
      directly to an increase in training subscription revenues generated from sales
      resources external to the Company .





**Bad
      debt expense**


Bad
      debt
      expense was $12,426 in fiscal year 2007 compared to $12,111 in fiscal year
      2006.





**Depreciation
      and Amortization**


Depreciation
      and amortization increased by $594,656 to $738,769 in 2007 from $144,113 in
      2006. The increase is attributable to a reassessment resulting in a reduction
      in
      the estimated lives of certain intangible assets, depreciation related to the
      addition of infrastructure fixed assets, and newly acquired modeling and
      laboratory information systems fixed assets.





15




**General
      and Administrative Expenses**


General
      and Administrative expenses increased by 34% to $1,997,664 in fiscal year 2007
      from $1,488,786 in fiscal year 2006. Labor related expenses increased by 55%
      to
      $896,969 during fiscal year 2007 from $579,589 during fiscal year 2006. The
      increase is attributable to management and staff acquired with the ETS business
      line and other administrative staff. Non-labor related administrative expenses
      increased by 21% to $1,100,695 during fiscal year 2007 from $909,197 during
      fiscal year 2006. The increase is primarily attributable to transition costs
      related to assimilation of the new ETS business line and the absorption of
      infrastructure costs pertaining to the sale of the parent company.





**Loss
      from Operations**


Loss
      from
      Operations increased by $707,560 to $928,604 during fiscal year 2007 from
      $221,044 during fiscal year 2006. The increase is due principally to increases
      in marketing, reseller, and infrastructure expenses from an expanding operation,
      and increases in depreciation and amortization expenses due to a reassessment
      of
      the estimated useful lives attached to intangible assets.





**Other
      Income (Expense)**


The
      decrease in fiscal year 2007 Other Income is attributable to the recognition
      of
      one time gains from the sale of equipment and intangible assets of $30,276
      in
      the first quarter of fiscal year 2006 and the gain realized from a liability
      insurance settlement of $80,016 in the fourth quarter of fiscal year 2006.
      This
      was partially offset by a decrease in interest expense of $35,330 during fiscal
      year 2007 compared to fiscal year 2006 resulting from the elimination of
      inter-company operating line of credit debt partially offset by increased term
      borrowings and equipment financings. Interest expense on debt was $49,105 in
      fiscal year 2007 compared to $84,435 in fiscal year 2006.




**Net
      Loss**


The
      operation sustained a net loss of $645,569 in fiscal year 2007 compared to
      a net
      loss of $147,021 in fiscal year 2006. The increase in net loss of $498,548
      is
      due to increasing operating expenses from an expanded operation incurred during
      fiscal year 2007 compared to fiscal year 2006, partially offset by increasing
      gross profit margins and income tax benefits in the comparison of the two fiscal
      years. The principal reasons for the increases in operating expenses are related
      to the assimilation and transition costs pertaining to the newly acquired ETS
      business line, the absorption of infrastructure costs related to the sale of
      the
      parent company, and the reassessment of the useful lives of certain intangible
      assets. The infrastructure costs of the operation are under continuing review
      and restructuring.





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


Known
      trends or uncertainties that may have a material impact upon revenues include:
      (1) a general market resistance to on-line training; (2) that many industry
      associations develop free or lower cost training against which we may find
      it
      difficult to compete; (3) that our annual subscription revenue model may not
      be
      generally 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.





16




Vivid
      Learning Systems has an operating history of 12 years. Other than fluctuating
      revenues from two large clients experienced in 2005 and 2006, the Company has
      not experienced any infrequent events, transactions or significant economic
      conditions that materially impact the amount of revenue.





**Liquidity
      and Capital Resources**


As
      of
      September 30, 2007, the Company had cash and cash equivalents of $80,331 as
      compared to $166,645 as of September 30, 2006. Historically, the Company has
      financed its cash flow requirements through the management of its line of
      credit, local economic development loans, and cash generated from
      operations.




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




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




**Net
      Cash Provided by Operating Activities**


Cash
      flows provided by operating activities amounted to $279,714 in fiscal year
      2007
      compared to $669,354 in fiscal year 2006. The main reason for the decrease
      in
      cash flows provided by operations is attributable to an increase in the net
      loss
      and deferred taxes partially offset by increases in depreciation and
      amortization expenses in fiscal year 2007 as compared to fiscal year
      2006.





**Net
      Cash Used in Investing Activities**


Cash
      flows used in investing activities amounted to $184,957 in fiscal year 2007
      compared to $142,748 in fiscal year 2006. The increase is attributable to
      increased expenditures related to the acquisition of property and equipment
      and
      cost expenditures for software development.





**Net
      Cash Used in Financing Activities**


Cash
      flows used in financing activities amounted to $181,071 in fiscal year 2007
      compared to $376,583 in fiscal year 2006. The decrease is attributable to the
      elimination of payment requirements for line of credit indebtedness and a
      reduction in related party note payments .





**Future
      Needs**


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




17




**Other
      Material Events**


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





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.





**Off-Balance
      Sheet Arrangements**


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




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




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




• Future
      minimum lease payments total $347,796 for operations in fiscal year 2008-2012
      at
      the 5710 and 5728 Bedford Street, Pasco, WA locations.





**Material
      Commitments for Capital Expenditures**


There
      presently exist no material commitments to outside vendors for capital
      expenditures other than five capital lease obligations recorded on the balance
      sheet for leasehold improvements at the Bedford street location, the purchase
      of
      a telephone system, the purchase of computer workstations, and the purchase
      of
      video equipment. As part of the general replacement budget, $100,000 is budgeted
      for fiscal year 2008 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.





18





**ITEM
      7.  FINANCIAL STATEMENTS**





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





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





There
      were no changes in or disagreements with our accountants on accounting and
      financial disclosure matters in 2007.





**ITEM
      8A.  CONTROLS AND PROCEDURES**





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





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





**ITEM
      8B.  OTHER INFORMATION**





None.





**PART
       III**




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





Information
      regarding our directors appears under “Proposal No. 1 - Election of Directors”
in our Proxy Statement for the 2008 Annual Meeting of Stockholders (the “Proxy
      Statement”). Information regarding our executive officers appears under
“Executive Officers” in our Proxy Statement. Information about compliance with
      Section 16(a) of the Exchange Act appears under “Section 16(a) Beneficial
      Ownership Reporting Compliance” in the Proxy Statement. Information regarding
      our Audit Committee and our Audit Committee’s financial expert appears under
“Audit Committee Report” in our Proxy Statement. These portions of the Proxy
      Statement are incorporated by reference into this report.





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





19




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




**ITEM
      10. EXECUTIVE COMPENSATION**





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




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





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




**ITEM
       12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





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




**ITEM
      13.  EXHIBITS**




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





Exhibit
              Number
            
            Description3.1
            
            Certificate
                of Incorporation, Applied Tec*knowledge*y,
                Inc., Washington, March 2, 1995*3.2
            
            Articles
                of Amendment of Applied Tec*knowledge*y,
                Inc., Washington, April 3, 1997*3.3
            
            Amended
                and Restated Articles of Incorporation of Vivid Concepts, Inc.,
                Washington, September 2, 1997*3.4
            
            Certificate
                of Amendment, Vivid Concepts, Inc., Washington, February 23,
                2000*3.5
            
            Certificate
                of Incorporation of Vivid Learning Systems, Inc., Delaware, December
                23,
                2003*3.6
            
            Amended
                and Restated Articles of Incorporation of Vivid Learning Systems,
                Inc.,
                Washington, December 24, 2003*3.7
            
            Bylaws
                of Applied Tec*knowledge*y,
                Inc., Washington, May 24, 1995*3.8
            
            Amended
                and Restated Bylaws of Vivid Learning Systems, Inc., Washington,
                November
                25, 2003*3.9
            
            Bylaws
                of Vivid Learning Systems, Inc., Delaware, December
                2003*4.1
            
            Specimen
                Certificate of Common Stock*4.2
            
            Warrant
                issued to Matt Hammer, May 25, 2004*4.3
            
            Warrant
                issued to Nick Bauer, May 25, 2004*




20




4.4
            
            Stock
                Option issued to Jackson Steinem, December 23, 2003**4.5
            
            Form
                of Option for 2003 Stock Option Plan, Incentive*4.6
            
            Form
                of Option for 2003 Stock Option Plan, Nonqualified*10.1
            
            2003
                Stock Option Plan, Vivid Learning Systems, Inc.,
                Delaware*10.2
            
            Lock
                Up Agreement, February 2004*10.3
            
            Lease
                for 723 The Parkway, Richland, Washington*10.4
            
            Lease
                for 2345 Stevens Road, Richland, Washington**10.5
            
            Contract
                between Human Resource Novations, Inc. and Vivid Concepts, Inc.,
                dated
                April 21, 1999**10.6
            
            Management
                Contract with Nuvotec, Inc.****10.7
            
            Contract
                with Fluor Hanford, Inc.***10.8
            
            Contract
                with Pennsylvania State System of Higher Education
              Foundation,
                Inc., dated August 18, 2004***10.9
            
            Asset
                Purchase Agreement with FoodSafety, Inc.****10.10
            
            Share
                Exchange Agreement ImageWorks Media Group, Inc.****10.11
            
            Agreement
                between Vivid Learning Systems, Inc. and Nuvotec USA, Inc., regarding
                Line
                of Credit *****10.12
            
            Asset
                Purchase Agreement with TrueActive Software, Inc. , which includes
                as
                Exhibit B the Employment Agreement with Richard Eaton, president
                of
                TrueActive Software, Inc. *****10.13
            
            Conveyance,
                Bill of Sale and Assignment Agreement between Vivid Learning Systems,
                Inc.
                and TrueActive Software, Inc. *****10.14
            
            Promissory
                Note issued to TrueActive Software, Inc. *****10.15
            
            Letter
                from Nuvotec USA, Inc. assuming from Vivid Learning Systems, Inc.
                the
                obligations to TrueActive Software, Inc., dated September 26, 2005
                *****10.16
            
            Agreement
                between Vivid Learning Systems, Inc. and Nuvotec USA, Inc. regarding
                Line
                of Credit with Key Bank *****10.17
            
            Lease
                for 5728 Bedford Street, Pasco, Washington ******14
            
            Code
                of Ethics *****21.1
            
            List
                of Subsidiaries**23.1
            
            Accountant’s
                Consent, Williams & Webster, P.S. (filed herewith)31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002 (filed herewith)31.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002 (filed herewith)32.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 (filed herewith)32.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 (filed herewith)





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





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





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




21




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




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




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




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




(b)
      Vivid
      filed the following reports on Form 8-K during the last quarter of its fiscal
      year ended September 30, 2007:





On
      September 19, 2007, Vivid filed a Form 8-K to announce the appointment of
      Matthew Hammer as CEO and the transition of Sandra I. Muller to outside general
      counsel.





On
      August
      14, 2007, Vivid filed a Form 8-K to announce the resignation of Christopher
      L.
      Britton from the Board of Directors.





On
      July
      20, 2007, Vivid filed a Form 8-K to announce the appointment of Sandra I. Muller
      as CEO and Robert M. Blodgett as Corporate Secretary.





On
      July
      3, 2007, Vivid filed a Form 8-K to announce the termination of employment of
      CEO
      Christopher L. Britton, the appointment of Sandra I. Muller as acting CEO,
      the
      appointment of Diehl R. Rettig to the Board, the resignation of Robert J. Turner
      as Chairman of the Audit Committee and election of Diehl R. Rettig to serve
      as
      the Chairman of the Audit Committee, and the termination of negotiations for
      the
      acquisition by Vivid of Via Training LLC.





On
      June
      15, 2007, Vivid filed a Form 8-K to announce that the Company shares held by
      Nuvotec USA, Inc. had been distributed to the Nuvotec USA shareholders on a
      pro-rata basis.





On
      May
      18, 2007, Vivid filed a Form 8-K to announce that Vivid had executed a letter
      of
      intent to acquire Via Training LLC.





On
      May 3,
      2007, Vivid filed a Form 8-K to announce the press release by Perma-Fix
      Environmental Services, Inc. of its plans to purchase Nuvotec USA, Inc., then
      majority shareholder of Vivid.





On
      February 23, 2007, Vivid filed a Form 8-K to announce the resignation of Matthew
      Hammer as COO.





On
      December 19, 2006, Vivid filed a Form 8-K to amend the previously filed Form
      8-K
      announcing the acquisition of the ETS business line, said amendment to
      incorporate financial information for ETS.


On
      December 19, 2006, Vivid filed a Form 8-K to announce the acquisition of the
      ETS
      business line from Nuvotec USA, Inc.





On
      November 3, 2006, Vivid filed a Form 8-K to amend the previously filed Form
      8-K
      announcing an exchange of debt for stock transaction with Nuvotec USA, Inc.,
      said amendment to correct certain numerical notations.





22




On
      October 31, 2006, Vivid filed a Form 8-K to announce the exchange of debt for
      stock transaction with Nuvotec USA, Inc.





On
      October 27, 2006, Vivid filed a Form 8-K to announce the press release by
      Perma-Fix Environmental Services, Inc. announcing the execution of a letter
      of
      intent whereby Perma-Fix planned to purchase Nuvotec USA, Inc., Vivid’s majority
      shareholder.




**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 2007
      and
      2006 were $39,945 (approximate – final billing not yet received) and
      $58,200, 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 2007 and 2006 were $4,721
      and $22,176, respectively.





(3)
       Tax Fees





The
      aggregate fees billed for professional services rendered by Williams &
Webster, P.S. for tax related services for fiscal years 2007 and 2006 were
      $0
      and $3,845, respectively.





(4)
       All Other Fees





The
      aggregate fees billed for professional services rendered by Williams &
Webster, P.S. for other fees for fiscal years 2007 and 2006 were $4,304 and
      $0,
      respectively.





(5)
       Audit Committee Policies and Procedures





Vivid
      does have an Audit Committee. The Audit Committee’s report, as well as its
      pre-approval policies and procedures appear
      under “Report of the Audit Committee” in the Proxy Statement. That portion of
      the Proxy Statement is incorporated by reference into this report The
      Audit Committee and the Board of Directors of Vivid approved all of the services
      rendered to Vivid by Williams & Webster, P.S. for fiscal years 2007 and
      2006.





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





Not
      applicable.





23




**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 18 , 2007
            By:
            /s/Name:
            Matthew
                J. HammerTitle:
            Chief
                Executive Officer




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





SIGNATURE
            
            TITLE
            
            DATE/s/
            
            President,
                Chief Executive Officer
            
            December
                18, 2007Matthew
                J. Hammer/s/
            
            Treasurer,
                Secretary, Chief Financial Officer
            
            December
                18, 2007Robert
                M. BlodgettBoard
                of Directors/s/
            
            Chairman
            
            December
                18, 2007Robert
                L. Ferguson/s/
            
            Director
            
            December
                18, 2007William
                N. Lampson/s/
            
            Director
            
            December
                18, 2007Diehl
                R. Rettig/s/
            
            Director
            
            December
                18, 2007Andrew
                Thoresen/s/
            
            Director
            
            December
                18, 2007Robert
                J. Turner









**VIVID
      LEARNING SYSTEMS, INC.**


**Consolidated
      Financial Statements and**


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


**September
      30, 2007 and 2006**





**INDEX
      TO FINANCIAL STATEMENTS**




Vivid
      Learning Systems, Inc.





Index
                to Financial Statements
            F-1Report
                of Independent Registered Public Accounting Firm, Williams & Webster,
                P.S.
            F-2Consolidated
                Balance Sheets at September 30, 2007 and September 30,
                2006
            F-3Consolidated
                Statements of Income for the years ended September 30, 2007, and
                September
                30, 2006
            F-4Consolidated
                Statement of Stockholders’ Equity for the years ended September 30, 2007,
                and September 30, 2006
            F-5Consolidated
                Statements of Cash Flows for the for the years ended September 30,
                2007,
                and September 30, 2006
            F-6Notes
                to Consolidated Financial Statements
            F-7 to F-22




F-1




Vivid
      Learning Systems, Inc.


Pasco,
      Washington





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





We
      have
      audited the accompanying balance sheet of Vivid Learning Systems, Inc. as of
      September 30, 2007 and 2006, and the related statements of operations,
      stockholders’ equity and cash flows for the year 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 audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit 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 audit provides 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, 2007 and 2006, and the results of its operations, stockholders
      equity and its cash flows for the year then ended in conformity with accounting
      principles generally accepted in the United States of America.






Williams
      & Webster, P.S.


*Certified
      Public Accountants*







Spokane,
      Washington


December
      14, 2007




F-2




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





30-Sep-07
            
            30-Sep-06ASSETSCURRENT
                ASSETSCash
            
            $
            80,331
            
            $
            166,645Accounts
                and contracts receivable
            
            
            1,157,418
            
            
            700,115Accounts
                and contracts receivable, Fluor Hanford
            
            
            28,822
            
            
            27,077Prepaid
                expenses
            
            
            120,073
            
            
            119,110Other
                current assets
            
            
            186,534
            
            
            219,795TOTAL
                CURRENT ASSETS
            
            
            1,573,178
            
            
            1,232,742PROPERTY,
                PLANT AND EQUIPMENTProperty
                and equipment
            
            
            1,518,082
            
            
            1,318,651Less:
                Accumulated depreciation and amortization
            
            
            (1,152,471
            )
            
            (862,828
            )TOTAL
                PROPERTY, PLANT AND EQUIPMENT
            
            
            365,611
            
            
            455,823OTHER
                ASSETSSoftware,
                net of amortization
            
            
            1,328,424
            
            
            1,485,038Intangibles,
                net of amortization
            
            
            -
            
            
            436,943Goodwill
            
            
            375,000
            
            
            375,000Long-term
                contracts receivable
            
            
            85,202
            
            
            244,375Deferred
                tax asset
            
            
            838,433
            
            
            505,867TOTAL
                OTHER ASSETS
            
            
            2,627,059
            
            
            3,047,223TOTAL
                ASSETS
            
            $
            4,565,848
            
            $
            4,735,788LIABILITIES
                  AND STOCKHOLDERS' EQUITYCURRENT
                  LIABILITIESAccounts
                payable
            
            $
            295,376
            
            $
            94,049Payable
                to related party
            
            
            -
            
            
            670,702Line
                of credit payable
            
            
            57,072
            
            
            -Accrued
                contract labor
            
            
            221,374
            
            
            160,300Other
                current liabilities
            
            
            114,667
            
            
            63,136Unearned
                revenue
            
            
            118,654
            
            
            20,355Notes
                payable, related parties
            
            
            350,000
            
            
            111,853Current
                portion of long-term liabilities
            
            
            106,638
            
            
            25,795TOTAL
                CURRENT LIABILITIES
            
            
            1,263,781
            
            
            1,146,190LONG-TERM
                LIABILITIESLong-term
                debt
            
            
            182,786
            
            
            162,579Related
                party payables
            
            
            -
            
            
            422,325Other
                long-term liabilities
            
            
            170,954
            
            
            122,096TOTAL
                LONG-TERM LIABILITIES
            
            
            353,740
            
            
            707,000TOTAL
                LIABILITIES
            
            
            1,617,521
            
            
            1,853,190COMMITMENTS
                AND CONTINGENCIES
            
            
            -
            
            
            -STOCKHOLDERS'
                EQUITYPreferred
                stock, $0.0001 par value;5,000,000
                shares authorized, no shares issued and outstanding
            
            
            -
            
            
            -Common
                stock, $0.0001 par value;200,000,000
                shares authorized, 13,372,203 and 12,030,674shares
                issued and outstanding, respectively
            
            
            1,337
            
            
            1,203Additional
                paid-in capital
            
            
            4,384,475
            
            
            3,673,311Accumulated
                deficit
            
            
            (1,437,485
            )
            
            (791,916
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            2,948,327
            
            
            2,882,598TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            4,565,848
            
            $
            4,735,788





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





F-3




**VIVID
      LEARNING SYSTEMS, INC. CONSOLIDATED STATEMENTS OF
      OPERATIONS**





Fiscal Year EndedSeptember 30, 2007
            
            September 30, 2006REVENUESTraining
                subscriptions
            
            $
            2,516,291
            
            $
            1,977,293Training
                subscriptions, Fluor Hanford
            
            
            569,456
            
            
            565,003Custom
                products and services
            
            
            2,463,483
            
            
            1,378,995Custom
                products and services, Fluor Hanford
            
            
            506,972
            
            
            220,3136,056,202
            
            
            4,141,604COST
                OF REVENUESTraining
                subscriptions
            
            
            672,740
            
            
            596,874Custom
                products and services
            
            
            1,766,757
            
            
            745,1322,439,497
            
            
            1,342,006GROSS
                PROFIT
            
            
            3,616,705
            
            
            2,799,598EXPENSESMarketing
                and related labor expenses
            
            
            1,401,739
            
            
            1,068,252Bad
                debt expense
            
            
            12,426
            
            
            12,111Reseller
                commissions
            
            
            394,711
            
            
            307,380Depreciation
                and amortization
            
            
            738,769
            
            
            144,113Wages
                and contract labor
            
            
            896,969
            
            
            579,589Other
                operating expenses
            
            
            1,100,695
            
            
            909,197TOTAL
                OPERATING EXPENSES
            
            
            4,545,309
            
            
            3,020,642INCOME
                (LOSS) FROM OPERATIONS
            
            
            (928,604
            )
            
            (221,044
            )OTHER
                INCOME (EXPENSE)Gain
                <loss> on sale of equipment and intangible assets
            
            
            (1,733
            )
            
            30,276Other
                miscellaneous income
            
            
            -
            
            
            80,106Interest
                income
            
            
            1,307
            
            
            2,075Interest
                expense
            
            
            (49,105
            )
            
            (84,435
            )TOTAL
                OTHER INCOME (EXPENSE)
            
            
            (49,531
            )
            
            28,022INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            (978,135
            )
            
            (193,022
            )INCOME
                TAX BENEFIT (EXPENSE)
            
            
            332,566
            
            
            46,001NET
                INCOME (LOSS)
            
            $
            (645,569
            )
            $
            (147,021
            )BASIC
                AND DILUTED NET LOSS PER SHARE
            
            $
            (0.05
            )
            $
            (0.01
            )BASIC
                AND DILUTEDWEIGHTED
                AVERAGE NUMBER OF SHARES
            
            
            13,261,938
            
            
            11,147,261





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




F-4




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




ADDITIONAL
              
              RETAINEDCOMMON STOCK
              
              PAID-IN
              
              EARNINGSShares
              
              Amount
              
              CAPITAL
              
              (DEFICIT)
              
              TOTALBalance,
                  September 30, 2005
              
              
              10,247,996
              
              $
              1,025
              
              $
              2,512,061
              
              $
              (644,895
              )
              $
              1,868,191Common
                  stock issued in exchange for eliminationof
                  inter-company debt
              
              
              1,709,303
              
              
              171
              
              
              1,094,306
              
              
              -
              
              
              1,094,477Common
                  stock issued for compensation
              
              
              40,000
              
              
              4
              
              
              19,996
              
              
              -
              
              
              20,000Common
                  stock issued for exercise of options at $0.25 per share
              
              
              33,375
              
              
              3
              
              
              8,341
              
              
              -
              
              
              8,344Options
                  issued as compensation
              
              
              -
              
              
              -
              
              
              38,607
              
              
              -
              
              
              38,607Net
                  loss for the year ended September 30, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              (147,021
              )
              
              (147,021
              )Balance,
                  September 30, 2006
              
              
              12,030,674
              
              
              1,203
              
              
              3,673,311
              
              
              (791,916
              )
              
              2,882,598Common
                  stock issued in exchange for eliminationof
                  inter-company debt
              
              
              1,341,404
              
              
              134
              
              
              670,568
              
              
              -
              
              
              670,702Common
                  stock issued for exercise of options at $0.25 per share
              
              
              125
              
              
              -
              
              
              31
              
              
              -
              
              
              31Options
                  issued as compensation
              
              
              -
              
              
              -
              
              
              40,565
              
              
              -
              
              
              40,565Net
                  loss for the year ended September 30, 2007
              
              
              -
              
              
              -
              
              
              -
              
              
              (645,569
              )
              
              (645,569
              )13,372,203
              
              $
              1,337
              
              $
              4,384,475
              
              $
              (1,437,485
              )
              $
              2,948,327





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




F-5




**VIVID
                LEARNING SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH
                FLOWS**




Fiscal Year EndedSeptember 30, 2007
              
              September 30, 2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (645,569
              )
              $
              (147,021
              )Adjustments
                  to reconcile net income (loss)to
                  net cash provided by operating activities:Depreciation
                  and amortization
              
              
              738,769
              
              
              144,113Amortization
                  of capitalized software
              
              
              276,351
              
              
              269,109Bad
                  debt expenses
              
              
              12,426
              
              
              12,111Gain/loss
                  on sale of assets
              
              
              1,733
              
              
              (30,276
              )Changes
                  in deferred tax assets and liabilities
              
              
              (332,566
              )
              
              (45,786
              )Common
                  stock issued for compensation
              
              
              -
              
              
              20,000Options
                  issued for compensation
              
              
              40,565
              
              
              38,607Changes
                  in assets and liabilities:Accounts
                  and contracts receivable
              
              
              (247,493
              )
              
              382,277Prepaid
                  expenses
              
              
              24,626
              
              
              (13,243
              )Other
                  current assets
              
              
              37,842
              
              
              154,264Accounts
                  payable
              
              
              174,137
              
              
              (35,490
              )Accrued
                  payroll and related expenses
              
              
              (106,343
              )
              
              (83,579
              )Long-term
                  receivable contracts
              
              
              159,173
              
              
              124,167Other
                  current liabilities
              
              
              47,764
              
              
              (95,878
              )Unearned
                  revenue
              
              
              98,299
              
              
              (24,021
              )Net
                  cash provided (used) by operating activities
              
              
              279,714
              
              
              669,354CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of property, equipment and intangible assets
              
              
              (53,720
              )
              
              (36,835
              )Acquisition
                  of software
              
              
              (131,237
              )
              
              (105,913
              )Net
                  cash used by investing activities
              
              
              (184,957
              )
              
              (142,748
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from stock issuances
              
              
              -
              
              
              8,344Stock
                  options exercised for common stock
              
              
              31
              
              
              -Payments
                  on notes payable, related party
              
              
              (164,344
              )
              
              (547,587
              )Payments
                  on long-term debt
              
              
              (49,274
              )
              
              -Proceeds
                  from current and long-term debt
              
              
              57,072
              
              
              175,000Payments
                  on other long-term liabilities
              
              
              (24,556
              )
              
              (12,340
              )Net
                  cash provided (used) by financing activities
              
              
              (181,071
              )
              
              (376,583
              )Net
                  increase (decrease) in cash
              
              
              (86,314
              )
              
              150,023Cash
                  at beginning of period
              
              
              166,645
              
              
              16,622Cash
                  at end of period
              
              $
              80,331
              
              $
              166,645SUPPLEMENTAL
                  CASH FLOW INFORMATION:Interest
                  paid
              
              $
              49,105
              
              $
              84,435Income
                  taxes paid
              
              $
              -
              
              $
              -NON-CASH
                  TRANSACTIONS:Common
                  stock and options issued for services
              
              $
              -
              
              $
              20,000Common
                  stock issued for related party debt
              
              $
              670,702
              
              $
              1,092,448Note
                  receivable from sale of equipment and intangible assets
              
              $
              -
              
              $
              45,000Acquisition
                  of fixed assets via capital leases
              
              $
              124,944
              
              $
              46,483Leasehold
                  improvements financed
              
              $
              -
              
              $
              100,000





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




F-6


VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007




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





Nature
      of Operations


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





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





Effective
      October 1, 2006, the Company entered into an asset purchase agreement with
      its
      parent, Nuvotec USA, Inc. for the purchase of the assets and line of business
      of
      its Engineering and Technical Services (“ETS”) business unit. In satisfaction of
      the purchase price, Vivid Learning Systems, Inc. assumed all outstanding
      liabilities of ETS and recorded an inter-company related party liability. (See
      Note 16.)





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





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





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





Accounting
      Methods


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





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.




F-7


VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007


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, 2007 and 2006,
      all
      Company receivables are considered collectible and no additional valuation
      allowance is deemed necessary. The Company’s bad debt expense for the years
      ended September 30, 2007 and 2006 was $12,426 and $12,111,
      respectively.





The
      Company does not accrue interest on trade receivables.





Advertising


Advertising
      expenses consist primarily of costs incurred in the design, development, and
      printing of Company literature and marketing materials. The Company expenses
      all
      advertising expenditures as incurred. The Company's advertising expenses were
      $44,453 and $36,471 for the years ended September 30, 2007 and 2006,
      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,
      2007
      and 2006, the Company did not have any cash equivalents.





Compensated
      Absences


The
      Company leases all of its employees from HRnovations, Inc., which is co-owned
      and managed by a member of Vivid’s board of directors. The Company, whose former
      primary shareholder was Nuvotec USA, Inc., is part of a multi-employer plan,
      which is administered by HRnovations, Inc. Leased employees are entitled to
      paid
      personal time dependent upon the length of service. Accruals of compensated
      absences at September 30, 2007 and 2006 of $96,805 and $63,443, respectively,
      are reflected in the Company’s balance sheets and included in the captioned
      liability “accrued contract labor.”





Derivative
      Instruments


The
      Financial Accounting Standards Board issued Statement of Financial Accounting
      Standards No. 133, “Accounting for Derivative Instruments and Hedging
      Activities” (hereinafter “SFAS No. 133”), as amended by SFAS No. 137,
“Accounting for Derivative Instruments and Hedging Activities - Deferral of
      the
      Effective Date of FASB No. 133”, and SFAS No. 138, “Accounting for Certain
      Derivative Instruments and Certain Hedging Activities”, and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.
      These statements establish accounting and reporting standards for derivative
      instruments, including certain derivative instruments embedded in other
      contracts, and for hedging activities. They require that an entity recognize
      all
      derivatives as either assets or liabilities in the balance sheet and measure
      those instruments at fair value.





If
      certain conditions are met, a derivative may be specifically designated as
      a
      hedge, the objective of which is to match the timing of gain or loss recognition
      on the hedging derivative with the recognition of (i) with the recognition
      of
      (i) the changes in the fair value of the hedged asset or liability that are
      attributable to the hedged risk or (ii) the earnings effect of the hedged
      forecasted transaction. For a derivative not designated as a hedging instrument,
      the gain or loss is recognized in income in the period of change.





Historically,
      the Company has not entered into derivatives contracts to hedge existing risks
      or for speculative purposes.





As
      of
      September 30, 2007 and 2006, the Company has not engaged in any transactions
      that would be considered derivative instruments or hedging activities.





F-8


VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007





Earnings
      Per Share


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





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, 2007 and 2006.





Guarantees
      and Line of Credit


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





The
      Company’s former major shareholder had a line of credit with Key Bank. The rate
      was a variable rate tied to the bank’s prime rate. At September 30, 2006
      outstanding borrowings under this line were $1,000,000, of which $670,702 were
      attributable to the Company. The borrowings under this line at September 30,
      2006 attributable to Vivid are recorded as a short-term related party
      payable.





The
      Company secured a line of credit note on September 4, 2007 with Bank of the
      West. The line has a maximum credit facility of $250,000 and an initial annual
      interest rate of 7.5%. The rate is a variable rate tied to the bank’s prime rate
      minus one, and is subject to an annual pricing adjustment. At September 30,
      2007
      outstanding borrowings under this line are $57,072. The Company offers its
      assets as collateral as described in an executed commercial security agreement.




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.





F-9


VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007


In
      complying with this standard, the Company reviews its long-lived assets
      quarterly to determine if any events or changes in circumstances have transpired
      which indicate that the carrying value of its assets may not be recoverable.
      The
      Company determines impairment by comparing the undiscounted future cash flows
      estimated to be generated by its assets to their respective carrying
      amounts.





The
      Company does not believe any adjustments are needed to the carrying value of
      its
      assets at September 30, 2007 and 2006.





Intangible
      Assets


Goodwill
      represents the excess of the purchase price and related direct costs over the
      fair value of net assets acquired as of the date of the acquisition of
      ImageWorks Media Group. The Company reviews periodically its goodwill to assess
      recoverability based on projected undiscounted cash flows from operations.
      Impairments are recognized in operating results when a permanent diminution
      in
      value occurs. At September 30, 2007, no impairment was deemed necessary for
      the
      Company’s goodwill.





A
      noncompetition agreement, customer list, contracts in place and technology
      software are included in intangible assets on the balance sheet. These items
      represent a portion of the acquisition cost of ImageWorks Media Group, Inc.
      in
      2004. The non-competition agreement is being amortized on the straight-line
      method over a three-year period. The estimated useful lives of the remaining
      intangible assets was reexamined and are considered fully amortized as of
      September 30, 2007 For the years ended September 30, 2007 and 2006, related
      amortization expense was $436,943 and $100,000, respectively.





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





Management
      Services Provided by Nuvotec


In
      Vivid’s consolidated statements of income, “Other Operating Expenses” contains
      amounts that represent allocations of central overhead expenses, including
      legal
      and contracts, finance (including accounting and reporting, receivables and
      collection activities, payables and cash management, budgeting, etc.), executive
      and administrative expenses that are applied to the Vivid operation. The
      majority of the allocated expenses represent labor related costs applied to
      the
      Vivid operation. All identifiable direct costs of administration are booked
      directly to the Vivid operation. Detailed time charges are accounted for daily
      by all personnel, including Nuvotec central administrative personnel with time
      charged to Vivid tasks. These tasks and costs are analyzed on a recurring basis
      to adjust the amount of the allocation of central overhead costs to Vivid and
      are as follows:


Year
                  Ending September 30, 2007:
              
              $
              80,982Year
                  Ending September 30, 2006:
              
              $
              86,803





Principles
      of Consolidation


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





Property,
      Plant and Equipment


Property,
      plant and equipment are recorded at cost and depreciated utilizing the
      straight-line method over estimated useful lives of three to ten years.
      Amortization of leasehold improvements is provided using the straight-line
      method over the term of the lease plus options. See Note 13.





F-10




VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007


The
      Company evaluates the recoverability of property and equipment when events
      and
      circumstances indicate that such assets might be impaired. The Company
      determines impairment by comparing the undiscounted future cash flows estimated
      to be generated by these assets to their respective carrying amounts.
      Maintenance and repairs are expensed as incurred. Replacements and betterments
      are capitalized. The cost and related reserves of assets sold or retired are
      removed from the accounts, and any resulting gain or loss is reflected in
      results of operations.





Provision
      for Taxes


The
      current tax provision represents the federal income tax which the Company would
      have incurred on a separate, stand-alone basis. The Company receives the benefit
      of losses resulting from the federal income tax returns filed on a consolidated
      basis by its former 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.





Recent
      Accounting Pronouncements


In
      February 2007, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities - Including an amendment of FASB Statement
      No.
      115” (hereinafter “SFAS No. 159”). This statement permits entities to choose to
      measure many financial instruments and certain other items at fair value. The
      objective is to improve financial reporting by providing entities with the
      opportunity to mitigate volatility in reported earnings cause by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. This Statement is expected to expand the use of fair
      value measurement, which is consistent with the Board’s long-term measurement
      objectives for accounting for financial instruments. This statement is effective
      as of the beginning of an entity’s first fiscal year that begins after November
      15, 2007, although earlier adoption is permitted. Management has not determined
      the effect that adopting this statement would have on the Company’s financial
      condition for results of operations.





In
      September 2006, the FASB issued SFAS No. 158, "Employers' Accounting
      for Defined Benefit Pension and Other Postretirement Plans−An amendment of FASB
      Statements No. 87, 88, 106, and 132(R)." One objective of
      this standard is to make it easier for investors, employees, retirees and other
      parties to understand and assess an employer's financial position and its
      ability to fulfill the obligations under its benefit plans. SFAS No. 158
      requires employers to fully recognize in their financial statements the
      obligations associated with single−employer defined benefit pension plans,
      retiree healthcare plans, and other postretirement plans. SFAS No. 158
      requires an employer to fully recognize in its statement of financial position
      the over funded or under funded status of a defined benefit postretirement
      plan
      (other than a multiemployer plan) as an asset or liability and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income. This statement also requires an employer to measure the
      funded status of a plan as of the date of its year-end statement of financial
      position, with limited exceptions. SFAS No. 158 requires an entity to
      recognize as a component of other comprehensive income, net of tax, the gains
      or
      losses and prior service costs or credits that arise during the period but
      are
      not recognized as components of net periodic benefit cost pursuant to SFAS
      No. 87. This statement requires an entity to disclose in the notes to
      financial statements additional information about certain effects on net
      periodic benefit cost for the next fiscal year that arise from delayed
      recognition of the gains or losses, prior service costs or credits, and
      transition asset or obligation. Companies are required to initially recognize
      the funded status of a defined benefit postretirement plan and to provide the
      required disclosures for fiscal years ending after December 15, 2006.
      Management believes that this statement will not have a significant impact
      on
      the Company’s financial
      statements.




F-11




VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007
  In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 157, “Fair Value Measurements” (hereinafter
“SFAS No. 157”), which defines fair value, establishes a framework for measuring
      fair value in generally accepted accounting principles (GAAP), and expands
      disclosures about fair value measurements. Where applicable, SFAS No. 157
      simplifies and codifies related guidance within GAAP and does not require any
      new fair value measurements. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. Earlier adoption is encouraged. The Company does
      not
      expect the adoption of SFAS No. 157 to have a significant effect on its
      financial position or results of operations.





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





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





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




F-12


VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007


Reclassifications


Certain
      prior year amounts in the accompanying financial statements have been
      reclassified to conform to the fiscal 2007 presentation. The reclassifications
      have no effect on net assets, net revenues, or net earnings.





Revenue
      and Cost Recognition


The
      Company’s revenues are recognized at the time of shipment of products or
      performance of the contracted services. The Company sells its products and
      services both directly, using in-house sales employees, and indirectly, using
      channel sales partners. Channel sales partners are classified as independent
      resellers, value-added resellers, industry consultants and industry
      associations. Cost of goods principally consists of labor costs associated
      with
      software custom development and training subscriptions. See Note 4.





Reseller
      Commissions and Royalty Expenses


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




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




The
      Company amended and renewed, effective June 29, 2007, for three additional
      years, a material reseller agreement with Element K of Rochester, New
      York.




Royalty
      payments are recorded as an expense of ownership if the training content does
      not reside with the Company in a licensing fee arrangement between the
      Company and the owner of the content.





Software
      Development Costs


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




F-13


VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007


Production
      costs incurred subsequent to the establishment of technological feasibility
      are
      capitalized. Also capitalized are the component costs incurred associated with
      the development of product templates in accordance with Statement of Financial
      Accounting Standards No. 86, which consist primarily of labor related costs.
      As
      revenue generation commences on specific training content, additional costs
      incurred are classified as maintenance expense, or customer marketing expense,
      in the period they are incurred. Hours expended and costs incurred by production
      personnel on lesson content development on a per lesson basis are maintained
      so
      that cost efficiency in software content development can be analyzed on a lesson
      content by lesson content basis. Net realizable value of each course is
      determined by comparing the unamortized cost of each developed software course
      and the remaining available market (quantified by dollars) for that content
      in
      the industry in which Vivid is selling the content. This unamortized software
      development cost is then aggregated by course and a grand total is compared
      to
      the total remaining available aggregate market for the content to determine
      if a
      write-down is required. The Company’s amortization method assumes that sales of
      the Company’s existing software products will continue for at least the ensuing
      five years.





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,
              2007
            
            September 30,
              2006Software
                development costs
            
            $
            3,587,193
            
            $
            3,455,956Accumulated
                amortization
            
            
            (2,258,769
            )
            
            (1,970,918
            )$
            1,328,424
            
            $
            1,485,038





The
      Company amortizes its existing software products over a period of five years.
      For the years ended September 30, 2007 and 2006, $276,351 and $269,109 of
      amortization expense were recorded, respectively.





**NOTE
      4 – REVENUE AND COST RECOGNITION**




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





Training
      revenues are recognized at the time of shipment of products or performance
      of
      contracted services. Products are shipped FOB shipping point. Training contracts
      may contain elements of both custom contract work (contracted services) and
      subscription arrangements (delivery of training products). Training subscription
      revenues are recorded when collection of the subscription is highly probable
      and
      no significant Company obligations remain after the product has been delivered.
      The Company defers revenue recognition on training contracts related to payments
      received during the current period for the portion of the subscription contract
      that extends into future periods. At September 30, 2007 and September 30, 2006,
      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-14


VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007


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.





**NOTE
      5 – RELATED PARTY TRANSACTIONS**





At
      September 30, 2007 and September 30, 2006, the current related party payables
      consisted of $75,000 and $782,555, respectively, of borrowing from Nuvotec
      USA,
      Inc. and current amounts due to the former owners of ImageWorks. The long-term
      related party payable consists of borrowing from Nuvotec of $0 and $72,325.
      The
      amounts due to the former owners of ImageWorks were $275,000 and $350,000,
      respectively.





The
      former majority stockholder of the Company had been providing financial
      resources for the Company which were recorded as an inter-company payable as
      draws were made. The boards of directors of the Company and the former majority
      owner approved exchanges of a portion of the inter-company payables for equity
      in the form of common stock of Vivid. During the fiscal years ended September
      30, 2007 and 2006, the Company converted $670,702 and $1,094,477, respectively,
      in related party short-term debt due to Nuvotec, USA, Inc., into 1,341,404
      and
      1,709,303 shares of common stock, respectively, which shares were part of the
      distribution of Nuvotec USA, Inc. shares effective June 13, 2007.





**NOTE
      6 – PROFIT-SHARING AND PENSION PLANS**





The
      Company’s 401(k) plan implemented in 1999 covers all employees over the age of
      21 with 1,000 hours of service in a 12-month eligibility computation. The
      Company makes a contribution equal to one-half of the employee’s contribution up
      to the maximum of 5%. Employees’ contributions may not exceed 18% of their
      compensation for the plan year (maximum reflects money purchase and 401(k)
      combined). Company contributions to the 401 (k) plan for the years ended
      September 30, 2007 and 2006 amounted to $79,521 and **** $51,625,
      respectively.





The
      plan
      includes a profit sharing component wherein the Company can make discretionary
      contributions as determined by its board of directors, not to exceed the amount
      permissible under the Internal Revenue Code. The Company did not make any profit
      sharing contributions in 2007 or 2006.




F-15




VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007
  **NOTE
      7 – NOTES AND LOANS PAYABLE**





The
      Company’s long-term liabilities at September 30, 2007 and 2006 are as follows:


2007
              
              2006Note
                  payable to Benton-Franklin Economic Development District,due
                  in monthly installments of $2,560, payable at 10.5% interestper
                  annum, maturing September 1, 2015, collateralized by Company
                  assets
              
              $
              162,579
              
              $
              175,000Agreement
                  with third party lessor for building improvementsdue
                  in monthly installments of $1,200, payable at 7.75%
                  interestper
                  annum, due December 1, 2010 with additional five yearoption
                  which, if not exercised, results in a lump sum paymentof
                  $50,000 as payment to fully amortize the leaseholdimprovements,
                  collateralized by the improvements
              
              
              87,899
              
              
              95,179Note
                  payable, to FoodSafety.com, due in monthly installments of$3,3441,
                  payable at 4.8% per annum, maturing in July, 2009,Uncollateralized
              
              
              72,325
              
              
              109,178Notes
                  payable to related party, uncollateralized
              
              
              350,000
              
              
              425,000Capital
                  lease obligation for phone system, due in monthlyinstallments
                  of $775, payable at 11% interest per annum,due
                  February 28, 2011, collateralized by telephone system
              
              
              25,774
              
              
              40,291Capital
                  lease obligation for purchase of Dell computers, due in monthly
                  installments of $651, payable at 15% interest per annum, due September
                  28,
                  2009, collateralized by computers
              
              
              13,431
              
              
              -Capital
                  lease obligation for purchase of phone system enhancements, due
                  in monthly
                  installments of $858, payable at 11% per annum, due December 1,
                  2009,
                  collateralized by phone system
              
              
              20,451
              
              
              -Capital
                  lease obligation for purchase of video equipment, due in monthly
                  installments of $2,457, payable at 6.69% per annum, due July 25,
                  2010,
                  collateralized by video equipment
              
              
              77,919
              
              
              -810,378
              
              
              844,648Less:
                  Current portionNotes
                  payable
              
              
              106,638
              
              
              25,795Notes
                  payable, related party
              
              
              350,000
              
              
              111,853$
              353,740
              
              $
              707,000





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


Notes payable
              
              Notes payable, related party2008
              
              $
              106,638
              
              $
              350,0002009
              
              $
              110,398
              
              
              —2010
              
              $
              60,809
              
              
              —2011
              
              $
              31,595
              
              
              —2012
              
              $
              31,607
              
              
              —





**NOTE
      8 – CAPITAL STOCK**





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





F-16




VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007


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





**NOTE
      9 – STOCK–BASED COMPENSATION**





During
      the year ended September 30, 2006, 36,666 options vested which had been issued
      in 2004, and had a fair value of $5,830. During the year ended September 30,
      2007, 225,250 options vested which had been issued in 2004, and had a fair
      value
      of $36,040.




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





During
      the year ended September 30, 2006, additional options totaling 153,606 were
      issued of which 65,939 vested and had a fair value of $32,777. During the year
      ended September 30, 2007 10,939 of these options vested and had a fair value
      of
      $4,525. The fair value of each option granted is estimated on the grant date
      using the Black-Scholes Option Price Calculation. The following assumptions
      were
      made in estimating the fair value: risk-free interest is 4.75%; volatility
      is
      1.0136; expected life is 3 to 5 years; dividend yield is $0.





The
      value
      of the unvested options at September 30, 2007 was $57,970.





The
      following is a summary of stock option activity:


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





Number of
              Shares
            
            Weighted Average
              Exercise
                PriceOutstanding
                at October 1, 2005
            
            
            504,334
            
            $
            0.25Granted
            
            
            153,606
            
            
            0.54Exercised
            
            
            (33,375
            )
            
            0.25Expired
                or terminated
            
            
            (53,625
            )
            
            0.25Outstanding
                at September 30, 2006
            
            
            570,940
            
            $
            0.33Options
                exercisable at September 30, 2006
            
            
            365,189
            
            $
            0.31Outstanding
                at October 1, 2006
            
            
            570,940
            
            $
            0.33Granted
            
            
            89,500
            
            
            0.29Exercised
            
            
            (125
            )
            
            0.25Expired
                or terminated
            
            
            (144,417
            )
            
            0.25Outstanding
                at September 30, 2007
            
            
            515,898
            
            $
            0.34Options
                exercisable at September 30, 2007
            
            
            304,265
            
            $
            0.33




F-17




VIVID
          LEARNING SYSTEMS, INC.
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007


Common
      Stock Warrants


Pursuant
      to the acquisition of ImageWorks, 200,000 warrants to purchase the Company’s
      common stock were granted in May 2004 of which 50,000 remain outstanding as
      of
      September 30, 2007. The warrants have an exercise price of $3.00 and a term
      of
      four years. The following assumptions were made in estimating the fair value:
      risk-free interest is 4.75%, volatility is 1.0136 and expected life is 4 years.
      The warrants had no estimated fair market value at issuance.





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





**NOTE
      10 – LEASE COMMITMENTS**





The
      Company rents office space on an annual basis from Nuvotec through December
      31,
      2006 and, thereafter, on a month to month basis and is responsible for excise
      tax and maintenance expenses based upon its share of office space occupancy
      in
      relation to the total office space leased by Nuvotec. The Company paid $41,996
      and $70,448 for rent, excise tax and maintenance of this property for the years
      ended September 30, 2007 and 2006, respectively **.**





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





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





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


2008
              
              $
              158,5462009
              
              $
              114,2502010
              
              $
              60,0002011
              
              $
              15,0002012
              
              
              -





**NOTE
      11 – ECONOMIC DEPENDENCY**





The
      Company provides services in Washington State to a dozen large corporate
      contractors within the framework of a diverse set of programs and tasks. Most
      of
      the funding for these services originates from the Department of Energy/ Federal
      Government. During the year ended September 30, 2007 and 2006, services provided
      to these contractors aggregated $2,403,542 and $1,036,023, **** representing
      40% and 25% of total revenue, respectively. At September 30, 2007 and 2006,
      amounts due from these contractors are included in accounts receivable in the
      amounts of $355,072 and $54,614, respectively.





The
      Company’s concentration risks for customer revenues and accounts receivable
      greater than 10% of the total account balances for the respective periods are
      as
      follows:





Fiscal Year
              Ending 9/30/07
            
            Fiscal Year
              Ending 9/30/06Revenues—Fluor
              Hanford
            
            $
            1,079,518
            
            $
            785,316Accounts
                Receivable
              Fluor
                Hanford
            
            $
            28,822
            
            $
            27,077




F-18


VIVID
          LEARNING SYSTEMS, INC.
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007




**NOTE
      12 – COMMITMENTS AND CONTINGENCIES**





Commitments


The
      Company is obligated, under separate agreements, to make royalty payments based
      on varying percentages (8% to 25%) of cash collections from the sale of specific
      software applications. For the years ending September 30, 2007 and 2006, the
      Company incurred $99,094 and $62,490 in royalty obligations, respectively,
      which
      are recorded in marketing expense. At September 30, 2007 and 2006, the Company
      had no outstanding royalty obligations.





**NOTE
      13 – PROPERTY AND EQUIPMENT**





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


September 30,
                2007
              
              September 30,
                2006Computers
                  and equipment
              
              $
              1,221,404
              
              $
              1,060,240Furniture
                  and fixtures
              
              
              176,191
              
              
              141,209Leasehold
                  Improvements
              
              
              120,487
              
              
              117,2021,518,082
              
              
              1,318,651Less
                  accumulated depreciation
              
              
              (1,152,471
              )
              
              (862,828
              )Property
                  and equipment, net
              
              $
              365,611
              
              $
              455,823





Depreciation
      expense for the years ended September 30, 2007 and 2006 was $290,326 and
      $44,113, respectively.





**NOTE
      14 – INCOME TAXES**





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


September 30,
                  2007
                
                September 30,
                  2006Amount
                
                Percent
                
                Amount
                
                PercentRecorded
                    tax provision
                
                $
                (412,583
                )
                
                34
                
                $
                (65,645
                )
                
                34Amortization
                    book totax
                    difference
                
                
                38,173
                
                
                nil
                
                
                (300
                )
                
                nilStock
                    and options effect
                
                
                13,792
                
                
                nil
                
                
                17,944
                
                
                nilOther
                    permanent adjustments
                
                
                28,052
                
                
                nil
                
                
                2,000
                
                
                nilTotal
                    current taxexpense
                    (benefit)
                
                $
                (332,566
                )
                
                34
                
                $
                (46,001
                )
                
                34





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, 2007 and 2006 are as
      follows:


September 30,
                  2007
                
                September 30,
                  2006Deferred
                    tax asset:Net
                    operating loss carryforwards
                
                $
                786,361
                
                $
                534,141Temporary
                    difference inDepreciation
                    methods
                
                
                38,173
                
                
                (46,218
                )Stock
                    options
                
                
                13,899
                
                
                17,944Total
                    deferred tax asset
                
                $
                838,433
                
                $
                505,867




F-19




VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007




**NOTE
      15 –** **SEGMENT
      INFORMATION**





The
      Company has two operating segments at September 30, 2007: training subscriptions
      and custom products and services.





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





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





Segment
      information (after inter-company eliminations) for the years ended September
      30,
      2007 and 2006 is as follows:


September 30,
              
              September 30,2007
              
              2006Revenues:Training
                  subscriptions
              
              $
              3,085,747
              
              $
              2,542,296Custom
                  products and services
              
              
              2,970,455
              
              
              1,599,308Total
                  Revenues
              
              $
              6,056,202
              
              $
              4,141,604Income
                  (loss) before income taxes:Training
                  subscriptions
              
              
              2,413,007
              
              
              1,945,422Custom
                  products and services
              
              
              1,203,698
              
              
              854,176Corporate
              
              
              (4,594,840
              )
              
              (2,992,620
              )Income
                  (loss) before income taxes
              
              $
              (978,135
              )
              $
              (193,022
              )
 
 September 30,
              
              September 30,2007
              
              2006Identifiable
                  assets:Training
                  subscriptions
              
              $
              1,328,424
              
              $
              1,485,038Custom
                  products and services
              
              
              490,559
              
              
              379,047Corporate
              
              
              2,746,865
              
              
              2,871,703Total
                  Identifiable Assets
              
              $
              4,565,848
              
              $
              4,735,788Depreciation
                  and amortization:Training
                  subscriptions
              
              $
              276,351
              
              $
              269,109Custom
                  products and services
              
              
              216,457
              
              
              112,397Corporate
              
              
              522,312
              
              
              31,716Total
                  Depreciationand
                  Amortization
              
              $
              1,015,120
              
              $
              413,222





F-20




VIVID
          LEARNING SYSTEMS, INC.
 NOTES
          TO
          THE CONSOLIDATED FINANCIAL STATEMENTS
 September
          30, 2007




**NOTE
      16 – ACQUISTION AND PROFORMA**





Effective
      October 1, 2006, Vivid Learning Systems, Inc. entered into an asset purchase
      agreement with its parent, Nuvotec USA, Inc. (“seller”). Pursuant to the
      agreement, the Company purchased from the seller the assets of the Engineering
      and Technical Services (“ETS”) business line of the seller. In satisfaction of
      the purchase price, Vivid Learning Systems, Inc. assumed all outstanding
      liabilities of ETS and recorded an inter-company related party liability of
      $85,970. The fair market values of the assets acquired and liabilities assumed
      were as follows:


Accounts
                  Receivable
              
              $
              211,555Other
                  Current Assets
              
              
              30,170Net
                  Property and Equipment
              
              
              42,619Total
                  Assets Acquired
              
              
              284,344Accounts
                  Payable
              
              
              (27,190
              )Other
                  Current Liabilities
              
              
              (171,184
              )Total
                  Liabilities Assumed
              
              
              (198,374
              )Net
                  assets acquired in excess of liabilities
              
              $
              85,970




The
      following proforma unaudited financial statements reflect the combination of
      Vivid with ETS for the periods presented. The proforma financial statements
      reflect the result of the satisfaction of the purchase agreement between Vivid
      and ETS, a division of Nuvotec.





The
      proforma financial statements have been prepared utilizing the historical
      financial statements of Vivid and ETS. These proforma financial statements
      should be read in conjunction with the historical financial statements and
      notes
      thereto of Vivid Learning Systems.





The
      proforma financial statement of operations assumes that the combination occurred
      at the beginning of the periods presented in the statements. There were no
      inter-company eliminations necessary between Vivid and ETS at
      consolidation.




The
      proforma financial statements do not purport to be indicative of the financial
      positions and results of operations, which actually would have been obtained
      if
      the combination had occurred on the dates indicated, or the results, which
      may
      be obtained in the future.





F-21


VIVID
        LEARNING SYSTEMS, INC.
 NOTES
        TO
        THE CONSOLIDATED FINANCIAL STATEMENTS
 September
        30, 2007





**VIVID
                LEARNING SYSTEMS, INC****SEPTEMBER
                30, 2006****CONSOLIDATED
                STATEMENTS OF OPERATIONS -
                PROFORMA**




VividLearning
                  
                  
                  
                  
                  
                  PROFORMASystems, Inc.
                  
                  ETS
                  
                  
                  
                  CONSOLIDATEDFor the Year EndedSeptember 30,
                  
                  September 30,
                  
                  
                  
                  September 30,2006
                  
                  2006
                  
                  Eliminations
                  
                  2006**REVENUES**Training
                      subscriptions
                  
                  $
                  1,977,293
                  
                  $
                  
                  
                  $
                  
                  
                  $
                  1,977,293Training
                      subscriptions, Fluor Hanford
                  
                  
                  565,003
                  
                  
                  
                  
                  
                  
                  
                  
                  565,003Custom
                      products and services
                  
                  
                  1,378,995
                  
                  
                  1,809,168
                  
                  
                  
                  
                  
                  3,188,163Custom
                      products and services, Fluor Hanford
                  
                  
                  220,313
                  
                  
                  660,288
                  
                  
                  
                  
                  
                  880,6014,141,604
                  
                  
                  2,469,456
                  
                  
                  -
                  
                  
                  6,611,060**COST
                      OF REVENUES**Training
                      subscriptions
                  
                  
                  596,874
                  
                  
                  
                  
                  
                  
                  
                  
                  596,874Custom
                      products and services
                  
                  
                  745,132
                  
                  
                  1,787,007
                  
                  
                  
                  
                  
                  2,532,1391,342,006
                  
                  
                  1,787,007
                  
                  
                  -
                  
                  
                  3,129,013**GROSS
                      PROFIT**
                  
                  
                  2,799,598
                  
                  
                  682,449
                  
                  
                  -
                  
                  
                  3,482,047**EXPENSES**Marketing
                      and related labor expenses
                  
                  
                  1,068,252
                  
                  
                  149,091
                  
                  
                  
                  
                  
                  1,217,343Bad
                      debt expense
                  
                  
                  12,111
                  
                  
                  4,191
                  
                  
                  
                  
                  
                  16,302Reseller
                      commissions
                  
                  
                  307,380
                  
                  
                  -
                  
                  
                  
                  
                  
                  307,380Depreciation
                      and amortization
                  
                  
                  144,113
                  
                  
                  15,674
                  
                  
                  
                  
                  
                  159,787Wages
                      and contract labor
                  
                  
                  579,589
                  
                  
                  190,672
                  
                  
                  
                  
                  
                  770,261Other
                      operating expenses
                  
                  
                  909,197
                  
                  
                  246,840
                  
                  
                  
                  
                  
                  1,156,0373,020,642
                  
                  
                  606,468
                  
                  
                  -
                  
                  
                  3,627,110**INCOME
                      <LOSS> FROM OPERATIONS**
                  
                  
                  (221,044
                  )
                  
                  75,981
                  
                  
                  -
                  
                  
                  (145,063
                  )**OTHER
                      INCOME <EXPENSE>**Gain
                      <loss> on sale of equipment and intangible assets
                  
                  
                  30,276
                  
                  
                  (13,859
                  )
                  
                  
                  
                  
                  16,417Miscellaneous
                      income
                  
                  
                  80,106
                  
                  
                  -
                  
                  
                  
                  
                  
                  80,106Interest
                      income
                  
                  
                  2,075
                  
                  
                  -
                  
                  
                  
                  
                  
                  2,075Interest
                      expense
                  
                  
                  (84,435
                  )
                  
                  (12,620
                  )
                  
                  
                  
                  
                  (97,055
                  )28,022
                  
                  
                  (26,479
                  )
                  
                  -
                  
                  
                  1,543**INCOME
                      <LOSS> BEFORE INCOME TAXES**
                  
                  
                  (193,022
                  )
                  
                  49,502
                  
                  
                  -
                  
                  
                  (143,520
                  )**INCOME
                      TAX BENEFIT <EXPENSE>**
                  
                  
                  46,001
                  
                  
                  (7,514
                  )
                  
                  
                  
                  
                  38,487**NET
                      INCOME <LOSS>**
                  
                  $
                  (147,021
                  )
                  $
                  41,988
                  
                  $
                  -
                  
                  $
                  (105,033
                  )NET
                      LOSS PER COMMON SHARE,BASIC
                      AND DILUTED
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (0.01
                  )WEIGHTED
                      AVERAGE NUMBER OFCOMMON
                      STOCK SHARESOUTSTANDING,
                      BASIC AND DILUTED
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,147,261





F-22