––––––––––––––––

––––––––––––––––

Approximate date of proposed sale to public: From time to time after the effectiveness of this registration statement, as determined by the selling stockholder.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o  ___________________________

If this Form is a post-effective amendment filed pursuant to Rule 462 (c) under the Securities Act, check the following box and list the Securities  Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462 (d) under the Securities Act, check the following box and list the Securities  Act registration statement number of the earlier effective registration statement for the same offering.  o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  o

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the commission, acting pursuant to said Section 8(a), may determine.

Subject to completion, dated October ___, 2005

PROSPECTUS

10,579,999 Shares

VALIDIAN CORPORATION

Common Stock

This prospectus covers the resale of a total of 10,579,999 shares of our common stock being offered by the selling stockholders.  Of the shares covered by this prospectus, up to 6,666,666 shares have been issued and 3,913,333 shares are issuable upon exercise of warrants issued to the selling stockholders.  We will not receive any proceeds from sales of shares by the selling stockholders.

Our common stock is quoted on the OTC Bulletin Board, under the symbol “VLDI”.  There is currently only a limited trading market in our common stock, and we do not know whether an active trading market will develop.  On October 14 , 2005, the last reported sale price for the common stock was $0. 45 per share.

We concurrently registered the resale of up to 10,591,250 shares of our common stock by certain stockholders pursuant to a separate prospectus contained in a Registration Statement on Form SB-2, as amended (Registration No. 333-114303).  This prospectus relates only to the resale of common stock by the selling stockholders named in this prospectus.

_________________________________

Investing in our common stock involves a high degree of risk.

See the section entitled “Risk Factors,” beginning on page 6.

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.  ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The information in this prospectus is not complete and may be changed.  The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective.  This prospectus in not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale is not permitted.

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The date of this prospectus is October     , 2005.

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TABLE OF CONTENTS

PAGE

Forward Looking Statements

2

Prospectus Summary

3

Risk Factors

7

Use of Proceeds

17

Price Range of Common Stock

18

Management’s Discussion and Analysis or Plan of Operation

19

Business

31

Management

37

Executive Compensation

39

Certain Relationships and Related Transactions

42

Principal Stockholders

43

Description of Securities

45

Selling Stockholders

49

Plan of Distribution

54

Shares Eligible for Future Sale

56

Legal Matters

58

Experts

58

Additional Information

58

Index to Financial Statements

F-1

________________________________________________________________________

You should rely only on information contained in this document or to which we have referred you.  Neither we nor the selling stockholders have authorized anyone to provide you with different or additional information.  This document may only be used where it is legal to sell these securities.  The information in this document may only be accurate on the date of this document.  You should not assume that the information in the prospectus, or incorporated herein by reference, or in any prospectus supplement is accurate as of any date other than the date on the front of those documents.

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1

FORWARD LOOKING STATEMENTS

We caution readers that certain important factors may affect our actual results and could cause these results to differ materially from any forward-looking statements that we make in this prospectus. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements. This prospectus contains statements that constitute “forward-looking statements.” These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as “believes,” “anticipates,” “expects,” “estimates,” “plans,” “may,” “will,” or similar terms.  These statements appear in a number of places in this prospectus and include statements regarding our intent, belief or current expectations with respect to many things. Some of these things are:

·

trends affecting our financial condition or results of operations for our limited history;

·

our business and growth strategies;

·

our technology;

·

the Internet; and

·

our financing plans.

We caution readers that any such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties. In fact, actual results most likely will differ materially from those projected in the forward-looking statements as a result of various factors. Some factors that could adversely affect actual results and performance include:

·

our limited operating history;

·

our lack of sales to date;

·

our future requirements for additional capital funding;

·

the failure of our technology and products to perform as specified;

·

the discontinuation of growth in the use of the Internet;

·

the enactment of new adverse government regulations; and

·

the development of better technology and products by others.

The information contained in the following sections of this prospectus identify important additional factors that could materially adversely affect actual results and performance:  

·

"Risk Factors";

·

“Business”; and

·

“Management's Discussion and Analysis or Plan of Operation.”

You should carefully consider and evaluate all of these factors. In addition, we do not undertake to update forward-looking statements after we file this report with the SEC, even if new information, future events or other circumstances have made them incorrect or misleading.

2

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus.  We urge you to read this entire prospectus carefully, including “Risk Factors” on page 6 and our financial statements and the notes to those financial statements contained elsewhere in this prospectus.

The Company

We provide software products to assist public and private enterprises address the increasingly complex issues surrounding application security.  Using our tools, customers can facilitate secure communication and implement a strong security infrastructure.

Our technology is based upon our intellectual property and was used to develop our products.  Our intellectual property includes an addressing scheme, an authentication process and a key exchange process for all parties to a communication, thus offering an authentication model for secure data exchanges.

Our business strategy is to license our technology either directly or through distribution channels to medium to large organizations including corporate information technology departments and independent software vendors and developers.

As of September 30, 2005 , we had twelve full-time employees and contractual personnel, including three executive officers, five sales and marketing staff, two product development personnel, and two in administration.  In addition, we contract with an independent software development group in Europe, who had twenty- six individuals deployed to our contract on a full-time basis as of September 30, 2005 .

We have initiated a marketing program in North America to bring our products to the marketplace. The direct sales division makes presentations to organizations based on leads generated through existing contacts of management and sales representatives, at e-commerce and computer security trade shows, and through presentations in technical seminars attended by personnel with a mandate for application security.  The channel sales division partners us with value-added resellers (“VAR”), independent marketing reps (“IMR”), system integrators (“SI”), independent software vendors (“ISV”) and application service providers (“ASP”).  We currently have agreements with distribution partners in the U.S., Canada and Mexico.

We have utilized the services of industry specialists in the health care, government and supply chain management sectors to assist in identi fying specific areas and a limited number of corporations where our products would facilitate secure communication and the implementation of a strong security infrastructure with ease of deployment and management.

Sales cycles for our products are expected to be from four to eight months.  The territory where most potential clients reside is expected to be North America, Europe and Asia Pacific.  

Currently we offer three products:

Application Security Infrastructure (“ASI”).  Our ASI is an application security framework for securing data transport between distributed applications and Web services. ASI is specifically designed for distributed applications and distributed networks. It automatically manages all critical security

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functions for any application, including authentication, encryption, key generation, key distribution, addressing and data transport. ASI delivers messages and files to, and only to, the target destination, and data never travels “in the clear” at any time between applications.

Flash Communicator (FC).  Our Flash Communicator (FC) product provides a strong level of security for instant communication and file exchange between authenticated parties.  FC creates “gated communities” of authenticated users.  It offers real-time tools for collaboration between individuals and groups. FC performs encryption of both messages and attachments within its own operation, so that data never travels “in the clear” at any point in time. Within a FC exchange, all participants are authenticated and messages and large files of most types, including video and audio files, can be transferred encrypted.  We believe that FC is currently the only secure instant messenger residing entirely on USB flash memory devices: the Validian “Flash Communicator^TM”. FC operates over Validian's Application Security Infrastructure (ASI) and benefits from all the security features of ASI.  

Software Development Kit (“SDK”).  We provide a SDK, for rapidly and simply securing data transport between applications through ASI. The SDK includes a complete, integrated and built-in set of control, transport and security features, which are automatically inherited by any applications linked to ASI through the SDK.  Application developers who use the Validian SDK do not have to learn and master any of the various transport and security products or mechanisms to implement security on their applications.  The SDK is offered free of charge to qualified developers and system integrators.

We maintain our principal executive offices at 30 Metcalfe Street, Suite 620, Ottawa, Ontario Canada K1P 5L4, telephone (613) 230-7211.

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The Offering

Common Stock Offered by the Company

None.

Common Stock Offered by the Selling

Stockholders

10,579,999 shares, including 3,913,333 shares issuable

upon the exercise of outstanding warrants.

Common Stock

Outstanding as of September 30, 2005

31,593,019 shares.

Outstanding After this Offering

35,506,352 shares, including 3,913,333 shares of

common stock covered by this prospectus that are

issuable upon the exercise of outstanding warrants.  

Common Stock Reserved

4, 852 ,302 shares issuable upon exercise of options

that have been granted, 2, 147 ,698 shares issuable

upon exercise of additional options that may be granted

under our stock option plans, 12,691,833 shares issuable

upon exercise of outstanding warrants, and

approximately 486,000 shares issuable upon conversion

of convertible debentures outstanding as of

September 30, 2005 , including interest thereon

accrued to maturity.

Other Resale Prospectus

We concurrently registered the resale of up to 10,591,250 shares of our common stock by certain stockholders pursuant to a separate prospectus contained in a Registration Statement on Form SB-2, as amended (Registration No. 333-114303).  This prospectus relates only to the resale of common stock by the selling stockholders named in this prospectus.

Risk Factors

We urge you to read the “Risk Factors” section beginning on page 6 of this prospectus so that you understand the risks associated with an investment in our common stock.

5

Summary Financial Data

The summary financial data set forth below with respect to our consolidated statements of operations and cash flows for the six month periods ended June 30, 2005 and 2004 and each of the two fiscal years in the period ended December 31, 2004 and with respect to the consolidated balance sheets at June 30 , 2005 and at December 31, 2004 and 2003 are derived from, and should be read in conjunction with, our interim consolidated condensed financial statements and the notes thereto, and our audited consolidated financial statements and the notes thereto, included elsewhere in this prospectus.

6

RISK FACTORS

There are many risks that may affect your investment in our common stock, including those described below.  You should carefully consider these risk factors together with all of the other information.  If any of these or other risks actually occur, our business, financial condition and operating results, as well as the trading price or value of our securities could be materially adversely affected and you may lose all or part of your investment.

Risks relating to our business

We are a development stage company, and our limited operating history makes evaluating our business and prospects difficult.

We are a development stage company, and our limited operating history makes it difficult to evaluate our current business and prospects or to accurately predict our future revenues or results of operations. The commercial acceptance of our products is unproven and therefore we may not be able to generate a sufficient number of revenue-paying customers to sustain operations.  Our revenue and income potential are unproven, and our business plan is constantly evolving. The Internet is constantly changing and software technology is constantly improving, therefore we may need to continue to modify our business plan to adapt to these changes. As a result of our being in the early stages of development, particularly in the emerging technology industry, we are more vulnerable to risks, uncertainties, expenses and difficulties than more established companies.  As a result, we may never achieve profitability and we may not be able to continue operations if we cannot successfully address the risks associated with early stage development companies in emerging technologies.

We have a history of operating losses and we anticipate losses and negative cash flow for the foreseeable future.  Unless we are able to generate profits and positive cash flow we may not be able to continue operations.  

We incurred a net loss of $ 2,412,305 and negative cash flow from operations of $ 1,595,095 during the six months ended June 30, 2005, and a net loss of $8,017,166 and negative cash flow from operations of $4,323,111 during the year ended December 31, 2004.  During the year ended December 31, 2003, we incurred a net loss of $3,001,900 and negative cash flow from operations of $955,256.  We expect operating losses and negative cash flow from operations to continue for the foreseeable future.

We will need to generate significant revenues to achieve profitability. Consequently, we may never achieve profitability.  Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. If we are unable to achieve or sustain profitability in the future, we may be unable to continue our operations.

Our auditors have drawn readers’ attention to the uncertainty of our ability to continue as a going concern.

Our independent certified public accountants have added an explanatory paragraph to their audit opinion issued in connection with our consolidated financial statements.  It states that our ability to continue as a going concern is uncertain due to our history of operating losses and difficulty in generating operating cash flows.  Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  These adjustments might include changes in the possible future recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

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We will require additional capital to proceed with our business plan.  If we are unable to obtain such capital we will be unable to proceed with our business plan and we will be forced to limit or curtail our operations.

We will require additional working capital to proceed with our business plan. We have sufficient cash reserves, based on our current level of expenditures, to fund operations until approximately mid-November 2005.   For a discussion of our capital requirements, see the disclosure in "Management's Discussion and Analysis or Plan of Operation—Plan of Operations.”  We do not currently have a commitment from any third party to provide financing and may be unable to obtain financing on reasonable terms or at all.  Furthermore, if we raise additional working capital through equity, our stockholders will experience dilution.  If we are unable to raise additional financing by approximately the end of October 2005, and thereafter as required, we will be unable to grow or maintain our current level of business operations and, in fact, we will be forced to limit or curtail our operations.

The loss of any of our key personnel would likely have an adverse effect on our business.

Our future success depends, to a significant extent, on the continued services of our key personnel.  Our loss of any of these key persons most likely would have an adverse effect on our business.  Competition for personnel throughout the industry is intense and we may be unable to retain our current personnel or attract, integrate or retain other highly qualified personnel in the future.  If we do not succeed in retaining our current personnel or in attracting and motivating new personnel, our business could be materially adversely affected.

The business environment is highly competitive and, if we do not compete effectively, we may experience material adverse effects on our operations.

The market for Internet security products and services is intensely competitive and we expect competition to increase in the future.  We compete with large and small companies that provide products and services that are similar to some aspects of our security services.  Our competitors may develop new technologies in the future that are perceived as being more secure, effective or cost efficient than the technology underlying our security services.  In particular, the Internet security market has historically been characterized by low financial entry barriers.

Some of our competitors have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial, technical and marketing resources than we do.  As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products than we will.  We believe that there may be increasing consolidation in the Internet security market and this consolidation may materially adversely affect our competitive position.  In addition, our competitors may have established or may establish financial or strategic relationships among themselves, with existing or potential customers, resellers or other third parties and rapidly acquire significant market share.  If we cannot compete effectively, we may experience future price reductions, reduced gross margins and loss of market share, any of which will materially adversely affect our business, operating results and financial condition.

If we are unable to develop market recognition, we may be unable to generate significant revenues and our results of operations may be materially adversely affected.

To attract customers we may have to develop a market identity and increase public awareness of our technology and products. To increase market awareness of our technology and our products, we will continue to make significant expenditures for marketing initiatives. However, these activities may not

8

result in significant revenue and, even if they do, any revenue may not offset the expenses incurred in building market recognition. Moreover, despite these efforts, we may not be able to increase public awareness of our technology and our products, which would have a material adverse effect on our results of operations.

We must establish and maintain strategic and other relationships.

One of our significant business strategies has been to enter into strategic or other similar collaborative relationships in order to reach a larger customer base than we could reach through our direct sales and marketing efforts.  We may need to enter into additional relationships to execute our business plan.  We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms.  If we fail to enter into additional relationships, or maintain our existing relationships, we would have to devote substantially more resources to the distribution, sale and marketing of our security services and communications services than we would otherwise.

Our success in obtaining results from these relationships will depend both on the ultimate success of the other parties to these relationships and on the ability of these parties to market our products successfully.

Furthermore, our ability to achieve future growth will also depend on our ability to continue to establish direct seller channels and to develop multiple distribution channels.  Failure of one or more of our strategic relationships to result in the development and maintenance of a market for our services could harm our business.  If we are unable to maintain our relationships or to enter into additional relationships, this could harm our business.

If we are unable to respond to rapid technological change and improve our products and services, our business could be materially adversely affected.

The Internet security industry is characterized by rapid technological advances, changes in customer requirements, frequent new product introductions and enhancements and evolving industry standards in computer hardware and software technology.  As a result, we must continually change and improve our products in response to changes in operating systems, application software, computer and communications hardware, networking software, programming tools and computer language technology.  The introduction of products embodying new technologies and the emergence of new industry standards may render existing products obsolete or unmarketable.  In particular, the market for Internet and intranet applications is relatively new and is rapidly evolving.  Our future operating results will depend upon our ability to enhance our current products and to develop and introduce new products on a timely basis that address the increasingly sophisticated needs of our end-users and that keep pace with technological developments, new competitive product offerings and emerging industry standards.  If we do not respond adequately to the need to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or customer requirements, our operating results may be materially diminished.

New products and services developed or introduced by us may not result in any significant revenues.

We must commit significant resources to develop new products and services before knowing whether our investments will result in products and services the market will accept.  The success of new products and services depends on several factors, including proper new definition and timely completion, introduction and market acceptance.  There can be no assurance that we will successfully identify new product and service opportunities, develop and bring new products and services to market in a timely

9

manner, or achieve market acceptance of our products and services, or that products, services and technologies developed by others will not render our products, services or technologies obsolete or non-competitive.  Our inability to successfully market new products and services may harm our business.

We may not be able to protect and enforce our intellectual property rights, which could result in the loss of our rights, loss of business or increased costs.

Our success depends to a significant degree upon the protection of our software and other proprietary technology.  The unauthorized reproduction or other misappropriation of our proprietary technology would enable third parties to benefit from our technology without paying us for it.  We rely on a combination of patent, trademark, trade secret and copyright laws, license agreements and non-disclosure and other contractual provisions to protect proprietary and distribution rights of our products.  We have registered trademarks in the United States, Canada and Europe and have filed two patent applications, one in Canada and the other in the U.S., for our technology.  Although we have taken steps to protect our proprietary technology, they may be inadequate and the unauthorized use thereof could have a material adverse effect on our business, results of operations and financial condition.  Existing trade secret, copyright and trademark laws offer only limited protection.  Moreover, the laws of other countries in which we market our products may afford little or no effective protection of our intellectual property.  If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome and expensive, even if we were to prevail.

Claims by third parties that we infringe upon their proprietary technology could hurt our financial condition.

If we discover that any of our products or technology we license from third parties violates third party proprietary rights, we may not be able to reengineer our product or obtain a license on commercially reasonable terms to continue offering the product without substantial reengineering.    In addition, product development is inherently uncertain in a rapidly evolving technology environment in which there may be numerous patent applications pending for similar technologies, many of which are confidential when filed.  Although we sometimes may be indemnified by third parties against claims that licensed third party technology infringes proprietary rights of others, this indemnity may be limited, unavailable or, where the third party lacks sufficient assets or insurance, ineffective.  We currently do not have liability insurance to protect against the risk that our technology or future licensed third party technology infringes the proprietary rights of others.  Any claim of infringement, even if invalid, could cause us to incur substantial costs defending against the claim and could distract our management from our business.  Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages.  A judgment could also include an injunction or other court order that could prevent us from selling our products.  Any of these events could have a material adverse effect on our business, operating results and financial condition.

If our electronic security technology were breached, our business would be materially adversely affected.

A key element of our technology and products is our Internet security feature.  If anyone is able to circumvent our security measures, they could misappropriate proprietary information or cause interruptions or problems with hardware and software of customers using our products.  Any such security breaches could significantly damage our reputation.  In addition, we could be liable to our customers for the damages caused by such breaches or we could incur substantial costs as a result of defending claims for those damages. We may need to expend significant capital and other resources to protect against such security breaches or to address problems caused by such breaches. Security measures

10

taken by us may not prevent disruptions or security breaches.    In the event that future events or developments result in a compromise or breach of the technology we use to protect a customer's personal information, our financial condition and business could be materially adversely affected.  

We face restrictions on the exportation of our encryption technology, which could limit our ability to market our products outside of the United States, Canada and Europe.

Some of our Internet security products utilize and incorporate encryption technology.  Exports of software products utilizing encryption technology are generally restricted by the United States and various non-United States governments, particularly in response to the terrorist acts of September 11, 2001.  If we do not obtain the required approvals, we may not be able to sell some of our products in international markets, which could materially adversely affect our results of operations.

Our operating results may prove unpredictable, and may fluctuate significantly.

Our operating results are likely to fluctuate significantly in the future due to a variety of factors, many of which are outside of our control.  Factors which may cause operating results to fluctuate significantly include the following:

·

new technology or products introduced by us or by our competitors;

·

the timing and uncertainty of sales cycles and seasonal declines in sales;

·

our success in marketing and market acceptance of our products and services by our existing customers and by new customers;

·

a decrease in the level of spending for information technology-related products and services by our existing and potential customers; and

·

general economic conditions, as well as economic conditions specific to users of our products and technology.

Our operating results may be volatile and difficult to predict.  As such, future operating results may fall below the expectations of securities analysts and investors.  In this event, the trading price of our common stock may fall significantly.  

We expect to generate some revenues and incur some operating expenses outside of the United States.  If applicable currency exchange rates fluctuate , our revenues and results of operations may be materially and adversely affected.

We expect that some portion of our revenues will be based on sales provided outside of the United States.  In addition, we expect that a significant portion of our operating expenses will be incurred outside of the United States.  As a result, our financial performance will be affected by fluctuations in the value of the U.S. dollar to foreign currency. At the present time, we have no plan or policy to utilize forward contracts or currency options to minimize this exposure, and even if these measures are implemented there can be no assurance that such arrangements will be available, be cost effective or be able to fully offset such future currency risks.

Other risks associated with international operations could adversely affect our business operations and our results of operations.

There are certain risks inherent in doing business on an international level, such as:

·

unexpected changes in regulatory requirements, export and import restrictions;

11

·

controls relating to encryption technology that may limit sales sometime in the future;

·

legal uncertainty regarding liability and compliance with foreign laws;

·

competition with foreign companies or other domestic companies entering into the foreign markets in which we operate;

·

tariffs and other trade barriers and restrictions;

·

difficulties in staffing and managing foreign operations;

·

longer sales and payment cycles;

·

problems in collecting accounts receivable;

·

political instability;

·

fluctuations in currency exchange rates;

·

software piracy;

·

seasonal reductions in business activity during the summer months in Europe and elsewhere; and

·

potentially adverse tax consequences.

Any of these factors could adversely impact the success of our international operations. One or more of such factors may impair our future international operations and our overall financial condition and business prospects.

Risks relating to our common stock and this offering

Our common stock price may be volatile.

The market prices of securities of Internet and technology companies are extremely volatile and sometimes reach unsustainable levels that bear no relationship to the past or present operating performance of such companies. Factors that may contribute to the volatility of the trading price of our common stock include, among others:

·

our quarterly results of operations;

·

the variance between our actual quarterly results of operations and predictions by stock analysts;

·

financial predictions and recommendations by stock analysts concerning Internet companies and companies competing in our market in general, and concerning us in particular;

·

public announcements of technical innovations relating to our business, new products or technology by us or our competitors, or acquisitions or strategic alliances by us or our competitors;

·

public reports concerning our products or technology or those of our competitors; and

·

the operating and stock price performance of other companies that investors or stock analysts may deem comparable to us.

In addition to the foregoing factors, the trading prices for equity securities in the stock market in general, and of Internet-related companies in particular, have been subject to wide fluctuations that may be unrelated to the operating performance of the particular company affected by such fluctuations.  Consequently, broad market fluctuations may have an adverse effect on the trading price of our common stock, regardless of our results of operations.

12

There is a limited market for our common stock.  If a substantial and sustained market for our common stock does not develop, our stockholders' ability to sell their shares may be materially and adversely affected.

Our common stock is tradable in the over-the-counter market and is quoted on the OTC Bulletin Board. Many institutional and other investors refuse to invest in stocks that are traded at levels below the Nasdaq Small Cap Market which could make our efforts to raise capital more difficult.  In addition, the firms that make a market for our common stock could discontinue that role.  OTC Bulletin Board stocks are often lightly traded or not traded at all on any given day.  We cannot predict whether a more active market for our common stock will develop in the future.  In the absence of an active trading market:

·

investors may have difficulty buying and selling or obtaining market quotations;

·

market visibility for our common stock may be limited; and

·

a lack of visibility for our common stock may have a depressive effect on the market price for our common stock.

Shares issuable upon the exercise of options, warrants and convertible debentures or under anti-dilution provisions in certain agreements could dilute stock holdings and adversely affect our stock price.

We have issued options and warrants to acquire common stock to our employees and certain other persons at various prices, some of which are, or may in the future have, exercise prices at or below the market price of our stock.  As of September 30, 2005 we have outstanding options and warrants, to purchase a total of 17, 544 ,135 shares of our common stock.  Of these options and warrants, 12,786,833 have exercise prices above the recent market price of $0. 45 per share (as of October 14 , 2005), and 4,757,302 have exercise prices at or below this recent market price.  If exercised, these options and warrants will cause immediate and possibly substantial dilution to our stockholders.

We have two existing stock option plans, one of which has 1,310,000 shares remaining available for grant as of September 30, 2005, the second of which has 837 ,698 shares remaining available for grant as of September 30, 2005.  Future options issued under these plans may have further dilutive effects.

The holders of our convertible debentures have the option of converting outstanding principal plus accrued interest thereon into shares of our common stock at a ratio of one common share for every $0.50 of debt converted.  Any such conversion would have a dilutive effect on stockholders.

Issuance of shares pursuant to the exercise of options, warrants, anti-dilution provisions, or the conversion of debentures, could lead to subsequent sales of the shares in the public market, which could depress the market price of our stock by creating an excess in supply of shares for sale.  Issuance of these shares and sale of these shares in the public market could also impair our ability to raise capital by selling equity securities.

A large number of shares will be eligible for future sale and may depress our stock price.

As of September 30, 2005, we had outstanding 31,593,019 shares of common stock of which approximately 11,603,576 shares were "restricted securities" (as that term is defined under Rule 144 promulgated under the Securities Act of 1933) excluding approximately 7,100,000 outstanding shares registered for resale under our effective resale registration statements which were issued to, but not resold by, the selling stockholders as of May 31, 2005.  These restricted shares are eligible for sale under Rule

13

144 at various times, upon the expiry of the applicable holding period.  No prediction can be made as to the effect, if any, that sales of shares of common stock or the availability of such shares for sale will have on the market prices prevailing from time to time.  Nevertheless, the possibility that substantial amounts of our common stock may be sold in the public market may adversely affect prevailing market prices for the common stock and could impair our ability to raise capital through the sale of our equity securities.

We do not intend to pay dividends in the near future.

Our board of directors determines whether to pay dividends on our issued and outstanding shares.  The declaration of dividends will depend upon our future earnings, our capital requirements, our financial condition and other relevant factors.  Our board does not intend to declare any dividends on our shares for the foreseeable future.

Our common stock may be deemed to be a "penny stock."  As a result, trading of our shares may be subject to special requirements that could impede our stockholders' ability to resell their shares.

Our common stock may be deemed to be a "penny stock" as that term is defined in Rule 3a51-1 of the Securities and Exchange Commission.  Penny stocks include stocks:

·

that are not traded on a national securities exchange that has been continuously registered since April 20, 1992 and has maintained quantitative initial and continued listing standards that are substantially similar to or stricter than the listing standards in place at January 8, 2004;

·

that are not traded on securities exchange, a “junior tier” of an exchange or an automated quotation system sponsored by a registered national securities association that has established initial listing standards that meet or exceed specified criteria and maintains similar quantitative continued listing standards; or;

·

of issuers with net tangible assets less than:

o

$2,000,000 if the issuer has been in continuous operation for at least three years; or

o

$5,000,000 if in continuous operation for less than three years, or

o

of issuers with average revenues of less than $6,000,000 for the last three years.

Section 15(g) of the Exchange Act, and Rule 15g-2 of the Securities and Exchange Commission, require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks not less than two business days before a transaction is effected and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account.  Moreover, Rule 15g-9 of the Securities and Exchange Commission requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.  This procedure requires the broker-dealer:

·

to obtain from the investor information concerning his or her financial situation, investment experience and investment objectives;

·

to determine reasonably, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions;

·

to provide not less than two business days before a transaction is effected, the investor with a written statement setting forth the basis on which the broker-dealer made the determination in the second bullet above; and

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to receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives.  

Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them.

Our current executive officers, directors and major stockholders own a significant percentage of our voting stock. As a result, they exercise significant control over our business affairs and policy.

As of September 30, 2005, our current executive officers, directors and holders of 5% or more of our outstanding common stock together beneficially owned approximately 46 % of the outstanding common stock if they exercised all of the options and warrants held by them.  These stockholders are able to significantly influence all matters requiring approval by stockholders, including the election of directors and the approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control and may make some transactions more difficult or impossible to complete without the support of these stockholders.

Our restated articles of incorporation contain provisions that could discourage an acquisition or change of control of our company.

Our restated articles of incorporation authorize our board of directors to issue preferred stock without stockholder approval.  Provisions of our certificate of incorporation, such as the provision allowing our board of directors to issue preferred stock with rights more favorable than our common stock, could make it more difficult for a third party to acquire control of us, even if that change of control might benefit our stockholders.

We currently do not have an effective system of internal controls , and therefore we may not be able to detect fraud or report our financial results accurately, which could harm our business.

Effective internal controls are necessary for us to provide reliable financial reports and to detect and prevent fraud.  We periodically assess our system of internal controls to review their effectiveness and identify potential areas of improvement.  These assessments may conclude that enhancements, modifications or changes to our system of internal controls are necessary.  Performing assessments of internal controls, implementing necessary changes, and maintaining an effective internal controls process is expensive and requires considerable management attention.  Internal control systems are designed in part upon assumptions about the likelihood of future events, and all such systems, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. A consequence of these and other inherent limitations of control systems is that there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.  If we fail to implement and maintain an effective system of internal controls or prevent fraud, we could suffer losses, could be subject to costly litigation, investors could lose confidence in our reported financial information, and our image and operating results could be harmed, which could have a negative effect on the trading price of our common stock.

In connection with the audit of our consolidated financial statements for the year ended December 31, 2004, our independent registered public accounting firm advised the Board of Directors and management of certain significant internal control deficiencies that they considered to be, in the aggregate, a material weakness.   In particular, our independent registered public accounting firm

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identified the following weaknesses in our internal control system:  (1) a lack of segregation of duties; (2) a lack of formal procedures relating to all areas of financial reporting; (3) the failure to timely record on our books one conversion of our 4% convertible debentures; (4) the lack of timely preparation of certain back up schedules; and (5) the failure to sufficiently review financial statements and disclosures in our financial statements and report on Form 10-KSB for the year ended December 31, 2004 prior to delivering a draft to our independent registered public accounting firm for review.  Because of the size and resources of our company, we may not be able to remediate in the foreseeable future all of the deficiencies identified.  If we are unable to remediate the identified material weakness, there is a more than remote likelihood that a material misstatement to our SEC reports will not be prevented or detected, in which case investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our ability to raise additional capital and could also have an adverse effect on our stock price .

We may have difficulty implementing in a timely manner the internal controls procedures necessary to allow our management to report on the effectiveness of our internal controls, and we may incur substantial costs in order to comply with the requirements of the Sarbanes-Oxley Act of 2002.

The Sarbanes-Oxley Act of 2002 has introduced many new requirements applicable to us regarding corporate governance and financial reporting.  Among many other requirements is the requirement under Section 404 of the Act for management to report on our internal controls over financial reporting and for our registered public accountant to attest to this report.  We are required to comply with Section 404 effective the fiscal year ending December 31, 2007 .  Although our management has begun the necessary processes and procedures for issuing its report on our internal controls, we cannot be certain that we will be successful in complying with Section 404.  We expect to devote substantial time and incur costs during fiscal 2005 , 2006 and 2007 to implement appropriate controls and procedures to ensure compliance.  If we are not able to timely comply with the requirements set forth in Section 404, we might be subject to sanctions or investigations by regulatory authorities.  Any such action could adversely affect our business and financial results.

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USE OF PROCEEDS

The selling stockholders will receive all of the proceeds of the sale of shares of our common stock pursuant to this prospectus.  We will not receive any proceeds from the sale of shares by the selling stockholders.  We will, however, receive approximately $3,462,000 if all of the warrants issued to the selling stockholders are exercised for cash, and we intend to use any such proceeds for general corporate purposes.  

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PRICE RANGE OF COMMON STOCK

The principal U.S. market in which our common stock, all of which are of one class, $.001 par value per share, is traded is in the over-the-counter market.  Our stock is quoted on the OTC Bulletin Board under the symbol “VLDI”.  

The following table sets forth the range of high and low bid quotes of our common stock per quarter for the periods noted as reported by the OTC Bulletin Board.  These quotes reflect inter-dealer prices without retail mark-up, markdown or commission and may not necessarily represent actual transactions.  

MARKET PRICE OF COMMON STOCK

On October 14 , 2005, the closing price of our common stock was $0. 45 per share.

There were approximately 180 holders of record of our common stock as of September 30 , 2005, inclusive of those brokerage firms and/or clearing houses holding our securities for their clientele, with each such brokerage house and/or clearing house being considered as one holder.  The aggregate number of shares of common stock outstanding as of September 30 , 2005 was 31,593,019 shares.  

We have not paid or declared any dividends upon our common stock since inception and, by reason of our present financial status and our contemplated financial requirements, we do not contemplate or anticipate paying any dividends in the foreseeable future (see “Risk Factors”).

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MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

In this section, we explain our consolidated financial condition and results of operations for the six months ended June 30, 2005 and 2004 and the years ended December 31, 2004 and December 31, 2003 , and our plan of operations for the twelve months ending September 30 , 2006. As you read this section, you may find it helpful to refer to our consolidated financial statements and our interim consolidated condensed financial statements included in this prospectus.

Until we acquired our former subsidiary, Graph-O-Logic, S.A. in August 1999, we had no material or substantive business operations.  Since then, our business has been as more fully described in “Business.”  Accordingly, in this section we focus solely on the historical business operations of the subsidiary and our current business plan and operations.

Critical Accounting Policies

We prepare our financial statements in accordance with generally accepted accounting principles in the United States of America.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Significant accounting policies and methods used in preparation of the financial statements are described in note 2 to our December 31, 2004 Consolidated Financial Statements and updated in note 2 to our June 30, 2005 Interim Consolidated Condensed Financial Statements included in this prospectus.  We evaluate our estimates and assumptions on a regular basis, based on historical experience and other relevant factors.  Actual results could differ materially from these estimates and assumptions.  The following critical accounting policies are impacted by judgments, assumptions and estimates used in preparation of our December 31, 2004 Consolidated Financial Statements and our June 30 , 2005 Interim Consolidated Condensed Financial Statements.

Revenue Recognition:

We have not recorded any revenues to date.  At such time as we enter into revenue generating contracts with customers, we will recognize revenue when title has passed, persuasive evidence of an arrangement exists, performance has occurred, the amount of the contract is determinable, customer specified test criteria have been met and the earnings process is complete.

Impairment or disposal of long-lived Assets:

We account for long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”.  This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

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Research and Development Expenses:

We expense all of our research and development expenses in the period in which they are incurred.  At such time as our product is determined to be commercially available, we will capitalize those research and development expenditures that are related to the maintenance of the commercial products, and amortize these capitalized expenditures over the estimated life of the commercial product.  The estimated life of the commercial product will be based on management’s estimates, including estimates of current and future industry conditions.  A significant change to these assumptions could impact the estimated useful life of our commercial product, resulting in a change in the amortization period, and, possibly, impairment charges in the period in which the estimate is changed.

Stock Based Compensation:

We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations including FASB Interpretation No. 44, “Accounting For Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25” issued in March 2000, to account for stock options for employees.  Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.  Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans.  These provisions are required to be applied to stock compensation granted to non-employees.  As permitted by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting described above for awards granted to employees, and have adopted the disclosure requirements of SFAS No. 123.

Had compensation costs in respect of options granted to employees been determined using the fair value based method at the grant date, our pro forma net loss and basic and diluted loss per share for the six months ended June 30, 2005 and 2004, and for the years ended December 31, 2004 and 2003, would have been as follows:

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Plan of Operations

We are a development stage enterprise.  As such, our historical results of operations are unlikely to provide a meaningful understanding of the activities expected to take place during the period through September 30 , 2006.  Our major initiatives through September 30 , 2006 are:

·

obtaining commercial sales of our products, and continuing our current marketing program;

·

developing and improving product agents to perform specialized functions common to many e-commerce sites; and

·

furthering the development of our products.

For more information, please see “Business―Our Technology.”

Marketing Plans:  We started the marketing process in the second quarter of 2000, with our original focus being potential customers located in the United States and Western Europe.  The potential customers and our current marketing program are more fully described in “Business―Target Market.”  Marketing activities are multi-faceted.

We will continue to focus our marketing efforts on identifying potential customers by presenting technical seminars, participating in trade shows, using the services of public relations firms, market research, the creation and dissemination of technical and commercial collateral materials, the maintenance and periodic re-design of our website, and the placement of advertisements in print and electronic publications.  We plan on spending approximately $630,000 on our marketing efforts during the twelve months ending September 30 , 2006.

Our sales representatives, who are compensated on a base compensation plus commission basis, will follow up with potential customers identified through our marketing efforts, with the objective of more fully explaining the benefits of our products and negotiating the terms of the licensing of our products.  We expect to spend approximately $1,385,000 on our sales initiatives, including compensation and travel expenses, during the twelve months ending September 30 , 2006.  

Our sales and marketing expenditures for the twelve months ending September 30 , 2006 are expected to total approximately $2,015,000.

Cost of Sales and Services:  In the event that our sales efforts are successful, we will need to assist our customers in the implementation of our product licenses.  Depending on the success of our sales efforts, we expect to spend approximately $530,000 on compensation, training and related activities during the twelve months ending September 30 , 2006.

Product Developments:  We plan on continuing to fund third parties to develop our key technology and related products, under the direction and management of our product management group and our senior management.  For more information please see “Business - Our Technology”.

We will improve and further develop our products based on responses from potential customers.  The cost associated with our product development activities are primarily those currently planned and thus are subject to a high degree of control.  We estimate that the cost of our product development program during the twelve months ending September 30 , 2006 will be approximately $1,185,000.

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General and Administrative Expenses:  We expect to spend approximately $990,000 on general and administrative activities during the twelve months ending September 30 , 2006.

During the twelve months ending September 30 , 2006 we expect to spend a total of $4,720,000, subject to our ability to generate revenues from the licensing of our products and our ability to raise additional capital.

Since entering the development stage, we have obtained financing through the private placement of debt, convertible debentures, common stock and warrants, and through the exercise of some of these warrants.  Until such time as we generate sufficient revenues from the licensing of our software applications, we will continue to be dependent on raising substantial amounts of additional capital through any one of a combination of debt offerings or equity offerings, including but not limited to:

·

debt instruments, including demand notes and convertible debentures similar to those discussed below in “Liquidity and Capital Resources”;

·

private placements of common stock;

·

exercise of stock options at an average exercise price of $0.41 per share;

·

exercise of Series ‘E’ warrants at an exercise price of $0.33 per share;

·

exercise of Series ‘F’ warrants at an exercise price of $0.50 per share;

·

exercise of Series ‘G’ warrants at an exercise price of $0.75 per share;

·

exercise of Series ‘H’ warrants at an exercise price of $0.50 per share;

·

exercise of Series ‘I’ warrants at an exercise price of $0.90 per share; or

·

funding from potential clientele or future industry partners.

Selected Financial Data

The selected financial data set forth below with respect to our consolidated statements of operations and cash flows for the six month periods ended June 30, 2005 and 2004 and each of the two fiscal years in the period ended December 31, 2004 and with respect to the consolidated balance sheets at June 30 , 2005 and at December 31, 2004 and 2003, are derived from our interim consolidated condensed financial statements and from our audited consolidated financial statements, included in this prospectus.  The following selected financial data should be read in conjunction with these financial statements and the notes thereto.

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Results of Operations

In this section, we discuss our earnings for the periods indicated and the factors affecting them that resulted in changes from one period to the other.

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The Six Months Ended June 30, 2005 Compared to the Six Months Ended June 30 , 2004

Revenue:  We generated no revenues during the six months ended June 30 , 2005, nor did we generate any revenues during the six months ended June 30 , 2004.  Since August 1999 we have directed all of our attention towards the completion, and sales and marketing of, our software applications.  We believe that if we are successful in our development and sales and marketing efforts, we will generate a source of revenues in the future from sales and/or licensing of our software applications.

Selling, general and administrative expenses: Selling, general and administrative expenses consist primarily of personnel costs, professional fees, insurance, communication expenses, occupancy costs and other miscellaneous costs associated with supporting our research and development and sales and marketing activities.  During the six months ended June 30 , 2005 we incurred a total of $ 1,245,264 , including $ 1,028,314 in cash-based expenses and $ 216,950 in stock-based expenses, as compared to $ 1,355,085 , of which $ 967,868 was cash-based and $ 387,217 was stock-based expense, during the six months ended June 30 , 2004.  There was an overall decrease in selling, general and administrative expenses of $ 109,821 (8 %), comprised of a $ 170,267 (44 %) decrease in the stock-based component, which was partially offset by a $ 60,446 ( 6%) increase in the cash-based component of this expense.  The increase in the cash-based component of selling, general and administrative expenses occurred as a result of the addition of one new administrative employee in August 2004, increased occupancy and insurance costs, increased professional fees relating to our adherence to increasing legislative requirements generally and the additional ongoing reporting requirements relating to our private debt and equity placements which took place during the fourth quarter of 2003 and the first quarter of 2004, and the costs relating to our annual general meeting which was held in February, 2005, for which there was no comparable cost during the six months ended June 30, 2004.  These increases were partially offset by a reduction in the level of activity of our sales and marketing departments, as compared to the level of activity of these departments during the three months ended June 30, 2004, during which we commenced a ramp-up of our sales and marketing efforts in anticipation of the commercial release of one of our products.  This ramp-up initially entailed the addition of seven new sales and marketing personnel, expansion of our leased office space, and increased travel and related costs.  As a result of a delay in the expected release date of this product , our sales and marketing staff was reduced by five during the third and fourth quarters of 2004, with three positions being terminated and two positions being redeployed to product development.   During the second quarter of 2005, there was one additional position redeployed from sales to product development.  

The stock -based component of selling, general and administrative expense for the six month periods ended June 30, 2005 and 2004 consisted of the amortization of prepaid consulting fees recognized on the issuance of warrants during 2003, and the recognition of the fair value of common stock and stock options issued during the period as compensation for services rendered.  In addition, there was $110,400 in stock-based selling, general and administrative expenses for the six months ended June 30, 2004 relating to the accrual of penalties on the late registration of common stock underlying our 4% convertible debentures, for which there was no comparable transaction during the six months ended June 30, 2005.  The   amortization of prepaid stock-based consulting fees was lower during the six months ended June 30 , 2005 ($60,419, as compared to $207,117 during the six months ended June 30, 2004) as a result of the cancellation of a long-term service agreement during the first quarter of 2004, which reduced the amortization of the related prepaid expense during subsequent periods.  Additionally, prepaid fees relating to another contract became fully amortized during the fourth quarter of 2004.  The fair value of common stock and stock options issued during the six months ended June 30, 2005 was $156,531, compared to $69,700 during the six months ended June 30, 2004.  During the six months ended June 30, 2005, we issued 250,000 stock options to a consultant in recognition of the consultant’s service and commitment to

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our company, for which there was no comparable transaction during the six months ended June 30, 2004.  During the six months ended June 30, 2004, the $69,700 relating to the issuance of common stock and stock options was in respect of common stock issued to a consultant as partial payment of fees.  

During the third quarter of 2002 we began marketing our software applications, with the objective of increasing the number of beta sites and gaining market recognition for our software applications and for our company.  We continued with this objective until the second quarter of 2004, at which time we began to ramp up our sales and marketing efforts in anticipation of one of our software applications becoming ready for commercial licensing during the fourth quarter of 2004.     As a result of a delay in the expected release date for this software application, we scaled back the ramp-up of our sales and marketing program during the fourth quarter of 2004.  Notwithstanding this delay, our initiatives during this phase of our selling and marketing plan focus on the objective of obtaining future commercial sales of our products.  The market for software applications is extremely competitive, and is dominated by well-known, established companies.  Moreover, the sales cycle in our segment is typically long.  For these reasons we have incurred, and will continue to incur, significant sales and marketing expenses in advance of our software applications reaching the stage of being ready for full commercial release.

Research and development expenses: Research and development expenses consist primarily of personnel costs and consulting expenses directly associated with the development of our software applications.  During the six months ended June 30 , 2005, we incurred $ 662,862 developing our software applications, which represents an increase of $ 169,370 (34%) over the $493,492 we incurred during the six months ended June 30 , 2004.  This increase is due primarily to the expansion of the contract development group from an average of 20 personnel during the three months ended June 30 , 2004, to an average of 26 personnel during the six months ended June 30 , 2005 .  We also contracted with an independent consultant for a review of our products as part of our plans for the next generation of our software applications .  Additionally, we redeployed from sales and marketing to product development, one consultant and two employees, one of whom subsequently left the Company , during the third and fourth quarters of 2004.  During the six months ended June 30, 2005, we also redeployed and promoted one employee from our sales department to product development, to replace and expand upon the position previously held by an employee who resigned during the same period.

Interest and financing costs:  Interest and financing costs consist of interest and financing costs associated with our 4% senior convertible debentures, interest on promissory notes payable and interest on the capital lease. During the six months ended June 30 , 2005, we incurred $ 478,052 in interest and financing costs, a decrease of $ 1,064,254 (69 %) over the $ 1,542,306 in interest and financing costs incurred during the six months ended June 30 , 2004.  Of the $ 478,052 in interest and financing costs we incurred during the six months ended June 30 , 2005, $ 458,889 relates to our 4% senior subordinated convertible debentures, $ 17,625 relates to promissory notes payable, and $ 1,538 relates to the capital lease.  The $ 458,889 in interest and financing costs associated with our 4% senior subordinated debentures for the six months ended June 30 , 2005 is comprised of:  $ 7,147 of accrued interest charges on the debentures outstanding during the period; $ 382,457 of accretion of debentures payable through charges to interest expense; and $ 69,285 of amortization of deferred financing costs.  The accretion of debentures payable in the amount of $ 382,457 includes $ 284,580 which represents the unamortized discount that was recognized as interest expense during the period as a result of the conversion of $ 391,020 in principal of our 4% senior convertible debentures, net of deferred financing costs of $ 163,980.  

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The $ 1,542,306 we incurred in interest and financing costs during the six months ended June 30 , 2004 is comprised of $ 1,522,857 relating to our 4% senior subordinated convertible debentures, and $ 19,449 in accrued interest on the 12% promissory notes.  The $ 1,522,857 in interest and financing costs associated with our 4% senior subordinated debentures for the six months ended June 30 , 2004 is comprised of:  $ 35,772 of accrued interest charges on the debentures outstanding during the period; $1 ,144,889 of accretion of debentures payable through charges to interest expense; and $ 342,196 of amortization of deferred financing costs.  The accretion of debentures payable in the amount of $1,144,889 includes $808,727 which represents the unamortized discount that was recognized as interest expense during the period as a result of the conversion of $376,345 in principal of our 4% senior convertible debentures, net of deferred financing costs of $593,655.

The decrease of $ 28,625 (80 %) in accrued interest charges on the debentures outstanding during the period occurred as a result of a lower principal balance outstanding during the six months ended June 30 , 2005 as compared with the six months ended June 30 , 2004, due to the conversion of a total of $1, 775 ,000 in principal during the second and third quarters of 2004 and the first and second quarters of 2005.  The decrease of $ 762,432 (67 %) in accretion of debentures payable during the six months ended June 30 , 2005 as compared with the six months ended June 30 , 2004, occurred primarily as a result of the inclusion of $284,580 in unamortized discount on the conversion of debentures payable during the six months ended June 30 , 2005, as compared to the $808,727 in unamortized discount included in the accretion of debentures payable during the six months ended June 30, 2004.  Additionally, there was a reduction in accretion for debentures outstanding during the period, which occurred because of there being a lower principal balance of debentures payable during the six months ended June 30 , 2005, on which accretion was calculated for the period.  The decrease of $ 272,911 (80 %) in amortization of deferred financing costs also occurred as a result of the lower principal balance for which the charge was made.

The decrease of $1, 824 (9 %) in accrued interest on 12% promissory notes occurred as a result of the conversion of $169,964 in principal balance of the notes during the first quarter of 2004, which reduced interest charges for periods subsequent to the conversion.   The capital lease was entered into at the end of the second quarter of 2004 .  As such , there were no charges to interest on capital lease for the six months ended June 30 , 2004.

Net loss:  We incurred a loss of $ 2,412,305 ($0. 08 per share) for the six months ended June 30 , 2005, compared to a loss of $ 4,969,055 ($0. 20 per share) for the six months ended June 30 , 2004.  Our revenues and future profitability are substantially dependent on our ability to:

*

license the software applications to a sufficient number of clients;

*

be cash-flow positive on an ongoing basis;

*

modify the successful software applications, over time, to provide enhanced benefits to then-existing users; and

*

successfully develop related software applications.

The Fiscal Year Ended December 31, 2004 Compared to the Fiscal Year Ended December 31, 2003

Revenue:  We generated no revenues during the year ended December 31, 2004, nor did we generate any revenues during the year ended December 31, 2003.  As of August 1999, we have directed all of our attention towards the completion and marketing of the software applications discussed above.  We believe that if we are successful in our development and marketing efforts, we will generate a source of revenue in the future from sales and/or licensing of our software applications.  

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Selling, general and administrative expenses: Selling, general and administrative expenses consist primarily of personnel costs, professional fees, insurance, communications expenses, occupancy costs and other miscellaneous costs associated with supporting our research and development and sales and marketing activities.  During the year ended December 31, 2004 we incurred a total of $3,058,649, including $2,494,680 in cash-based expenses and $563,969 in stock-based expenses, as compared to $1,752,725, of which $802,080 was cash-based and $950,645 was stock-based expenses, during the year ended December 31, 2003.  There was an overall increase in selling, general and administrative expenses of $1,305,924 (75%), comprised of a $1,692,600 (211%) increase in the cash-based component of this expense, which was partially offset by a $386,676 (41%) decrease in stock-based expenses.  The increase in the cash-based component of selling, general and administrative expenses occurred primarily as a result of the ramp-up of our sales and marketing efforts during the second and third quarters of 2004, which entailed the addition of seven new sales and marketing personnel, expansion of our leased office space, and increased travel and related costs.  As a result of a delay in the expected release date of one of our products, our sales and marketing staff was reduced by five during the third and fourth quarters of 2004, with three positions being terminated and one position being redeployed to product development.  

We also added two individuals to our administrative staff, one during the second quarter and one during the third quarter of 2004, and incurred higher professional fees, insurance premiums and investor relations costs.  The decrease in the stock-based component of selling, general and administrative expenses occurred primarily as a result of an unusually large number of stock options and warrants being issued to consultants in recognition of their commitment to us in our early stages, during the year ended December 31, 2003, for which there was no comparable transaction during the year ended December 31, 2004.  During the year ended December 31, 2004, the stock-based selling, general and administrative expenses consisted of amortization of prepaid consulting fees recognized on the issuance of warrants during 2003, accrued expense associated with the commitment to grant options, and $110,400 in penalties on the late registration of our common stock underlying our 4% senior convertible debentures.

During the third quarter of 2002 we began marketing our software applications, with the objective of increasing the number of beta sites and gaining market recognition for our software applications and for our company.  We continued with this objective until the second quarter of 2004, at which time we began to expand our sales and marketing efforts in anticipation of one of our software applications becoming ready for commercial licensing during the fourth quarter of 2004.   As a result of a delay in the expected release date for this software application, we have scaled back the ramp-up of our sales and marketing program during the fourth quarter of 2004.  Notwithstanding this delay, our initiatives during this phase of our selling and marketing plan focus on the objective of obtaining future commercial sales of our products.  The market for software applications is extremely competitive, and is dominated by well-known, established companies.  Moreover, the sales cycle in our segment is typically long.  For these reasons we have incurred, and will continue to incur, significant sales and marketing expenses in advance of our software applications reaching the stage of being ready for full commercial release.     

Research and development expenses: Research and development expenses consist primarily of personnel costs and consulting expenses directly associated with the development of our software applications.  During the year ended December 31, 2004, we spent $1,234,042, including $1,229,661 in cash-based expenses and $4,381 in stock-based compensation expense, as compared to $997,822, of which $662,006 was cash-based and $335,816 was stock-based compensation expense, during the year ended December 31, 2003, in research and development expenses.  There was an overall increase in research and development expenses of $236,220 (24%), comprised of a $567,655 (86%) increase in the cash-based component of this expense, which was partially offset by a $331,435 (99%) decrease in stock-based expense. The increase in the cash-based portion of research and development expenses is due

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primarily to the expansion of the contract development group from an average of 9 personnel during the year ended December 31, 2003, to an average of 24 personnel during the year ended December 31, 2004.  Additionally we redeployed from sales and marketing to product development, one consultant and two employees, one of whom was subsequently terminated, during the third and fourth quarters of 2004. The decrease in stock-based compensation expense occurred as a result of $335,816 in stock-based compensation on the issuance of options and warrants to consultants in recognition of their commitment to us in our early stages, being reflected in the expense for the year ended December 31, 2003, with no similar transaction occurring during the year ended December 31, 2004.

Interest and financing costs:  Interest and financing costs consist of interest and financing costs associated with our 4% senior convertible debentures, interest on promissory notes payable and interest on the capital lease.  During the year ended December 31, 2004, we incurred $2,126,574 in interest and financing costs, an increase of $2,066,750 (3,455%) over the $59,824 in interest and financing costs incurred during the year ended December 31, 2003.  Of the $2,126,574 in interest and financing costs incurred during 2004, $2,087,594 relates to our 4% senior subordinated convertible debentures, $37,375 relates to the promissory notes payable, and $1,605 relates to the capital lease.  

The $2,087,594 in interest and financing costs associated with our 4% senior subordinated convertible debentures for the year ended December 31, 2004 is comprised of $51,563 of accrued interest charges on the debentures outstanding during the period; $1,552,073 of accretion of debentures payable through charges to interest expense; and $483,958 of amortization of deferred financing costs.  The accretion of debentures payable in the amount of $1,552,073 includes $1,076,151 which represents the unamortized discount that was recognized as interest expense during the year as a result of the conversion of $498,903 in principal of the 4% senior convertible debentures, net of deferred financing costs of $721,097.

During the year ended December 31, 2003 our $59,824 in interest and financing costs related solely to the 12% and 5% promissory notes payable.  The decrease of $22,449 (38%) in interest on promissory notes payable reflects the lower principal balance outstanding during the year ended December 31, 2004 as compared with the year ended December 31, 2003, which occurred as a result of the conversion of promissory notes into common stock of the corporation during the second quarter of 2003 and the first quarter of 2004.  As the transaction involving the issuance of $2,000,000 of 4% senior subordinated convertible debentures and 1,400,000 Series H warrants took place in December 2003 and January 2004, there were no comparable expenses during the year ended December 31, 2003.

Write-off of prepaid services and write-off of deferred consulting services: As a result of completing the $6,000,000 private equity placement, we cancelled a long-term service agreement with an unrelated company during the first quarter of 2004.  The termination of this agreement resulted in the cancellation of 4,000,000 Series F warrants, which were issued by us during September 2003, which entailed the write-off of $322,494 of prepaid services and $1,048,100 of deferred consulting services.  There was no comparable event during the year ended December 31, 2003.

Loss on extinguishment of debt: During the year ended December 31, 2004, we settled promissory notes and accrued interest totaling $180,000, through the issuance of 360,000 shares of our common stock.  We recorded a loss in connection with this transaction, representing the difference between the market value of the shares issued at the time of the settlement, and the amount which would have been paid had the debt been settled in cash.

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Depreciation of property and equipment: Depreciation of property and equipment was $46,231 during the year ended December 31, 2004, an increase of $41,898 (967%), over the $4,333 charged to depreciation expense during the year ended December 31, 2003.    This increase occurred as a result of the addition of $176,515 in new capital assets during the year ended December 31, 2004.  

Net Loss: We incurred a loss of $8,017,166 ($0.29 per share) for the year ended December 31, 2004, compared to a loss of $3,001,900 ($0.16 per share) for the year ended December 31, 2003.    Our revenues and future profitability and future rate of growth are substantially dependent on our ability to:

·

license the software applications to a sufficient number of clients;

·

to be cash-flow positive on an ongoing basis;

·

modify the successful software applications, over time, to provide enhanced benefits to existing users; and

·

successfully develop related software applications.

Liquidity and Capital Resources

General:  Since inception, we have funded our operations from private placements of debt and equity securities.  In addition, until September 1999 we derived revenues from consulting contracts with affiliated parties, the proceeds of which were used to fund operations.  Until such time as we are able to generate adequate revenues from the licensing of our software applications, we cannot assure that cash from the issuance of debt securities, the exercise of existing warrants and options, and the placements of additional equity securities will be sufficient to fund our long-term research and development and selling, general and administrative expenses.

We achieved our first commercial sale during the quarter ended September 30, 2005.   We anticipate further commercial sale s during the fourth quarter of 2005, however we cannot be assured that this will be the case.  We did not hire additional personnel during the six months ended June 30 , 2005.  During October 2005, we added one part-time consultant to our staff .   Subject to raising sufficient additional capital during the fourth quarter of 2005, we expect to hire one or two additional personnel in the sales and marketing departments during the next 6 months.  We have not made any material commitments for capital equipment expenditures during the next 12 months.

We have sufficient cash reserves, based on our current level of expenditures, to fund operations until approximately mid-November 2005 .  In the event that we are not successful in raising sufficient additional capital by approximately the end of October 2005, we will have to severely reduce all of our expenditures.  This may result in significant delays in, or possibly precluding, the generation of sufficient revenues from the licensing of our products to generate positive cash flows from operations.

Sources of capital:  In August 1999 we made a transition in business strategies.  Prior to August 1999 we provided consulting services in addition to developing our core technology.  Since then, we have directed all of our efforts to the development, and sales and marketing of, our software applications.  Our principal sources of capital for funding our business activities subsequent to August 1999 have been the private placements of debt and equity securities.

During the six months ended June 30 , 2005, we granted 150,000 stock options , valued at $54,965, to consultants for services rendered during 2004.  The granting of these options resulted in the settlement of $54,965 in accrued liabilities.    

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During the year ended December 31, 2004, we issued 4% convertible debentures and 980,000 Series H warrants, for gross proceeds of $1,400,000, and we completed a private placement of 6,666,666 common shares and 3,333,333 Series I warrants for gross proceeds of $6,000,000, in order to fund current and future operations.  Also during the year ended December 31, 2004, we issued 70,000 shares of our common stock, valued at $72,800 (average of $1.04 per common share) to an unrelated company in consideration for consulting and financial services rendered.  A total of 104,000 Series F warrants were exercised for gross proceeds of $52,000 during the year ended December 31, 2004.  These funds were used to cancel an account payable owing to the holder of the exercised warrants.  We have not entered into any off-balance sheet arrangements which would have provided us with a source of capital.

Uses of capital:  Since August 1999 we have directed our efforts towards the development and marketing of our software applications.  In May 2000, we started to actively market our software applications.  We commenced our current marketing program during the third quarter of 2002, and have since engaged additional personnel to assist in, and to expand the scope of, this effort.  The initial objective of this program was to secure pilot projects and to gain market recognition for our company and our products, in order to generate future commercial sales of our products in the earliest time-frame possible.  During 2004, we added a total of five people to our sales and marketing team, in order to accelerate our efforts to generate future commercial sales of our products.  We also added two administrative employees, increased the area of our leased premises, and acquired new property and equipment.  Additionally, we increased the size of our contract software application development group, and hired two employees in the product development department, in order to implement revisions and enhancements to those of our products currently in use as they are identified, while continuing to develop additional products.  During the first and second quarters of 2005, we continued the scale-back of our sales and marketing program which was commenced in the fourth quarter of 2004, in order to maintain a sustainable level for sales and marketing expenditures leading up to the first commercial release of our products.  We have not entered into any off-balance sheet arrangements which would have resulted in our use of capital.

The cost to implement appropriate controls and procedures to ensure compliance with Section 404 of the Sarbanes-Oxley Act is included in our budget for 2005 and 2006 .

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BUSINESS

Summary

Validian Corporation provides software products to assist public and private enterprises address the increasingly complex issues surrounding application security.  Validian ASI(TM) is an application-security software system that protects the exchange of information at the application layer, where the majority of breaches occur, and protects mission-critical applications against hack attacks and unauthorized access, which often occur at the hardware and software perimeter.  Validian ASI makes secure data exchange among applications, including distributed applications, straightforward and affordable for any organization, regardless of size and resources.  Validian ASI facilitates security audit compliance and assurance, whether mandated by government, industry or internal policy; prevents impersonation through application authentication and authorization; delivers confidentiality through application authentication and authorization; and delivers confidentiality through end-to-end encryption of all exchanges, so that data never travels “in the clear”.  Incorporated in the United States, Validian has offices in the United States and Canada.

Our Technology

Our technology is based upon our intellectual property and was used to develop our products.

Our Intellectual Property

Our intellectual property includes an addressing scheme, an authentication process and a key exchange process for all parties to a communication, thus offering an authentication model for secure data exchanges. It also includes an encryption function using standard algorithms that encrypts data from within an originating application and decrypts the data within the receiving application.

Our technology provides benefits, by enabling users:

·

to integrate security and transport in all communication and document exchanges through an integrated approach; and

·

to develop and use existing interactive, distributed applications (like e-commerce, e-banking, e-health and e-loyalty) with an integrated security model.

Based on this technology, we have developed the products described below.

Target Market

Our business strategy is to license our technology either directly or through distribution channels to medium to large organizations that develop, market, sell, distribute or use software products where interaction with a distributed customer, employee and/or partner base is essential.  This includes:

·

corporate IT departments that serve their corporation with a variety of applications and implementation environments, according to the needs of the various internal departments. This implies writing applications for more than one platform or to migrate, at one point in time, from one platform to another while ensuring the security of communication between applications and over distributed networks; and

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·

independent software vendors and developers serving a relatively large group of customers, on a regional or national basis and who must respond to a variety of conditions and platforms, as imposed by their customers in specific industrial sectors and secure the exchanges between their customers’ partners, suppliers and other participants.

Potential customer industrial sectors include, among others:

·

manufacturers in supply management chains;

·

electronic health care providers and suppliers;

·

governments;

·

financial institutions and insurance companies; and

·

software distribution services.

Marketing Strategy and Distribution Channels

We have initiated a marketing program in North America and Europe to bring our products to the marketplace. This program has two components: direct and channel sales.

Direct Sales

The direct sales approach entails making high-level contacts within the organizations of target customers to present the benefits and competitive advantages of our products.  Leads to such presentations are generated through existing contacts of management and sales representatives, and through attendance at and participation in specialized e-commerce and computer security trade shows, and the presentation of the benefits of our products in technical seminars attended by personnel with a mandate for application security.  

Channel Sales

In order to penetrate the market for our products, we are attempting to partner with, value-added resellers (“VARs”), independent marketing representatives (“IMRs”), system integrators (“SIs”), independent software vendors (“ISVs”) and application service providers (“ASPs”).  Potential partners are being identified based upon their ability to penetrate specific markets more easily than we can. We believe major customers also will act as VARs in their sector.  

Sales representatives and sales agents are promoting our products within these two channels.  The representatives are responding to queries and expressions of interest from those interested in becoming early adopters of our working models.  These early customers and distributors may have an impact on the product development schedule, as we will develop interfaces with users’ existing systems in response to their feedback and individual requirements.

Currently, we have agreements with distribution partners in the U.S., Canada, and Mexico.

Marketing Analysis

During the year ended December 31, 2004, we utilized the services of industry specialists in the health care, government and supply chain management sectors. Their mandate was to identify specific areas and a limited number of corporations where our products would facilitate secure communication and the implementation of a strong security infrastructure with ease of deployment and management.

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To support our sales force and these specialists, we have developed technical literature on the following topics:

·

security;

·

features and benefits;

·

integration into current systems;

·

openness of the architecture;

·

future developments; and

·

implementation procedures.

Estimated Sales Cycles

We expect that individual sales cycles will be from four to eight months in duration.  The territory where most potential clients reside is expected to be in North America, Europe and Asia Pacific.  We retained two sales representatives in the third quarter of 2002 and two sales agents in the fourth quarter of 2002.  We added one sales representative and three sales agents during the second quarter of 2004.  At September 30, 2005 we had a vice president of sales, two sales representatives, and one sales agent.

Marketing Expenses

The main expense factors for our marketing campaign are for:

·

personnel, both internal and outside specialists;

·

buying or renting lists of potential customers for direct marketing campaigns;

·

direct marketing to potential customers;

·

banner advertising on vertical industry websites;

·

participation in trade shows;

·

travel and living expenses;

·

web site development and maintenance; and

·

literature preparation and distribution.

For more information, please see “Management’s Discussion and Analysis or Plan of Operation―Plan of Operations.”

Our Products

Currently, we are offering three main products on a commercial basis.

Our Application Security Infrastructure (“ASI”)

Our ASI is a comprehensive integrated infrastructure for securing data transport between distributed applications and Web services. ASI is specifically designed for distributed applications and distributed networks. It automatically manages all critical security functions for any application, including authentication, encryption, key generation, key distribution, addressing and data transport. ASI guarantees the delivery of the messages and files to, and only to, the target destination, and data never travels “in the clear” at any time between applications.

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Our Flash Communicator (FC)

Our Flash Communicator (FC) product provides a strong level of security for instant communication and file exchange between authenticated parties.  FC creates “gated communities” of authenticated users.  It offers real-time tools for collaboration between individuals and groups. FC performs encryption of both messages and attachments within its own operation, so that data never travels in the clear at any point in time. Within an FC exchange, all participants are authenticated and messages and large files of most types, including video and audio files, can be transferred encrypted.  We believe that FC is currently the only secure instant messenger residing entirely on USB flash memory devices: the Validian “Flash Communicator^TM”.  FC operates over Validian's Application Security Infrastructure (ASI) and benefits from all the security features of ASI.  

Our Software Development Kit (“SDK”)

We provide a SDK, for rapidly and simply securing data transport between applications through ASI. The SDK includes a complete, integrated and built-in set of control, transport and security features, which are automatically inherited by any applications linked to ASI through the SDK.  Application developers who use the Validian SDK do not have to learn and master any of the various transport and security products or mechanisms to implement security on their applications.  They do not have to worry about the low-level IP addresses or ports nor concern themselves with implementing complex security features, as the SDK performs these functions automatically.  This provides the application with a complete communication security chain, as the ASI protection initiates from within the originating application and transports data to within the destination application.  The SDK is offered free of charge to qualified developers and system integrators.

Competition

Competitors for the ASI market are different from competitors for the FC market.

ASI Competition

Our ASI product competes primarily with the products described below.

VPN

Virtual Private Networks (“VPN”) is a technology that ensures a secure communication link between two devices linked to the Internet or any communication network. This type of network security ensures that between those two hardware devices, the data cannot be intercepted and tampered with.

The main supplier of VPN is Check Point Software Technologies Ltd., but a number of suppliers are also offering competing products.

PKI

Public Key Infrastructure (“PKI”) is a sophisticated method of authenticating communicating parties by providing each party with a set of two uniquely linked keys, one private key that is kept by the party and one public key that is published for every one to see. When communicating, messages are encrypted with the private key of the sender and decrypted by the receiver using the public key of the sender. Since both keys are mathematically linked, the receiver is assured that the message is coming from that sender and nobody else.

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This exchange mechanism has been extended to protect more applications but we believe that its implementation on a large scale for distributed environments proves difficult and costly.  Main suppliers of PKI include Entrust, Baltimore Technology and Verisign.

SSL

Secure Socket Layer (“SSL”) is a browser level protection offered by Netscape and Microsoft and incorporated in most browsers. SSL establishes a secure connection from a server to a browser requesting access to an application on this server. SSL is a standard widely used across a large number of platforms and systems. However, it relies on a rather weak trust model, since the browser is not authenticated by the server. This brings a risk of impersonation.

FC Competition

Our FC competes primarily with the following products:

Free Instant Messaging (“IM”)

The major suppliers of individual-class, free and unsecure IM systems are Yahoo!, Microsoft and AOL.

Enterprise-class Secure IM

The enterprise-class secure IM industry is in its infancy. Some suppliers offer products but the installed base is still limited. Suppliers include WireRed, Jabber, Bantu, Sigaba, Yahoo, FaceTime and IBM. AOL and Microsoft also have announced products which are in different states of development.  We believe that we have significant technical competitive advantages over those suppliers and we are positioning to be able to take a portion of this market.

Research and Development

We spent the following amounts during the periods mentioned on research and development activities:

For more information, see: “Management’s Discussion and Analysis or Plan of Operation―Plan of Operations.”

Intellectual Property Protection

We rely on common law and statutory protection of trade secrets and confidentiality agreements. We claim copyright in specific software products and various elements of our core technology. We have registered trademarks in North America and in Europe to cover the Flash Communicator product and the generic term of “FlashWare,” as well as some graphic identification and the Validian name itself.  

Our intellectual property includes an addressing scheme, an authentication process and a key exchange process for all parties to a communication, thus offering a strong trust model for secure exchanges. It also includes an encryption function using standard algorithms that encrypts data from within an originating application and decrypts within the receiving application.

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We believe, but we cannot assure, that our technology and its implementation may be patentable.  We have filed two patent applications covering certain aspects of our products.  The initial patent applications cover the U.S. and Canada.  These may be expanded to other countries as and when we penetrate new markets.  We have defined migration paths for the various products and developed schedules for that migration.  This defines the requirement for additional patent, trademarks and copyright protection, which we plan to apply for as required in order to prevent unauthorized use of our technology.

We cannot assure that we will be able to obtain or to maintain the foregoing intellectual property protection.  We also cannot assure that our technology does not infringe upon the intellectual property rights of others.  In the event that we are unable to obtain the foregoing protection or our technology infringes intellectual property rights of others, our business and results of operations could be materially and adversely affected.  For more information please see “Risk Factors - We may not be able to protect and enforce our intellectual property rights which could result in the loss of our right, loss of business or increase our costs.” below.

Employees

As of September 30, 2005 , we had twelve full-time employees and contractual personnel, including three executive officers, five sales and marketing staff, two product development personnel, and two in administration.   Nine are located in Ottawa, Canada, one is located in Montreal, Canada, one is located in Washington, DC, and one is located in Memphis, Tennessee. In addition, we contract with an independent software development group in Europe, who had twenty- six individuals deployed to our contract on a full-time basis as of September 30, 2005 . We also regularly engage technical consultants and independent contractors to provide specific advice or to perform certain marketing or technical tasks.

Our Corporate History

We were incorporated in Nevada on April 12, 1989 as CCC Funding Corp. to seek out one or more potential business ventures.  On January 28, 2003, we changed our name from Sochrys.com Inc. to Validian Corporation.

Properties

Our principal executive office is located at 30 Metcalfe St., Suite 620, Ottawa, Canada, K1P 5L4. The telephone number is (613) 230-7211.  Our United States office is located at 4651 Roswell Road, Suite B-106, Atlanta, Georgia 30342.  The telephone number is (404) 256-1963.  

Our Ottawa office is leased from a non-affiliated party under a long-term lease agreement.  The lease provides shared access to and use of 5,576 square feet.  Our Atlanta office is leased from a non-affiliated party per oral arrangement on a month-by-month basis.  The lease provides shared access to and use of 1,000 square feet.

Legal Proceedings

We are not presently a party to any material litigation.

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MANAGEMENT

The following table sets forth certain information concerning our directors and executive officers as of September 30 , 2005:

Name

Age

Position

Bruce I. Benn

    51

   Director,  President, Chief Executive Officer,

Executive Vice President and Secretary

Effective May 6, 2005, the Board of Directors of the Company appointed Bruce I. Benn to the positions of President and Chief Executive Officer of the Company.  Mr. Benn has served as a Director, Executive Vice President and Secretary of the Company since February 2004.  From 1999 until February 2004, he provided services to the Company through Capital House Corporation.  Mr. Benn plays a major role in making key management and strategic decisions and oversees all aspects of corporate finance for the Company.  He has been principally responsible for arranging the $16 million of capital for the Company from 1999 to date.  Since 1989, Mr. Benn has been the President, Director and co-founder of Capital House Corporation, a boutique investment bank that has provided and/or arranged early and mid stage venture capital and hands-on managerial assistance to a portfolio of leading technology software companies. Mr. Benn was also a founder, Director and Officer of DevX Energy, Inc. from 1995 until October 2000.  From 1980 to 1993, he was with Corporation House Ltd., where he was a Vice President and a Director from 1985 to 1993.  He is an attorney and holds a Masters of Law degree from the University of London, England, a Baccalaureate of Laws from the University of Ottawa, Canada, and a Bachelor of Arts in Economics from Carleton University in Ottawa, Canada.  

Name

Age

Position

Ronald I. Benn

 50

Director, Chief Financial Officer and Treasurer

Ron Benn was appointed a Director, Chief Financial Officer and Treasurer in February 2004. He is a co-founder, Officer and Director of Capital House Corporation since 1989.  He was recently Chief Financial Officer of Coast Software, a position he held since September 2000 and where he was directly involved in raising more than $7 million in capital. Since 1995, he also has been a Director of Telemus Electronics.  From 1995 until 2000 he was Chief Financial Officer of DevX Energy, Inc., a former publicly traded company on the NASDAQ exchange. He has 21 years’ experience in senior finance positions, having begun his career in 1980 with Clarkson Gordon (now Ernst & Young) in the audit department. He holds a Chartered Accountant designation with the Institute of Chartered Accountants of Ontario (1982), and bachelor of commerce and bachelor of science degrees. Ron Benn is the brother of Bruce Benn.

Name

Age

Position

Dr. André Maisonneuve                64

Director, Chairman and Vice President-

Strategic  Marketing

André Maisonneuve has been a Director and Chairman since January 2002, and in addition to these positions was Chief Financial Officer and Secretary from January 2002 until February 2004 and President and Chief Executive Officer from January 2002 until May 2005.  Mr. Maisonneuve was appointed Vice President-Strategic Marketing, effective May 6, 2005.  Prior to this, he was Director, Executive Vice President and Secretary from July 2001 until January 2002. He oversees key management and strategic decisions relating to product positioning. He has over 30 years of experience in launching and managing information technology companies, both private and public. Prior to joining our company in 1999, from 1998 to 1999, he was Executive Vice President with Chataqua Inc., a computer based learning company. From 1995 to 1998, he was Director General of CESAM, a multi media industry consortium. From 1990 to 1995, he was Chairman of ADGA Inc., a software developer for computer

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based learning. From 1987 to 1990, he was Chief Executive Officer of Telemus Electronics, a defense-electronics company selling core technology and products to the U.S. Navy and large defense contractors such as Lockheed Martin, Teledyne Technologies and Ericsson. From 1985 to 1987, he was an Executive Vice President at ACDS, where he was instrumental in implementing an international distribution network for a publicly held spatial-database company, where customers included EDS, Atlanta Gas and IBM. From 1970 to 1985, he founded and managed CEGIR, an international information-technology and management-consulting company with customers in 14 countries and links with the major international development banks.  He has a Ph.D. in Engineering and is a graduate of Harvard Graduate Business School.

Each of our directors and officers serves a term of one year or until his successor is appointed.

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EXECUTIVE COMPENSATION

The following table shows all the cash compensation paid or to be paid by us or our subsidiaries, as well as certain other compensation paid or accrued, during the fiscal years indicated, to our chief executive officer and one additional executive officer whose total annual salary and bonus exceeded $100,000 in all capacities in which the person served.  

Summary Compensation Table

*

Became Director, Executive Vice President and Secretary in July 2001.  In addition, Mr. Maisonneuve served as Chief Financial Officer from January 2002 to February 2004 and President and Chief Executive Officer from January 2002 to May 2005.

There were no grants of options and Stock Appreciation Rights (“SAR”) during the past fiscal year to the executive officer listed above.

The following table sets forth information with respect to the executive officer listed above, concerning exercise of options during the last fiscal year and unexercised options and SARs held as of the end of the fiscal year:

Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values

(1)  Calculated based on $0.43 per share of common stock, the closing bid price of our common stock on December 31, 2004.

Long-Term Incentive Plans – Awards In Last Fiscal Year

There were no awards under our long-term incentive plans during the last fiscal year to the executive officer listed above.

Directors are not compensated for acting in their capacity as directors.  Directors are reimbursed for their accountable expenses incurred in attending meetings and conducting their duties.

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Employment Agreement with Bruce Benn

Effective May 6, 2005, we entered into an employment agreement with Bruce Benn who has agreed to serve as our President and Chief Executive Officer.  Pursuant to the agreement, Mr. Benn receives a base salary of Cdn $120,000 per annum.  Annual performance bonuses may be paid at our discretion and are subject to the achievement of pre-established performance criteria.  The term of the agreement continues indefinitely until terminated in accordance with the terms of the agreement.

The employment agreement provides that we may terminate the employment agreement for any reason upon providing Mr. Benn six months’ notice, or a payment in lieu of notice in an amount equal to six months of base salary (increased by one month for each year of employment by or contractual assignment to our company) plus unused vacation.  Any payments are deemed to be inclusive of all entitlements under the Ontario Employment Standards Act.  We may terminate the employment agreement at any time without notice, or payment in lieu of notice, for just cause.  In addition, Mr. Benn may terminate the employment agreement at any time upon providing six weeks’ notice.

Following a triggering event, Mr. Benn may, within 30 days after his actual knowledge of a triggering event, consider himself terminated and be entitled to a payment of 12 months’ base salary.  A triggering event includes (1) any person becoming the beneficial owner of more than 50% of our voting shares; (2) any resolution being passed or any action or proceeding being taken with respect to our liquidation, dissolution or winding; or (3) if we amalgamate, consolidate or merge with another corporation.

The agreement includes a noncompetition covenant pursuant to which for a period of one year from the effective date of termination of the employment agreement, howsoever caused, Mr. Benn may not (1) be directly or indirectly engaged in any company or firm who competes in the business of secure data transfer; (2) intentionally act in any manner that is detrimental to the relations between us, our dealers, distributors, VARs, IMRs, customers, employees or others; or (3) directly or indirectly solicit any of our customers, distributors, VARs, IMRs, or be connected with any person, firm or corporation soliciting or servicing any of our customers.

Employment Agreement with Andre Maisonneuve

Effective May 6, 2005, we entered into an employment agreement with Andre Maisonneuve who resigned as our President and Chief Executive Officer and agreed to serve as our Vice President--Strategic Marketing.  This employment agreement supersedes the employment agreement between Andre Maisonneuve and us, dated April 2004.  Pursuant to the agreement, Mr. Maisonneuve receives a base salary of Cdn $120,000 per annum.  Annual performance bonuses may be paid at our discretion and are subject to the achievement of pre-established performance criteria.  The term of the agreement continues indefinitely until terminated in accordance with the terms of the agreement.

The employment agreement provides that we may terminate the employment agreement for any reason upon providing Mr. Maisonneuve six months’ notice, or a payment in lieu of notice in an amount equal to six months of base salary (increased by one month for each year of employment by or contractual assignment to our company) plus unused vacation.  Any payments are deemed to be inclusive of all entitlements under the Ontario Employment Standards Act.  We may terminate the employment agreement at any time without notice, or payment in lieu of notice, for just cause.  In addition, Mr. Maisonneuve may terminate the employment agreement at any time upon providing six weeks’ notice.

Following a triggering event, Mr. Maisonneuve may, within 30 days after his actual knowledge of a triggering event, consider himself terminated and be entitled to a payment of 12 months’ base salary.  A triggering event includes (1) any person becoming the beneficial owner of more than 50% of our voting shares; (2) any resolution being passed or any action or proceeding being taken with respect to our liquidation, dissolution or winding up; or (3) if we amalgamate, consolidate or merge with another corporation.

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The agreement includes a noncompetition covenant pursuant to which for a period of one year from the effective date of termination of the employment agreement, howsoever caused, Mr. Maisonneuve may not (1) be directly or indirectly engaged in any company or firm who competes in the business of secure data transfer; (2) intentionally act in any manner that is detrimental to the relations between us, our dealers, distributors, VARs, IMRs, customers, employees or others; or (3) directly or indirectly solicit any of our customers, distributors, VARs, IMRs, or be connected with any person, firm or corporation soliciting or servicing any of our customers.

Employment Agreement with Ronald Benn

Effective May 6, 2005, we entered into an employment agreement with Ron Benn who has agreed to serve as our Treasurer and Chief Financial Officer.  Pursuant to the agreement, Mr. Benn receives a base salary of Cdn $120,000 per annum.  Annual performance bonuses may be paid at our discretion and are subject to the achievement of pre-established performance criteria.  The term of the agreement continues indefinitely until terminated in accordance with the terms of the agreement.

The employment agreement provides that we may terminate the employment agreement for any reason upon providing Mr. Benn six months’ notice, or a payment in lieu of notice in an amount equal to six months of base salary (increased by one month for each year of employment by or contractual assignment to our company) plus unused vacation.  Any payments are deemed to be inclusive of all entitlements under the Ontario Employment Standards Act.  We may terminate the employment agreement at any time without notice, or payment in lieu of notice, for just cause.  In addition, Mr. Benn may terminate the employment agreement at any time upon providing six weeks’ notice.

Following a triggering event, Mr. Benn may, within 30 days after his actual knowledge of a triggering event, consider himself terminated and be entitled to a payment of 12 months’ base salary.  A triggering event includes (1) any person becoming the beneficial owner of more than 50% of our voting shares; (2) any resolution being passed or any action or proceeding being taken with respect to our liquidation, dissolution or winding up; or (3) if we amalgamate, consolidate or merge with another corporation.

The agreement includes a noncompetition covenant pursuant to which for a period of one year from the effective date of termination of the employment agreement, howsoever caused, Mr. Benn may not (1) be directly or indirectly engaged in any company or firm who competes in the business of secure data transfer; (2) intentionally act in any manner that is detrimental to the relations between us, our dealers, distributors, VARs, IMRs, customers, employees or others; or (3) directly or indirectly solicit any of our customers, distributors, VARs, IMRs, or be connected with any person, firm or corporation soliciting or servicing any of our customers.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Included in selling, general and administrative expenses for the year ended December 31, 2004, is $10,000 in administrative charges and $6,229 in reimbursable expenses, incurred during the period from February 1 to December 31, 2004, and $5,000 in general and administrative expenses incurred during January 2004, which were paid to Capital House Corporation.  Capital House Corporation became a related company effective in February 2004, when Bruce Benn and Ronald Benn, who are officers and directors of that company, became officers and directors of our company.  At March 31, 2004, we had a balance payable to Capital House Corporation of $113,076, which included $103,076 with respect to charges, including the rental of our Ottawa, Canada office space, incurred during the period from October 2001 to January 2004, which period was prior to our becoming a related party to this company.  All amounts owing to Capital House Corporation were repaid during fiscal 2004.  Effective April 2004, our agreement with Capital House Corporation was terminated, at which time we entered into a long-term lease agreement with a non-affiliated party for our Ottawa, Canada office space.  

During the six months ended June 30, 2005, and the year ended December 31, 2004, we recorded $ 14,604 and $14,181, respectively,  in sublease income, pursuant to a sublease arrangement with a company for which one of our officers and directors is also an officer and director.  At June 30 , 2005 and December 31, 2004 we had $2 ,603 and $14,181, respectively, in sublease payments receivable pursuant to this arrangement.

During the year ended December 31, 2003, there were no related party transactions.  

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PRINCIPAL STOCKHOLDERS

The following table sets forth information as of September 30, 2005, with respect to any person known by us to own beneficially more than 5% of our common stock; common stock beneficially owned by each of our officers and directors named in “Executive Compensation;” and the amount of common stock beneficially owned by our officers and directors as a group.

Approximate Percent

Name & Address of

  Number of Shares

  of Common Stock

  Beneficial Owner  

Beneficially Owned

Outstanding  (1)

Bruce Benn* (2) (10) (11)

3,580,000

11.0%

Waycross Corp.  (3)

3,400,000

10.8%

29 Rue des Deux Communes

1226 Thonex-Geneva

Switzerland

Valdosta Corp. (2)

3,400,000

10.8%

P.O. Box 30592

Cayside, 2nd Floor, Harbour Drive

Georgetown, Grand Cayman

Cayman Islands, BWI

J. Patterson McBaine (4)

3,141,601

9.9%

50 Osgood Place, Penthouse

San Francisco, CA 94133

Jon D. Gruber (5)

2,948,157

9.3%

50 Osgood Place, Penthouse

San Francisco, CA 94133

Gruber & McBaine Capital Management, LLC (6)

2,839,935

8.9%

50 Osgood Place, Penthouse

San Francisco, CA 94133

Echo Technologies S.A. (7)

2,183,788

      6.6%

Rte. de St. Cergue

297-1260 Nyon-Switzerland

Henrik Olsen(7)

2,183,788

6.6%

Lagunitas Partners, LP (8)

2,075,001

6.4%

50 Osgoode Place, Penthouse

San Francisco, CA 94133

André Maisonneuve* (9)

1,662,500

5.2%

Ron Benn*(2) (10) (12)

975,500

3.0%

All Executive Officers and Directors As a Group

6,118,000 (11)

18.4%

________________________________________________________________________________________________

*Executive Officer and/or a Director.

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(1)

Based upon 31,593,019 shares of common stock issued and outstanding as of September 30, 2005 and includes for each person the shares issuable upon exercise of the options and warrants owned by them.

(2)

Valdosta Corp. is a portfolio management corporation incorporated under the laws of the Cayman Islands. Bruce Benn has a beneficial interest in 2,650,000 of the shares owned of record by Valdosta Corporation. Accordingly, 2,650,000 shares of the 3,400,000 shares owned of record by Valdosta Corporation have been included as beneficially owned by him.  Ronald Benn has a beneficial interest in 250,000 of the shares owned of record by Valdosta Corporation.  Accordingly, 250,000 shares of the 3,400,000 shares owned of record by Valdosta Corporation have been included as beneficially owned by him.

(3)

Waycross Corp. is a portfolio management corporation incorporated under the laws of the Cayman Islands.  

(4)

Includes (a) 2,839,935 shares beneficially owned by Gruber & McBaine Capital Management, LLC (“GMCM”) and (b) 204,444 shares of common stock and warrants to purchase 97,222 shares of common stock held by Mr. McBaine.  Mr. McBaine exercises shared voting and dispositive power over the shares beneficially owned by GMCM.  Based on information provided to us by the stockholder as of May 31, 2005.

(5)

Includes (a) 2,839,935 shares beneficially owned by GMCM and (b) 11,000 shares of common stock and warrants to purchase 97,222 shares of common stock held by Jon D. Gruber and Linda W. Gruber.  Mr. Gruber exercises shared voting and dispositive power over the shares beneficially owned by GMCM.  Based on information provided to us by the stockholder as of May 31, 2005.

(6)

Includes (a) 1,408,334 shares of common stock and warrants to purchase 666,667 shares of common stock held by Lagunitas Partners LP, an investment limited partnership of which GMCM is the general partner and exercises shared voting and dispositive power, (b) 354,334 shares of common stock and warrants to purchase 166,667 shares of common stock held by Gruber McBaine International Ltd., an entity over which GMCM exercises shared voting and dispositive power, (c) warrants to purchase 83,333 shares of common stock held by Firefly Partners, LP, an investment limited partnership of which GMCM is the general partner and exercises shared voting and dispositive power,   and (d) 160,600 shares of common stock held for entities over which GMCM exercises shared voting and dispositive power.  Based on information provided to us by the stockholder as of May 31, 2005.  Jon D. Gruber and J. Patterson McBaine exercise voting and dispositive powers over the securities held by GMCM.  Based on information provided to us by the stockholder as of May 31, 2005.

(7)

Echo Technologies S.A. is a technology company incorporated under the laws of Switzerland. Includes 548,788 shares of common stock and 1,635,000 shares of common stock issuable upon exercise of warrants owned by Echo Technologies S.A. Henrik Olsen has a beneficial interest in a portion of the shares of Echo Technologies S.A. Accordingly, the 548,788 shares and 1,635,000 warrants owned of record by Echo technologies S.A. have been included as beneficially owned by him.

(8)

Includes 1,408,334 shares of common stock and warrants to purchase 666,667 shares of common stock held.  Lagunitas Partners LP is an investment limited partnership of which GMCM is the general partner and exercises shared voting and dispositive power.  Jon D. Gruber and J. Patterson McBaine exercise voting and dispositive powers over the securities held by GMCM.  Based on information provided to us by the stockholder as of May 31, 2005.

 (9)

Includes 1,525,000 shares of common stock issuable to André Maisonneuve upon exercise of the options and warrants owned by him.

(10)

Capital House Corporation is incorporated under the laws of Canada. Includes 400,000 shares of common stock issuable to Capital House Corporation upon exercise of the warrants owned by it. Bruce Benn and Ron Benn each has a beneficial interest in the shares of Capital House Corporation, and in 100,000 warrants owned of record by Capital House Corporation. Accordingly 100,000 warrants owned of record by Capital House Corporation have been included as beneficially owned by each of them.  Bruce Benn and Ron Benn are brothers.

(11)

Includes (a) 30,000 shares held directly by Bruce Benn, (b) 2,650,000 shares owned of record by Valdosta Corporation, (c) 100,000 shares of common stock issuable pursuant to warrants held of record by Capital House Corporation, and (d) 800,000 shares issuable upon exercise of options held directly by Bruce Benn.  See footnotes (2) and (10).

(12) Includes (a) 25,500 shares held directly by Ronald Benn, (b) 250,000 shares owned of record by Valdosta Corporation, (c) 100,000 shares of common stock issuable pursuant to warrants held of record by Capital House Corporation, and (d) 600,000 shares issuable upon exercise of options held directly by Ronald Benn.  See footnotes (2) and (10).

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DESCRIPTION OF SECURITIES

General

The following discussion summarizes our capital stock and describes certain provisions of our restated articles of incorporation and bylaws.  The information in this section is a summary only and is qualified by reference to our restated articles of incorporation and our bylaws, which have been filed as exhibits to the registration statement of which this prospectus forms a part.  Our authorized capital stock consists of 50,000,000 shares of common stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share.  As of September 30, 2005, we had 31,593,019 shares of common stock issued and outstanding.  No shares of our preferred stock are currently outstanding.

Common Stock

Holders of our common stock are entitled to dividends, if any, as our board of directors may declare from time to time from legally available funds, subject to the preferential rights of the holders of any shares of our preferred stock that we may issue in the future.  Except as otherwise required by law, the holders of our common stock are entitled to one vote per share on any matter to be voted upon by stockholders.  Our bylaws require that a majority of our issued and outstanding shares need be represented, in person or by proxy, to constitute a quorum and to transact business at a stockholders’ meeting.

Our restated articles of incorporation deny cumulative voting rights in connection with the election of directors.  Accordingly, directors will be elected by a plurality of the shares voting once a quorum is present.  Our restated articles of incorporation deny preemptive rights to all holders of common stock to subscribe for, purchase or acquire additional shares of capital stock issued in the future.  

Upon our voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding up of our affairs, the holders of our common stock are entitled to share, on a pro rata basis, all assets remaining after payment to creditors and subject to prior distribution rights, if any, on shares of preferred stock that we may issue in the future.  All of the outstanding shares of common stock are fully paid and non-assessable.

Common Stock Purchase Warrants

There are currently outstanding warrants to purchase an aggregate of 12,691,833 shares of common stock at exercise prices ranging from $0.33 to $0.90 per share.  We issued these warrants in connection with previous equity private placements and also in consideration for services rendered.  

Common Stock Options and Convertible Debentures

There are currently outstanding options to purchase an aggregate of 4, 852 ,302 shares of common stock, at exercise prices ranging from $0.33 to $0.90 per share.  We issued these options to employees and non-employees in exchange for services rendered and as performance incentives.  In accordance with our existing stock option plans, we may issue up to an additional 2, 147 ,698 options.

Also, as of September 30, 2005, there were outstanding $225,000 in principal amount of our 4% senior subordinated convertible debentures which are convertible at a ratio of one share of common stock for each $0.50 of debt plus accrued interest thereon converted.

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Preferred Stock

Under our restated articles of incorporation, we may issue up to 5,000,000 shares of preferred stock.  No shares of our preferred stock are currently outstanding.  Under our restated articles of incorporation, our board of directors, without further action by our stockholders, is authorized to issue shares of preferred stock in one or more series.  The board of directors may designate the preferred shares as to series, preferences, limitations and other provisions as the board of directors may designate from time to time.  The preferred stock could have voting or conversion rights that could adversely affect the voting power or other rights of holders of our common stock.  

Anti-Takeover Provisions of our Restated Articles of Incorporation, Bylaws and Nevada Law

Provisions with Anti-Takeover Implications

A number of provisions of our restated articles of incorporation and bylaws concern how we are governed and your rights as stockholders.  Under our restated articles of incorporation, our board of directors may issue preferred stock and set the voting rights, conversion rights, preferences, and other terms of the preferred stock.  These provisions and certain provisions of Nevada law could be deemed to discourage takeover attempts not first approved by our board of directors, including takeovers which may be considered by some stockholders to be in their best interests.  Any discouraging effect upon takeover attempts could potentially depress the market price of our common stock or cause temporary fluctuations in the market price of the common stock that otherwise could result from actual or rumored takeover attempts.  These provisions could also delay or frustrate the removal of incumbent directors or the assumption of control by stockholders, even if such removal or assumption would be beneficial to our stockholders.  These provisions could also discourage or make more difficult a merger, tender offer,  proxy contest or other takeover attempt, even if they could be favorable to the interests of our stockholders, and could potentially depress the market price of our common stock.

Special Meetings of Stockholders

Our bylaws provide that special meetings of our stockholders may be called by our president, by a majority of our board of directors or upon the written request of the holders of a majority of the then outstanding common stock entitled to vote at the meeting.

Stockholder Action by Written Consent

Our bylaws provide that whenever a vote of our stockholders is required or permitted to be taken to authorize or approve any action, other than the election of directors, such action may be taken without a stockholders’ meeting if approved by written consent of the holders of at least a majority of the voting power of the stockholders, except where a greater proportion of voting power is required, in which case such greater proportion of written consents by the stockholders will be required.  Our bylaws also provide that the bylaw provision allowing stockholder action by written consent will not supersede any specific provision relating to action by written consent of stockholders under Nevada law.  Nevada law provides that, unless otherwise provided in the articles of incorporation or the bylaws, any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if, before or after the action, a written consent approving the action is signed by stockholders holding at least a majority of the voting power, except that if a different proportion of voting power is required for the approval of an action at a stockholders’ meeting, then that proportion of written consents is required.

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Amendments to Bylaws

Our restated articles of incorporation and bylaws provide that our bylaws may be altered, amended or repealed by our board of directors or by the affirmative vote of the holders of a majority of our capital stock entitled to vote at any meeting of stockholders.

Nevada Law

Nevada’s statutes governing business combinations with interested stockholders and acquisitions of control shares may prohibit or delay mergers or other takeover or change in control attempts.  This could discourage attempts to acquire us.

The statutes governing business combinations with interested stockholders prohibit an applicable Nevada corporation from entering into specified business combinations with an interested stockholder and its affiliates and associates for a period of three years after the date of the transaction in which the person became an interested stockholder.  Business combinations may be completed prior to the expiration of the three-year period only if the business combination was approved prior to the time the interested stockholder attained such status, or if the interested stockholder attained such status with the approval of the board of directors.  Under Nevada law, a business combination encompasses a wide variety of transactions with or caused by an interested stockholder or its affiliates or associates, including mergers, asset sales, and other transactions in which an interested stockholder receives or could receive a financial benefit.  An interested stockholder means the beneficial owner of 10% or more of the voting shares of a corporation or one of its affiliates or associates.  The Nevada statutes governing business combinations with interested stockholders may have an anti-takeover effect for transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for the shares of our common stock.

Nevada’s statutes governing acquisitions of control shares prohibit a stockholder, under certain circumstances, from voting shares of a corporation’s stock after crossing certain threshold ownership percentages, unless the stockholder obtains the approval of the target corporation’s disinterested stockholders.  Once a stockholder crosses one of these thresholds, those shares acquired within 90 days become control shares and are deprived of the right to vote until disinterested stockholders restore the right.  If the voting rights are restored and the stockholder has a majority or more of all voting power, any stockholder who did not vote in favor of authorizing voting rights is entitled to demand fair value for its shares.  These statutes apply only to Nevada corporations doing business in the state and that have at least 200 stockholders, at least 100 of whom are stockholders of record and residents of Nevada.

Limitation of Liability and Indemnification of Officers and Directors

Our restated articles of incorporation provide that our directors and officers will not be personally liable to our company or our stockholders for damages arising out of a breach of fiduciary duty as a director or officer, except for damages for breach of fiduciary duty resulting from acts or omissions involving intentional misconduct, fraud or a knowing violation of law, or the payment of dividends in violation of Nevada law.  As a result, neither we nor our stockholders, personally or through stockholder derivative suits on our behalf, have the right to recover damages against a director or officer for breach of fiduciary duty, except in the situations described above.

Our bylaws provide that we must indemnify any person who was, is or is threatened to be made a party to any action, suit or proceeding, including derivative suits on our behalf, by reason of the fact that the person acted as one of our directors, officers, employees or agents, against all expenses, judgments, fines and amounts paid in settlement by the person in connection with the action if the person acted in good faith and in a matter the person reasonably believed to be in, or not opposed to, our best interests, or

47

in any criminal action if the person had no reasonable cause to believe his or her conduct was unlawful.  We are generally not required to indemnify our directors, officers, employees or agents if the person is found to be guilty of gross negligence or willful misconduct.  Our bylaws provide that we may purchase and maintain insurance on any of our directors, officers, agents and employees or anyone serving at our request.

Insofar as indemnification for the liabilities arising under Securities Act of 1933 may be permitted to our directors, officers or persons controlling our company pursuant to the provisions described above, we have been informed that in the opinion of SEC, such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.

Transfer Agent

The transfer agent and registrar for our common stock is Interwest Transfer Company, Inc., 1981 East Murray Holladay Road, Suite 100, P.O. Box 17136, Salt Lake City, Utah 84117, and its telephone number is (801) 272-9294.

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SELLING STOCKHOLDERS

General

This prospectus covers offers and sales from time to time by each selling stockholder of the common stock owned by such person.  Each selling stockholder acquired their shares pursuant to a private placement of equity by us.  Each of the selling stockholders currently holds or has the right to acquire one or both of the following:  (i) shares of common stock and (ii) shares of common stock issuable upon the exercise of warrants.  Pursuant to Rule 416 of the Securities Act, the selling stockholders may also offer and sell shares of common stock issued as a result of, among other events, stock splits, stock dividends and similar events.  We have prepared and filed the registration statement of which this prospectus is a part pursuant to the terms of a Registration Rights Agreements dated March 8, 2004 among us and the purchasers named therein.

On March 9, 2004, we completed the private placement of an aggregate of 6,666,666 of shares of our common stock and warrants to purchase common stock to 20 accredited investors.  The aggregate purchase price was $6,000,000 cash.  The transaction was completed pursuant to a Securities Purchase Agreement dated March 8, 2004 by and among us and the purchasers named therein.

The warrants issued to the purchasers are exercisable for an aggregate of 3,333,333 shares of our common stock at an exercise of $0.90 per share.  The warrants are exercisable for a period of 5 years from issuance.  The warrants contain customary anti-dilution protections; provided that other than for exempt issuances, as described below, the exercise price and the number of shares of common stock issuable upon exercise of the warrants will be adjusted in the event of any subsequent issuance of our common stock or rights, options, warrants or other securities bearing a right to acquire our common stock at a price less than the then-applicable exercise price of the warrants.  

Pursuant to the Securities Purchase Agreement and from the date thereof until 12 months after the date when this registration statement is first declared effective by the SEC, upon any financing by us of our common stock or common stock equivalents, each purchaser will have the ratable right to participate in up to 100% of such subsequent financing.  Notwithstanding the foregoing, any participation in future financing pursuant to the Securities Purchase Agreement will not apply in respect of an “exempt issuance,” which includes the issuance of (i) shares of common stock or options to our employees, officers or directors pursuant to any stock or option plan, (ii) shares issued to key consultants in an amount not to exceed, in the aggregate, 1% of our current issued and outstanding common stock, (iii) securities issued upon the exercise or conversion of any convertible securities, options or warrants issued and outstanding on the date of the Securities Purchase Agreement as otherwise described in the Securities Purchase Agreement, provided that such securities have not been amended since the date of the Securities Purchase Agreement, and (iv) with respect to Sections 4.13 and 4.14 of the Securities Purchase Agreement, shares issued pursuant to the penalty provision in the Registration Rights Agreement dated as of January 30, 2004 among us and the purchasers named therein.

Pursuant to the Securities Purchase Agreement and from the date thereof until 90 days after the effective date of this registration statement, neither we nor any of our subsidiaries, if any, may issue shares of common stock or common stock equivalents other than an exempt issuance; provided, however, such 90 day period will be extended for the number of trading days during such period in which (i) trading in our common stock is suspended by any trading market, or (ii) following the effective date of this registration statement, this registration statement is not effective or the prospectus included in this registration statement may not be used by the purchasers for the resale of their shares of common stock or the shares of common stock issued upon exercise of the warrants.

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The Securities Purchase Agreement contains various representations, warranties and covenants of the parties customary for a transaction of this type.  We have agreed to indemnify the purchasers against various liabilities.  We also waived certain control share and anti-takeover protections provided under the Nevada Revised Statutes with respect to the purchasers.

We entered into a registration rights agreement dated effective March 8, 2004 with each purchaser, and have agreed to file, within 30 calendar days of the date of the Securities Purchase Agreement, a registration statement with the SEC under the Securities Act, covering the resale of (i) the shares of common stock and (ii) the shares of common stock underlying the warrants and (iii) any shares of common stock issued or issuable upon a stock split, dividend or other distribution, recapitalization or similar event for an offering to be made on a continuous basis pursuant to Rule 415.  We and the purchasers each agreed with the other to indemnify the other for certain liabilities arising under the Securities Act.  Pursuant to the Registration Rights Agreement and subject to certain other provisions therein, if we fail to timely perform or provide in accordance with its responsibilities under the Registration Rights Agreement and certain Securities Act provisions, then, in addition to any other rights the holder or holders may have pursuant to the Registration Rights Agreement or under applicable law: (i) on each such date when we have failed to timely perform or provide under the Registration Rights Agreement, we will pay to each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1.0% of the aggregate purchase price paid by such holder pursuant to the Securities Purchase Agreement for any registrable securities then held by such holder; and (ii) on each monthly anniversary of each such event date (if the applicable event shall not have been cured by such date) until the applicable event is cured, we will pay to each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 2.0% of the aggregate purchase price paid by such holder pursuant to the Securities Purchase Agreement for any registrable securities then held by such holder.  

Our sales of common stock described above were exempt from registration pursuant to Section 4(2) of the Securities Act, and pursuant to Rule 506 of Regulation D of the Securities Act. A Rule 506 exemption was available for these sales because we sold only to accredited investors; we did not solicit or advertise the sales; a restrictive legend was placed on each certificate issued describing the restrictions against resale; and a Form D was filed with the SEC and in each state where the investors reside.  In connection with this transaction, we agreed to pay to the finder, The Shemano Group, Inc., a cash fee equal to 7% of the gross proceeds and issue warrants exercisable at $0.90 per share, to purchase 180,000 shares of common stock.

The Shemano Group has advised us that it is a registered broker-dealer and that it obtained warrants to purchase our common stock as compensation for its services in the placement of the common stock and warrants described above.   The following selling stockholders have advised us that they are affiliated with The Shemano Group, a registered broker-dealer, and that they acquired the securities from The Shemano Group to be resold pursuant to this prospectus in the ordinary course of business and had no agreements or understandings, directly or indirectly, with any person to distribute the securities at the time of purchase:  Gary Shemano, Mike Jacks, David Baker, Bill Corbett, Mark Lamb and Scott Cacchione.

Choice Focus Fund, Choice Long-Short Fund, Adams Select Fund, LP, Adams Technology Fund LLP, Edward and Edna Elbaor Family Fund LP #2 and Susanna Foels have advised us that each is affiliated with a registered broker-dealer and that they acquired the securities from us to be resold in the ordinary course of business and had no agreements or understandings, directly or indirectly, with any person to distribute the securities at the time of purchase.

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Cabernet Partners, L.P. and Chardonnay Partners, L.P. have advised us that:  (1) Robert Berlacher, the person who exercises voting and dispositive powers over the securities held by these selling stockholders, owns 20% of EGE Holdings Ltd., which owns 100% of the interests of Emerging Growth Equities, a registered broker dealer, and (2) they acquired the securities from us to be resold in the ordinary course of business and had no agreements or understandings, directly or indirectly, with any person to distribute the securities at the time of purchase.

Crestview Capital Master, L.L.C. has advised us that (1) one of its members is affiliated with Dillon Capital, Inc., a registered broker dealer, and (2) it acquired the securities from us to be resold in the ordinary course of business and had no agreements or understandings, directly or indirectly, with any person to distribute the securities at the time of purchase.

In addition, on September 3, 2003, we issued warrants to purchase an aggregate of 400,000 shares of our common stock to Scott Christie and Jeff Lamberson in consideration for business advisory services in connection with the Company’s capital raising and exploring financing alternatives, as well as in connection with our securing certain initial reference customers and pending potential customers for our newly released products.  The fair value of the warrants was calculated by management, using the Black Scholes option pricing model with the following weighted average assumptions:  expected dividend yield 0%; risk-free interest rate of 1.86%; expected volatility of 147%, and an expected life of 2 years.  The warrants have an exercise price of $0.75 per share , and at date of issuance had an expiry date of September 3, 2005.   On August 31, 2005, the warrants were amended to extend the expiry date to December 31, 2006.   The warrants contain customary anti-dilution provisions and were issued under Section 4(2) of the Securities Act.

Selling Stockholders Table

The following table sets forth:

·

the name of each selling stockholder;

·

the number or shares of common stock beneficially owned by each selling stockholder as of the date of this prospectus, giving effect to the exercise of the selling stockholders’ warrants into shares of common stock;

·

the number of shares being offered by each selling stockholder;

·

the number of shares represented by exercisable warrants;

·

the number of shares to be owned after the offering; and

·

the percent of class to be owned after offering.

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities and includes any securities which the person has the right to acquire within 60 days of the date of this prospectus through the conversion or exercise of options, warrants, promissory notes and any other security or other right.  Pursuant to the terms of the warrants held by the selling stockholders, the holder does not have the right to exercise any portion of the warrant to the extent that after exercise the holder, together with its affiliates, would own in excess of 4.99% of our outstanding shares of common stock.  Solely for purposes of the selling stockholder table below, we have disregarded the restriction described above and determined beneficial ownership based on the rules of the SEC.  

The table below was prepared based on information supplied to us by the selling stockholders, and presents the information as of May 31, 2005.  We may amend or supplement this prospectus from time to time to update the disclosure set forth in the table.  Because the selling stockholders identified in the table may sell some or all of the shares owned by them which are included in this prospectus, and

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because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares, no estimate can be given as to the number of shares available for resale hereby that will be held by the selling stockholders upon termination of the offering made hereby.  We have therefore assumed, for the purposes of the following table, that the selling stockholders will sell all of the shares owned by them that are being offered hereby.  None of the selling stockholders has held any position or office or had any material relationship with us or any of our affiliates in the last three years, other than as described herein.

* Less than one percent.

(1)

Includes (i) shares of common stock and warrants to purchase common stock held by the selling stockholder prior to this offering; (ii) shares of common stock issued pursuant to this prospectus which have not been resold by the selling stockholder; and (iii) shares of common stock offered pursuant to this prospectus from the exercise of warrants.

(2)

Includes shares issuable upon the exercise of warrants.

(3)

Assumes all shares registered for resale hereby are sold.

(4)

Choice Investment Management, LLC serves as the investment advisor to Choice Focus Fund, Choice Long-Short Fund, Adams Select Fund, LP, Adams Technology Fund LLP, Edward and Edna Elbaor Family Fund LP #2 and Susanna Foels.  Patrick Adams is the Managing Member and Portfolio Manager for Choice Investment Management, LLC and has voting and dispositive powers over the securities held by Choice Focus Fund, Choice Long-Short Fund, Adams Select Fund, LP, Adams Technology Fund LLP, Edward and Edna Elbaor Family Fund LP #2 and Susanna Foels.

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(5)

Alexandra Investment Management, LLC, a Delaware limited liability company (“Alexandra”), serves as investment adviser to Alexandra Global Master Fund Ltd., a British Virgin Islands company (“Master Fund”).  By reason of such relationship, Alexandra may be deemed to share dispositive power over the shares of common stock stated as beneficially owned by Master Fund.  Alexandra disclaims beneficial ownership of such shares of common stock.  Messrs. Mikhail A. Filimonov (“Filimonov”) and Dimitri Sogoloff (“Sogoloff”) are managing members of Alexandra.  By reason of such relationships, Filimonov and Sogoloff may be deemed to share dispositive power over the shares of common stock stated as beneficially owned by Master Fund.  Filimonov and Sogoloff disclaim beneficial ownership of such shares of common stock.

(6)

Bristol Capital Advisors, LLC is the investment manager to Bristol Investment Fund, Ltd.  Paul Kessler is the manager of Bristol Capital Advisors, LLC and a director of Bristol Investment Fund, Ltd., and as such has voting and investment control over the securities held by Bristol Investment Fung, Ltd.  Mr. Kessler disclaims beneficial ownership of these securities.

(7)

Robert Berlacher exercises voting and dispositive powers over the securities held by Cabernet Partners, L.P.

(8)

Robert Berlacher exercises voting and dispositive powers over the securities held by Chardonnay Partners, L.P.

(9)

Stewart Flink, Bob Hoyt and Daniel Warsh exercise voting and dispositive powers over the securities held by Crestview Capital Master, L.L.C.

(10)

Jeffrey H. Porter, investment adviser to EDJ Limited, exercises voting and dispositive powers over the securities held by EDJ Limited.

(11)

Gruber & McBaine Capital Management, LLC (“GMCM”) is the general partner for Firefly Partners L.P. Jon D. Gruber and J. Patterson McBaine, as managers of GMCM, exercise voting and dispositive powers over the securities held by Firefly Partners LP.

(12)

Gruber & McBaine International Ltd. is an entity over which GMCM exercises shared voting and dispositive power.  Jon D. Gruber and J. Patterson McBaine exercise voting and dispositive powers over the securities held by GMCM.

(13) Shares beneficially owned include (a) 2,839,935 shares beneficially owned by GMCM and (b) 11,000 shares of common stock and warrants to purchase 97,222 shares of common stock held by Jon D. Gruber and Linda W. Gruber.  Mr. Gruber exercises shared voting and dispositive power over the shares beneficially owned by GMCM.  Based on information provided to us by the stockholder as of May 31, 2005.

(14) Shares beneficially owned include (a) 2,839,935 shares beneficially owned by GMCM and (b) 204,444 shares of common stock and warrants to purchase 97,222 shares of common stock held by Mr. McBaine.  Mr. McBaine exercises shared voting and dispositive power over the shares beneficially owned by GMCM.  Based on information provided to us by the stockholder as of May 31, 2005.

(15)

E.B. Lyon IV exercises voting and dispositive power over the securities held by Gryphon Master Fund, L.P.

(16)

Lagunitas Partners LP is an investment limited partnership of which GMCM is the general partner and exercises shared voting and dispositive power.  Jon D. Gruber and J. Patterson McBaine exercise voting and dispositive powers over the securities held by GMCM.  Based on information provided to us by the stockholder as of May 31, 2005.

(17)

Paul Mannion and Andy Reckles exercise voting and dispositive powers over the securities held by Palisades Master Fund, LP.  We have been advised by the selling stockholder that 783,334 of the common shares beneficially owned, including 277,778 shares issuable on the exercise of warrants, have been pledged or otherwise deposited as collateral or are the subject matter of a voting trust or other similar agreement, or of any contract providing for the sale or distribution of securities.

(18)

Jeffrey H. Porter, as general partner of Porter Partners, L.P., exercises voting and dispositive powers over the securities held by Porter Partners, L.P.

53

PLAN OF DISTRIBUTION

The selling stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions.  These sales may be at fixed or negotiated prices.  The selling stockholders may use any one or more of the following methods when selling shares:

·

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

·

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

·

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

·

an exchange distribution in accordance with the rules of the applicable exchange;

·

privately negotiated transactions;

·

settlement of short sales;

·

broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

·

a combination of any such methods of sale;

·

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or

·

any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the Securities Act of 1933, if available, rather than under this prospectus.

Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated.  Each selling stockholder does not expect these commissions and discounts relating to its sales of shares to exceed what is customary in the types of transactions involved.

In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume.  The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities.  The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

54

The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933 in connection with such sales.  In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act of 1933.  Each selling stockholder has informed us that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the common stock.

We are required to pay certain fees and expenses incurred by us incident to the registration of the shares.  We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act of 1933.

Because selling stockholders may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, they will be subject to the prospectus delivery requirements of the Securities Act of 1933.  In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than under this prospectus.  Each selling stockholder has advised us that they have not entered into any agreements, understandings or arrangements with any underwriter or broker-dealer regarding the sale of the shares of common stock covered by this prospectus (the “resale shares”).  There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling stockholders.

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the selling stockholders without registration and without regard to any volume limitations by reason of Rule 144(e) under the Securities Act of 1933 or any other rule of similar effect or (ii) all of the shares have been sold pursuant to the prospectus or Rule 144 under the Securities Act of 1933 or any other rule of similar effect.  The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws.  In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of the distribution.  In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of our common stock by the selling stockholders or any other person.  We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.

55

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of common stock (including shares issued upon the exercise of outstanding warrants and options) in the public market after this offering could cause the market price of our common stock to decline.  Those sales also might make it more difficult for us to sell equity-related securities in the future or might reduce the price at which we could sell any equity-related securities.

As of September 30, 2005, we have outstanding 31,593,019 shares of common stock.  Of the shares of common stock outstanding at the date of this prospectus, approximately 19, 989,443 shares, including 6,666,666 of the shares covered by this prospectus, will be freely tradable without restriction or further registration under the Securities Act of 1933, except that any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, generally may be sold only in compliance with the limitations of Rule 144 described below.  Except as set forth below, all of the remaining 11,603,576 shares of common stock will be “restricted” securities as that term is defined in Rule 144.  The “restricted” securities may not be resold unless they are registered under the Securities Act of 1933 or are sold pursuant to an available exemption from registration, including Rule 144 under the Securities Act.  The restricted shares will be eligible for resale at various times upon the expiration of applicable holding periods.  Restricted securities may be sold in the public market only if they qualify for an exemption from registration under Rule 144, including Rule 144(k), or Rule 701 under the Securities Act of 1933.  

Of the maximum of 10,579,999 shares originally covered by the Registration Statement of which this prospectus forms a part, approximately 4,400,000 shares (as of May 31, 2005) have been issued to, but not resold by, the selling stockholders and 3,913,333 shares are issuable on the exercise of warrants, and will be freely tradeable, when issued, upon the effectiveness of the Registration Statement.  In addition, our Registration Statement on Form SB-2 (Registration No. 333-114303) covers a maximum of 10,591,250 shares, of which approximately 2,682,000 shares (as of May 31, 2005) have been issued to, but not resold by, the selling stockholders; approximately 486,000 shares (as of September 30, 2005) are issuable on the conversion of convertible debentures and interest accrued to maturity thereon; and 2,727,500 shares are issuable on the exercise of warrants.  These shares, when issued, will be freely tradeable upon the effectiveness of the Registration Statement.

Rule 144

In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of our common stock for at least one year is entitled to sell within any three-month period a number of shares that does not exceed the greater of:

·

1% of the number of shares of common stock then outstanding, which is approximately 315,930 shares as of September 30, 2005, or

·

the average weekly trading volume of our common stock during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC.

Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and to the availability of current public information about us.

56

Rule 144(k)

Under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell the shares under Rule 144(k) without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.  

Outstanding Options, Warrants and Convertible Debentures

Shares of common stock issuable upon the exercise or conversion of the following options, warrants and convertible debentures will be restricted securities and may be resold by their holders only when covered by an effective registration under the Securities Act of 1933, or under an available exemption from registration:

*

7,000,000 shares of common stock issuable upon exercise of options under our stock option plans, 4, 852,302 of which have been granted , 4,702,302 of which have vested and are currently exercisable;

*

12,691,833 shares of common stock issuable upon exercise of outstanding warrants; and

*

 450,000 shares of common stock issuable upon conversion of outstanding convertible debentures, plus approximately to a maximum 36,000 shares issuable upon conversion of accruable interest on the convertible debentures through December 31, 2005.

57

LEGAL MATTERS

The validity of the common stock offered by this prospectus was passed upon for us by Woodburn and Wedge.  Haynes and Boone, LLP provided assistance to us on certain other legal matters.

EXPERTS

Our consolidated financial statements as of December 31, 2004 and 2003, and for the years then ended, appearing in this prospectus have been audited by KPMG LLP, an independent registered public accounting firm, given upon such firm’s authority as an expert in auditing and accounting.

ADDITIONAL INFORMATION

We have filed a registration statement on Form SB-2 with the SEC.  This prospectus, which forms a part of that registration statement, does not contain all of the information included in the registration statement and the exhibits and schedules thereto as permitted by the rules and regulations of the SEC.   For further information with respect to us and the shares of our common stock offered hereby, please refer to the registration statement, including its exhibits and schedules.  Statements contained in this prospectus as to the contents of any contract or other document referred to herein are not necessarily complete and, where the contract or other document is an exhibit to the registration statement, each such statement is qualified in all respects by the provisions of such exhibit, to which reference is hereby made.

We file annual, quarterly and current reports and other information with the SEC.  You may read and review a copy of any document we file at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.  Our SEC filings are also available to the public from the SEC’s web site at www.sec.gov.  If you would like a copy of this registration statement, our annual report including audited financial statements or any of our other SEC filings, please submit your request to Validian Corporation, 30 Metcalfe Street, Suite 620, Ottawa, Canada  K1P 5L4, or call (613) 230-7211.

58

INDEX TO FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm to the Board of Directors

F-2

Consolidated Balance Sheets at December 31, 2004 and 2003

F-3

Consolidated Statements of Operations for the years ended

December 31, 2004 and 2003 and for the period from

August 3, 1999 to December 31, 2004

F-4

Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)

and Comprehensive Loss for the six years ended December 31, 2004

F-5

Consolidated Statements of Cash Flows for the years ended December

31, 2004 and 2003 and for the period from August 3, 1999 to

December 31, 2004

F-9

Notes to Consolidated Financial Statements

F-11

Consolidated Condensed Balance Sheets (unaudited) as at June 30 , 2005

and December 31, 2005

F-31

Consolidated Condensed Statements of Operations (unaudited) for the

three and six months ended June 30 , 2005 and 2004

and for the period from August 3, 1999 to June 30 , 2005

F-32

Consolidated Statements of Changes in Stockholders’ Equity (Deficiency)

and Comprehensive Loss (unaudited) for the period from December 31, 1998

to June 30, 2005

F-33

Consolidated Condensed Statements of Cash Flows (unaudited) for the

three and six months ended June 30 , 2005 and 2004 and

for the period August 3, 1999 to June 30 , 2005

F- 37

Notes to Consolidated Condensed Financial Statements (unaudited)

F- 38

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS

F-2

VALIDIAN CORPORATION

(A Development Stage Enterprise)

Consolidated Balance Sheets

December 31, 2004 and 2003

(In U.S. dollars)

______________________________________________________________________________________________

2004

2003

______________________________________________________________________________________________

Assets

Current assets:

Cash and cash equivalents

$

2,747,975

$

 546,423

Accounts receivable (note 12(b))

42,518

–

Prepaid expenses

241,450

635,960

_______________________________________________________________________________________________

3,031,943

1,182,383

_______________________________________________________________________________________________

Property and equipment (note 3)

139,450

9,166

Deferred financing costs (note 4)

281,224

491,450

Deferred consulting services

171,187

1,393,873

_______________________________________________________________________________________________

$

3,623,804

$

3,076,872

_______________________________________________________________________________________________

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

154,621

$

630,793

Accrued liabilities (note 8(c))

255,089

198,707

Promissory notes payable (note 5)

296,321

466,285

4% Senior subordinated convertible debentures (note 6)

332,073

–  

Current portion of capital lease obligation (note 7)

3,092

–  

______________________________________________________________________________________________

1,041,196

1,295,785

______________________________________________________________________________________________

Capital lease obligation (note 7)

10,239

–  

Stockholders’ equity:

Common stock ($0.001 par value.  Authorized 50,000,000

   shares; Issued and outstanding 30,435,153 shares in 2004

   and 20,567,548 shares in 2003 (note 8(a))

30,434

20,566

Preferred stock ($0.001 par value.  Authorized 5,000,000

   shares; issued and outstanding Nil shares in 2004

   and 2003)

–  

–  

Additional paid-in capital

19,620,601

10,822,021

Deficit accumulated during the development stage

(17,050,232)

(9,033,066)

Retained earnings prior to entering development stage

21,304

21,304

Treasury stock (7,000 shares in 2004 and 2003 at cost)

(49,738)

(49,738)

_______________________________________________________________________________________________

2,572,369

1,781,087

_______________________________________________________________________________________________

Guarantees and commitments (note 12)

Subsequent events (note 17)

$

3,623,804

$

3,076,872

_______________________________________________________________________________________________

See accompanying notes to consolidated financial statements.

F-3

VALIDIAN CORPORATION

(A Development Stage Enterprise)

Consolidated Statements of Operations

Years ended December 31, 2004 and 2003 and

the period from August 3, 1999 to December 31, 2004

(In U.S. dollars)

_______________________________________________________________________________________________

Period from

August 3,

1999 to

December 31,

2004

2003

2004

_______________________________________________________________________________________________

Expenses:

Selling, general and administrative (note 11)

$

3,058,649

$

1,752,725

$

7,270,048

Research and development

1,234,042

997,822

5,667,944

Depreciation of property and equipment

46,231

4,333

240,833

Write-off of prepaid services

322,494

174,375

496,869

Write-off of deferred consulting services

1,048,100

–  

1,048,100

Gain on sale of property and equipment

–  

–  

(7,442)

Write-off of accounts receivable

 –  

–  

16,715

Write-off of due from related party

–  

–  

12,575

Loss on cash pledged as collateral

   for operating lease

–  

–  

21,926

Write-down of property and equipment

–  

–  

14,750

_______________________________________________________________________________________________

5,709,516

2,929,255

14,782,318

_______________________________________________________________________________________________

Loss before the undernoted

(5,709,516)

(2,929,255)

(14,782,318)

Other income (expenses):

Interest income

34,831

–  

34,831

Gain (loss) on extinguishment of debt (note 5)

(198,000)

–  

93,507

Interest and financing costs (notes 4 and 9)

(2,126,574)

(59,824)

(2,356,617)

Other

(17,907)

(12,821)

(39,635)

_______________________________________________________________________________________________

(2,307,650)

(72,645)

(2,267,914)

_______________________________________________________________________________________________

Net loss

$  (8,017,166)

$   (3,001,900)

$(17,050,232)

_______________________________________________________________________________________________

Loss per common share before extraordinary

   item - basic and diluted (note 10)

$

(0.29)

$

(0.16)

_______________________________________________________________________________________________

Loss per common share after extraordinary

   item - basic and diluted (note 10)

$

(0.29)

$

(0.16)

_______________________________________________________________________________________________

Weighted average common shares outstanding

27,779,177

18,461,267

_______________________________________________________________________________________________

See accompanying notes to consolidated financial statements.

F-4

VALIDIAN CORPORATION

(A Development Stage Enterprise)

Consolidated Statements of Changes in

Stockholders’ Equity (Deficiency) and Comprehensive Loss

For the six years ended December 31, 2004

(In U.S. dollars)

See accompanying notes to consolidated financial statements.

F-5

VALIDIAN CORPORATION

 (A Development Stage Enterprise)

Consolidated Statements of Changes in

Stockholders’ Equity (Deficiency) and Comprehensive Loss

For the six years ended December 31, 2004

(In U.S. dollars)

See accompanying notes to consolidated financial statements.

F-6

VALIDIAN CORPORATION

(A Development Stage Enterprise)

Consolidated Statements of Changes in

Stockholders’ Equity (Deficiency) and Comprehensive Loss

For the six years ended December 31, 2004

(In U.S. dollars)

See accompanying notes to consolidated financial statements.

F-7

VALIDIAN CORPORATION

(A Development Stage Enterprise)

Consolidated Statements of Changes in

Stockholders’ Equity (Deficiency) and Comprehensive Loss

For the six years ended December 31, 2004

(In U.S. dollars)