<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

{X}    Annual report pursuant to section 13 or 15(d) of the Securities Exchange
       Act of 1934 for the fiscal year ended December 31, 2005 or

{ }    Transition report under section 13 or 15(d) of the Securities Exchange
       Act of 1934

For the transition period from___to___

                        Commission file number 000-15864

                               SEDONA CORPORATION
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                      Pennsylvania                              95-4091769
            ----------------------------------             ---------------------
             (State or other jurisdiction of                   (IRS Employer
             incorporation or organization)                Identification No.)

            1003 West 9th Avenue, Second Floor, King of Prussia, PA    19406
            ------------------------------------------------------- ------------
             (Address of principal executive offices)                (Zip Code)

            Registrant's telephone number, including area code: 610-337-8400
            Securities registered pursuant to Section 12 (b) of the Act: None
            Securities registered pursuant to Section 12 (g) of the Act:

                     Common Stock, par value $.001 per share
                     ---------------------------------------
                                (Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes {X} No { }.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.

Indicate by a check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes { } No {X}.

The Registrant's revenues for its most recent fiscal year total $722,641.

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes { } No {X}

The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant computed by reference to the closing price as
reported on OTCBB system as of March 25, 2006, was $16,986,867.

The number of shares of the Registrant's common stock, $.001 par value per share
("common stock") issued and outstanding as of March 25, 2006 was 89,547,583
shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

                                        1
<PAGE>

                       NOTE ON FORWARD-LOOKING STATEMENTS

This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by use of terms such as "may",
"will", "should", "could", "would", "plan", "estimates", "projects", "predicts",
"potential" "believes", "anticipates", "intends", or "expects". These
forward-looking statements relate to the plans, objectives, and expectations of
SEDONA(R) Corporation (the "Company", "SEDONA Corp." or SEDONA") for future
operations. In light of the risks and uncertainties inherent in all
forward-looking statements, the inclusion of such statements in this Form 10-KSB
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved or that any of the
Company's operating expectations will be realized. The Company's revenues and
results of operations are difficult to forecast and could differ materially from
those projected in the forward-looking statements contained herein as a result
of certain factors including, but not limited to, dependence on strategic
relationships, ability to raise additional capital, ability to attract and
retain qualified personnel, customer acquisition and retention and rapid
technological change. These factors should not be considered exhaustive; the
Company undertakes no obligation to release publicly the results of any future
revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.









                                        2
<PAGE>


                                     PART 1

ITEM 1.  BUSINESS


OVERVIEW

SEDONA(R) Corporation (OTCBB:SDNA) was incorporated in 1992 as Scan Graphics,
Inc., a manufacturer of peripheral scanning equipment and geographical
information systems software. In late 1999, the company changed its name to
SEDONA Corporation and sold the assets of its Tangent Imaging Systems operation.
The Company divested from its original business to focus all efforts on the
re-alignment of the business to become a software application and services
provider of web-based, vertical Customer Relationship Management (CRM) solutions
to small to mid-sized businesses (SMBs). The Company's CRM application solution,
Intarsia(R), enables SMBs to increase the profitability of their customer
portfolio to improve profits and shareholder value. SEDONA currently provides
Intarsia(R) to small to mid-sized financial services organizations. This is the
only business segment from which SEDONA generates revenues.

The Company is headquartered in King of Prussia, Pennsylvania with a software
delivery facility in Minneapolis, Minnesota.

MAJOR ACCOMPLISHMENTS HISTORY

Since the re-alignment of its business in fiscal year 1999, SEDONA has achieved
significant milestones that proved to be critical for positioning the Company as
a leading provider of CRM application solutions for the SMB market.

FISCAL YEAR 2000
----------------

       o      Acquisition of the Customer Information Management System (CIMS)
              business unit from Acxiom Corporation. The CIMS business unit
              developed, marketed, serviced and supported CRM systems, focusing
              principally on financial services markets. As a result of this
              transaction, SEDONA gained a significant head start towards
              offering a comprehensive CRM application solution.

       o      Acquired Lead Factory to provide a front office application for
              all users of SEDONA's CRM offering.

       o      Strategic partnership with Profit Resources to bring forward their
              competitive capabilities in predictive modeling and profitability
              management areas.

       o      Introduction of first version of Intarsia(R) providing a
              comprehensive set of components including a customizable portal,
              profitability management, campaign management, and support for
              wireless devices.

       o      Signed Customer Services Agreement (CSA) with IBM's Banking,
              Financing and Securities Group (BFS) for the marketing and selling
              of Intarsia(R) to BFS existing customers and prospective buyers.

FISCAL YEAR 2001
----------------

       o      Announced business partner relationships with Jack Henry &
              Associates and Symitar Systems to provide Intarsia(R) to community
              and regional banks and credit unions, respectively.

       o      Achieved Advanced Business Partner status with IBM Partner World
              for Developers.









                                        3
<PAGE>


ITEM 1.  BUSINESS (continued)



       o      Announced availability of Intarsia(R) version 3.2, which provided
              users with new features to create and distribute reports
              throughout the enterprise, increased functionality in household
              management, as well as extended the platforms on which it operated
              to the IBM eServer xSeries family.

FISCAL YEAR 2002
----------------

       o      Completed a worldwide, perpetual, non-exclusive technology license
              agreement with Sanchez Computer Associates, Inc. (recently
              acquired by Fidelity National Financial (FNF)), a core processor
              provider with more than 1,400 customers around the world.

       o      Completed a worldwide, perpetual, non-exclusive technology license
              agreement with Fiserv Solutions, Inc., an information management
              provider for the financial industry with 17,000 customers around
              the world.

       o      Completed a worldwide, perpetual, non-exclusive technology license
              agreement with Open Solutions Inc. (OSI), a software and services
              company servicing over 1,000 customers, which provides a
              fully-integrated suite of relational core data processing,
              financial accounting, Internet-based financial solutions, imaging
              and other delivery systems for community banks and credit unions.

       o      Announced the availability of Intarsia(R) version 4.0, which,
              among other new features, delivered support for international
              markets by providing multiple-language and multiple-currency
              capabilities.

FISCAL YEAR 2003
----------------

       o      Signed reseller agreement with AIG Technologies (AIGT), a member
              company of American International Group, Inc., for the marketing
              and distribution of Intarsia(R) with AIGT's WINS policy management
              application.

       o      Signed technology license agreement with COCC, a Connecticut-based
              core processor provider for the marketing and distribution of
              Intarsia(R) with COCC's next generation enterprise banking system,
              INSIGHT.

       o      Completed a perpetual, non-exclusive technology license agreement
              with ACEncrypt Solutions(TM) for the marketing, sales, and
              distribution of Intarsia(R) into the financial services and life
              and health insurance markets. (ACEncrypt is affiliated with
              SEDONA. See "Management.")

       o      Announced a new version 5.0 of Intarsia(R), specifically designed
              to support the property and casualty insurance market.

FISCAL YEAR 2004
----------------

       o      Signed reseller agreement with Eastpoint Technologies (recently
              acquired by OSI), a New Hampshire-based core processor provider
              with over 100 regional banks and credit union customers.

       o      Announced that Community National Bank of Northfield, MN selected
              Intarsia(R) as their CRM solution.

       o      GalaxyPlus, a business unit of Fiserv Solutions, Inc, introduced
              SMS, a turnkey marketing solution for credit unions based on
              SEDONA's Intarsia(R) Member Relationship Management (MRM)
              technology.








                                        4
<PAGE>



ITEM 1.  BUSINESS (continued)



       o      Announced Intarsia(R) version 5.1, the first vertical CRM
              application solution specifically designed to meet the needs of
              organizations with multiple lines-of-business across multiple
              vertical industries.

FISCAL YEAR 2005
----------------

       o      Announced that WA-based Venture Bank selected SEDONA as its new
              CRM provider.

       o      Entered into an agreement with Fiserv CBS Worldwide, which will
              include CBS MarketView, based on CRM technology from SEDONA, as a
              component of its business intelligence solution, CBS Data
              Warehouse.

       o      Announced that Dallas, TX -based Advancial Federal Credit Union,
              with assets over $613 million and over 42,000 members, selected
              SEDONA as its new MRM provider.

       o      Signed a worldwide, non-exclusive sales, marketing and
              distribution agreement with Optria, LLC for the banking, credit
              unions, thrifts, savings and loans and finance markets.

       o      Announced Intarsia(R) version 5.3 at the User Conference in
              Philadelphia, PA.

FISCAL YEAR 2006 (FIRST QUARTER)
--------------------------------

       o      Announced that Northern CA-based Plumas Bank, with total assets of
              $470 million, selected SEDONA as its new CRM provider.

       o      NAFCU Services Corporation (NSC), a wholly owned subsidiary of the
              National Association of Federal Credit Unions (NAFCU), selected
              SEDONA as NSC's Preferred Partner for CRM application and
              services. SEDONA was selected primarily for its high quality
              products and services, and proven success in the financial
              services industry.

       o      Announced IntegraSys, a business unit of Fiserv, Inc. selected
              SEDONA's MRM technology as the foundation for its MRM solution,
              ProfIT360. IntegraSys serves more than 1,500 credit unions.


DESCRIPTION OF BUSINESS STRATEGY

SEDONA is a software application and services provider that develops and markets
web-based, vertical CRM solutions to small and mid-size businesses. The
Company's CRM application solution, Intarsia(R), enables SMBs to increase the
profitability of their customer portfolio. The Company has strategically
targeted small to mid-size financial services organizations as the first
vertical market to introduce its leading CRM application solution including
community and regional banks, credit unions and insurance companies.

In an effort to rapidly and cost effectively capture a major share of the SMB
market, SEDONA adopted an indirect distribution channel strategy. The Company
licenses its CRM technology to Third Party Alliance Partners (TPAP), who market,
sell, distribute and support SEDONA's technology either as a component of its
TPAP total solution or as a standalone offering.

SEDONA has successfully signed OEM and reseller agreements with several leading
software and services providers for the financial services market, such as
Fiserv Solutions, Inc., Open Solutions Inc., Connecticut Online Computer Center,
Inc, FNF/Sanchez Computer Associates, ACEncrypt Solutions, LLC and Optria LLC,




                                        5
<PAGE>



ITEM 1.  BUSINESS (continued)



and continues to work to broaden its distribution channels, expanding its market
penetration within financial services and into new verticals, both domestically
and internationally.

The Company's revenues currently consist of license fees, monthly subscription
fees, set-up and installation services fees, professional services fees and
annual maintenance fees.

SEDONA believes that the key to selling CRM successfully to SMBs is finding a
solution that not only meets the organization's unique industry, business, and
budget requirements, but also provides the organization with proven technology
and services that can be cost effectively integrated into its business. When
these needs are met, SMBs should achieve a positive return on their CRM
investment (ROI).

     o   Targeting SMBs with a highly-verticalized CRM application solution

         The Company has strategically targeted the SMB market to introduce its
         leading CRM application solution. Based on studies by the Aberdeen
         Group, the SMB market represents the largest and fastest growing
         opportunity for CRM applications solutions as businesses place
         increasing emphasis on effectively managing the relationship of, and
         interaction with, their customers. This market, characterized by
         businesses with less than $250,000,000 in revenues and 500 employees,
         presents the greatest opportunity for CRM providers as the large-sized
         business (LB) market is becoming saturated with CRM deployments.

         According to Aberdeen Group's Worldwide CRM Spending: Forecast
         2002-2006 research report, the CRM spending in the LB market is
         expected to grow at a 2002-2006 CAGR (Compound Annual Growth Rate) of
         4.0% compared to a much faster growth in the SMB market as indicated in
         the table below.
<TABLE>
<CAPTION>
              ------------------------------- -------------------- --------------------- ---------------------
                                                    2002 CRM               2006 CRM
                   NUMBER OF EMPLOYEES              SPENDING               SPENDING            CAGR
              ------------------------------- -------------------- --------------------- ---------------------
              <S>                             <C>                  <C>                   <C>
                         1 to 19                     $577M                $794M                  9.3%
              ------------------------------- -------------------- --------------------- ---------------------
                        20 to 499                   $1.28B                $1.8B                  8.9%
              ------------------------------- -------------------- --------------------- ---------------------
</TABLE>
         As a significant segment of the overall SMB market, small and mid-sized
         financial services organizations, represented by community and regional
         banks, credit unions, savings and loans, brokerage firms and insurance
         companies and agencies, have identified CRM as a strategic initiative
         to improve the customer retention and profitability rates in a
         marketplace dominated by large national and international companies
         with greater resources, services and advertising power.

         Aberdeen Group, in the same report, projects that the CRM spending in
         the financial services market will represent 18.8% of the overall CRM
         spending over the next three years.








                                        6
<PAGE>



ITEM 1.  BUSINESS (continued)


            --------------------------------------- ----------------------------
                       VERTICAL MARKET                   % OF CRM SPENDING
            --------------------------------------- ----------------------------
                        Manufacturing                          25.4%
            --------------------------------------- ----------------------------
                      Financial Services                       18.8%
            --------------------------------------- ----------------------------
                   Retail and Distribution                     13.6%
            --------------------------------------- ----------------------------
                      Business Services                         7.1%
            --------------------------------------- ----------------------------
                   Government and Education                     6.7%
            --------------------------------------- ----------------------------
                 Transportation and Utilities                   6.4%
            --------------------------------------- ----------------------------
                          Healthcare                            5.6%
            --------------------------------------- ----------------------------
                    Information Technology                      5.5%
            --------------------------------------- ----------------------------
                      Telecommunications                        4.7%
            --------------------------------------- ----------------------------
                            Others                              6.2%
            --------------------------------------- ----------------------------

         SEDONA has strategically targeted small to mid-sized financial services
         organizations as the first vertical market to introduce its SEDONA CRM
         application solution.

         Unlike most traditional, general-purpose CRM applications, Intarsia(R)
         is a vertical CRM application solution specifically designed and priced
         to meet the needs of SMBs with multiple lines-of-business across
         several vertical industries. Intarsia(R) provides small to mid-sized
         financial services organizations with a complete view of their
         customers' relationships and interactions. This information enables
         them to gain knowledge about their customers' preferences, needs and
         characteristics and build the appropriate strategies to more
         effectively target the right products to the right people at the right
         time. Intarsia(R) provides those organizations with the ability to
         effectively identify, acquire, foster and maintain loyal, profitable
         customers.

         Intarsia(R) is designed to be an ideal solution for community and
         regional banks, credit unions, and insurance companies and agencies to
         assist in maximizing profits through effective customer relationship
         management but which lack the resources required to develop, implement
         and maintain a CRM program on their own.

         Nevertheless, the Company continues to evaluate the opportunity of
         providing a vertical CRM application solution to other vertical
         markets, since according to AMR Research, the CRM market for SMBs,
         including divisions of enterprises, is projected to become a $44
         billion opportunity over the next 10 years.

o        Removing the barriers to purchasing and maintaining a CRM system

         SEDONA's technology is designed to provide prospective customers and
         distribution partners with two licensing and implementation options:
         In-house and Application Services Provider (ASP). During 2005, 87% of
         SEDONA's license revenues were derived from in-house licensing and 13%
         from ASPs.

         The ASP model is especially attractive for SMBs that lack the financial
         resources and IT infrastructure to deploy an in-house enterprise
         business application such as CRM.

         The ASP model provides SMBs with an immediately available fully
         integrated system, including all the software, hardware and services
         required for the deployment of a comprehensive, web-based enterprise
         business application, for an affordable, fixed monthly subscription
         fee.

         The ASP model SEDONA and all its current and future OEM and reseller
         partners because it:









                                        7
<PAGE>



ITEM 1.  BUSINESS (continued)


              o   Shortens the sales cycle by greatly reducing the financial
                  barriers - software, hardware and "people-ware" costs - and
                  the resource requirements on a customer's existing IT
                  organization;

              o   Builds a recurring revenue stream, as the solution can
                  immediately be made available to an existing customer base
                  with a low monthly fee to stimulate volume deployment;

              o   Generates new revenue opportunities through the up-sell of new
                  integration and training services as well as software
                  upgrades; and

              o   Results in achieving a positive return on investment more
                  rapidly than traditional software licensing. The immediate
                  availability of the application enables organizations to
                  capitalize on its benefits right away.

         The complete solution achieved by branding and integrating SEDONA's
         Intarsia(R) technology into its partners' core business applications,
         combined with their marketing strength, broad distribution channels and
         strong reputation, provides SMBs with the opportunity to enjoy all the
         benefits of implementing an enterprise-wide CRM application.

     o   Marketing unique proprietary solution to target markets through
         multiple sales distribution channels

         Having strategically targeted a key segment of the vast CRM market and
         designed and priced its CRM application solution accordingly, SEDONA's
         sales strategy is to capture a share of the small to mid-sized
         financial services using multiple sales distribution channels and
         innovative marketing programs to garner awareness and market
         leadership.

         o        Indirect Sales Distribution Channel

                  SEDONA has signed Original Equipment Manufacturer (OEM) and
                  reseller agreements with several leading software and services
                  providers for the financial services market, such as Fiserv
                  Solutions, Inc., Open Solutions Inc., Connecticut Online
                  Computer Center, Inc, FNF/Sanchez Computer Associates,
                  ACEncrypt Solutions LLC and Optria LLC, and continues to work
                  to broaden its distribution channels, expanding its market
                  penetration within financial services and into new verticals,
                  both domestically and internationally.

                  Under the agreements with its current distribution partners,
                  the Company receives license fees and annual maintenance fees
                  for every in-house sale of its CRM technology, as well as
                  monthly subscription fees for every sale in an ASP
                  environment. These fees are paid to SEDONA whether the
                  Company's distribution partners sell SEDONA's CRM technology
                  as a component of their partner's total solution or as a
                  stand-alone offering.

                  The complete solution achieved by branding and integrating
                  SEDONA's Intarsia(R)(R) technology into its partners' core
                  business applications, combined with their marketing strength,
                  broad distribution channels and strong reputation, provides
                  SMBs with the opportunity to enjoy all the benefits of
                  implementing an enterprise-wide CRM application.




                                        8
<PAGE>



ITEM 1.  BUSINESS (continued)


                  SEDONA has also established partnerships with a number of
                  business and technical consulting services providers, such as
                  Profit Resources. This provides the Company's distribution
                  partners and their customers with deep industry knowledge and
                  expertise to assist in a successful implementation of their
                  Intarsia(R)-based CRM solutions.

                  In recognition to the Company's high quality products and
                  services, and proven success in the financial services
                  industry, SEDONA has been selected by NAFCU Services
                  Corporation (NSC), a wholly owned subsidiary of the National
                  Association of Federal Credit Unions (NAFCU), as NSC's
                  Preferred Partner for CRM application and services.

              o   Direct Sales Distribution Channel

                  In fiscal year 2006, the Company plans to re-establish a
                  direct sales channel to promote and sell Intarsia(R) directly
                  to the small to mid-size banking and credit union markets.
                  SEDONA will target community and regional banks and insurance
                  companies that run banking and credit unions core systems
                  other than the ones provided by the Company's distribution
                  partners.

                  The Company's customer base includes progressive financial
                  services organizations such as Bremer Financial Services,
                  Citizens Financial Services, First Niagara Bank, First Mariner
                  Bank, Sandy Spring Bank, Central Bank of Kentucky and Orange
                  County Teachers Federal Credit Union.

     o   Staying in the forefront of CRM technology

         The Company realizes that the key to selling CRM successfully to
         financial services organizations is finding a solution that not only
         meets their unique industry, business, and budget requirements, but
         also provides them with proven technology and services that can be cost
         effectively integrated into their multiple lines of business.

         SEDONA's vertical CRM application solution is specifically tailored and
         priced to support and meet the needs of the multiple lines-of-business
         of a financial services institution. Intarsia(R) provides financial
         services organizations with a more complete and accurate view of their
         customers' relationships and interactions. Financial services
         organizations gain knowledge about their customers' preferences, needs,
         and characteristics to more effectively target the right products to
         the right customers at the right time.

         Intarsia(R) provides a comprehensive set of marketing analytics and
         operational CRM capabilities necessary to:

              o   Analyze customer and prospect data, enabling financial
                  services organizations to manage critical business performance
                  such as profitability of customers, households, and products.

              o   Measure the effectiveness of a financial services
                  organization's lead generation and marketing campaigns and
                  ensure timely follow-up of referrals, customer requests, and
                  sales leads.

              o   Improve coordination and communication between financial
                  services organizations and its customers, enhancing the
                  ability to deliver effective service and improve
                  organizational productivity.






                                        9
<PAGE>



ITEM 1.  BUSINESS (continued)


              o   Automate business processes that may be critical for the
                  effective management and monitoring of the relationships and
                  interactions with a financial services organizations'
                  customers.

              o   Create "look-a-like" models to effectively identify prospects
                  that share the same characteristics as the institution's best
                  customers, increasing the institution's ability to acquire new
                  customers.

              o   Help predict customer retention and make profitable cross-sell
                  (next best product) recommendations.

              o   Develop personalized sales, marketing, and services programs
                  aimed at retaining the financial organization's most
                  profitable customers and turn unprofitable customers into
                  profitable ones.

              o   Seamlessly enhance the financial services organizations'
                  customer and prospect data with user demographics, behaviors,
                  interests, and preferences information provided by third-party
                  content management suppliers.

            Ultimately, Intarsia(R) provides the entire organization with
            greater control of the matrices that drive the profitability of
            their customers, get more share of their customers' wallet, and
            increase sales efficiency.

     o   Focusing on company's bottom line results

         The Company is committed to providing high returns to both its
         distribution partners and to its shareholders. Every investment by
         SEDONA in new products, markets and personnel must provide a measurable
         return of investment and provide a clear path to achieve profitability.

Research & Development

The main strategy of SEDONA's research and development activities is to provide
high-quality, high-value products and support services in a consistent and
predictable manner:

     o   Promote and cultivate a culture of team-based development:

         The research and development organization is structured into small
         teams of developers, responsible for the design, development and unit
         testing of each component of the Intarsia(R) application solution. Each
         project team also provides technical assistance to the system
         integration group.

     o   Efficient and predictable software development life cycle:

         SEDONA utilizes an industry-proven software development process that
         encourages component reusability and enhances the predictability,
         timeliness and quality of the overall software process.

         SEDONA has adopted the Base Level Integration Plan software development
         methodology, which has been designed to promote an interactive and
         predictable process for the development, unit and system integration
         testing and delivery of products. This methodology breaks the
         development of sophisticated products into four, pre-defined cycles per
         year resulting in two major product releases on May 1 and November 1 of
         each year. It also allows the Company to react quickly to business and
         technical changes generated by the marketplace and/or new customer
         requirements.




                                       10
<PAGE>



ITEM 1.  BUSINESS (continued)


         Base levels serve as the fundamental planning and execution process
         that drives the engineering activities for that time period, including
         the maintenance of existing products and releases, training and
         education requirements, as well as new product development. This
         process operates in the context of a development organization where
         there is a set of small project teams cooperating to build a large,
         complex software product.

         Research and development expenses were $912,000 and $1,102,000 for the
         years ended December 31, 2005 and 2004, respectively.

Trademarks and Copyrights

SEDONA believes in copyrighting and trademarking its products and services. The
Company has a service mark for a logo design, which was registered with the
United States Patent and Trademark Office (USPTO) on July 23, 2002 (Registration
No. 2598107), and a second service mark for the word mark "SEDONA" that was
registered with the USPTO on March 24, 2003 (Registration No. 2700294).

The Company also filed an application for federal registration of the word mark
"INTARSIA(R)" with the USPTO. This application was filed on March 8, 2000 and
was published for opposition on September 4, 2001. Following this publication,
the Company received a Notice of Opposition on January 17, 2002 from the
Intarsia(R) Corporation that opposed SEDONA's "INTARSIA(R)" mark for "computer
software that tracks and organizes customer and prospective customer data and
organizes marketing information, for use in customer relationship management."

Subsequently, Intarsia(R) Corporation agreed to accept a co-existence agreement
for the mark. SEDONA has the exclusive right to use the "Intarsia(R)" trademark
in connection with its services, as recited in the registration thereof.

Customers

As of December 2002, SEDONA sold its existing customer base and related services
to Fiserv Customer Contact Solutions (CCS), allowing SEDONA to focus on its
indirect business model and providing users of Intarsia(R) with Fiserv's
resources to support and grow the Intarsia(R) product line. However, as a result
of the Company's decision to re-establish a targeted direct sales channel and
the amendment of its Master Software License Agreement with Fiserv Solutions,
Inc, in December 2004, SEDONA re-signed maintenance service agreements with
several customers of Fiserv CCS. These agreements were re-signed during December
2004 and SEDONA began providing services under the maintenance agreements in
January 2005.

Revenues from one of the Company's major alliance partners, Fiserv Solutions
Inc. accounted for thirteen (13%) of total sales in 2005. In 2004, three
alliance partners accounted for ninety-one percent (91%) of total sales.

Substantially, all of the Company's revenues are from customers in the United
States and all long-lived assets are located in the United States.





                                       11
<PAGE>



ITEM 1.  BUSINESS (continued)


Backlog

Revenue backlog consists of unfulfilled purchase contracts, service contracts
such as those entered into with application service customers, as well as
deferred revenues, primarily for advanced royalties and maintenance contracts
where revenues are recognized ratably over the life of the contract. As of
December 31, 2005, the Company had a revenue backlog of $653,500, substantially
all of which is expected to be recognized as revenue in 2006. In addition, as of
December 31, 2005, the Company had recorded a total of $98,738 in current and
non-current accounts receivable and associated deferred revenue for monthly
subscription fees that will be recognized ratably over the contract terms.

Competition

The CRM market has offerings from a variety of providers that focus on sales
force automation, call center management, contact management, marketing customer
information file systems (MCIF) and other marketing solutions that address
certain aspects of the management of customer relationships. The Company's
offering is unique in that it combines a completely tailored CRM application
solution for the SMB market with a knowledgeable and experienced sales and
marketing distribution channel provided by the Company's partners. SEDONA's OEM
and reseller agreements with leading solution providers for the SMB market
enable the Company to leverage their marketing strength, broad distribution
channels and strong reputation. These strategic partnerships provide SEDONA with
a revenue opportunity and strengthen its competitive position.

SEDONA's primary competitors are John Harland Company (Harland), Harte-Hanks
Inc. (Harte-Hanks), Marquis Software Solutions (Marquis) and Raddon Financial
Group (Raddon).

     o   Harland (NYSE:JH) provides software solutions for financial
         institutions, including, but not limited to, bank core systems, deposit
         and loan origination, teller, mortgage, call center, document solution
         and customer relationship management.

     o   Harte-Hanks (NYSE:HHS) provides marketing services, including, but not
         limited to, sales lead management, inbound/outbound telemarketing and
         web-based database marketing, to consumers and business-to-business
         marketers across multiple vertical markets.

     o   Marquis is a privately-held company primarily focused on low cost MCIF,
         sales and services and referral tracking solutions for the financial
         services market.

     o   Raddon is a privately-held company that provides integrated marketing
         solutions, including, but not limited to, research data, strategic
         counsel, and analysis and MCIF system, to the financial services
         market.

SEDONA believes that it maintains superior product capabilities that provide a
fully integrated, vertical CRM solution in contrast to the generally older
technologies of its principal competitors. Also, CRM is SEDONA's only business
and the Company's focus on the SMB market enables it to maintain a strong
reputation in that market.






                                       12
<PAGE>



ITEM 1.  BUSINESS (continued)


The Company anticipates additional competition from other established and new
companies as the markets for CRM applications continue to develop. In addition,
current and potential competitors have established, or may in the future
establish, cooperative relationships among themselves or with third parties.
Large software companies may acquire or establish alliances with SEDONA's
smaller competitors. The Company expects that the software industry will
continue to consolidate. It is possible that new competitors or alliances among
competitors may emerge and rapidly acquire a significant market share.

The results of increased competition and reduction of the Company's potential
market share could materially and adversely affect its business, operating
results and financial condition. In several of its targeted vertical markets,
the Company believes there is a distinct trend by competitors toward securing
market share at the expense of profitability.

SEDONA believes that the most important competitive factor, which enables the
Company to differentiate itself from the competition, is its focus on delivering
a specifically tailored CRM solution to the SMB market through a number of
leading-edge core processor providers.

Because the core processor providers are responsible for the SMB's
mission-critical business applications, they have all the information required
to make the implementation of a CRM solution viable. Using the core processor
providers as a sales, marketing and distribution channel improves SEDONA's
opportunity to establish itself as a leading provider of CRM application
software and services as those organizations create a formidable barrier for
other CRM providers to enter the market. There are additional core processing
providers that SEDONA is seeking to establish partnerships with, and the Company
anticipates expanding its market presence in this way. (See Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations.)

The Company further believes its position in the market is based on the
following factors:

     o   Management - The Company has many years of management-level experience
         dealing with the SMB and software markets (see "Management") and has
         also established processes to ensure that it can effectively deliver
         quality software on time (see "Business-Research and Development);

     o   Market leadership - The Company has established leadership in its
         market sector and believes that it has set the benchmark for others to
         follow; and

     o   Technical - The Company has an advanced product and knowledge base
         within its engineering group.

Employees

As of March 25, 2006, the Company had 15 full-time employees. None of these
employees are covered by a collective bargaining agreement. The Company believes
that its employee relations are good.








                                       13
<PAGE>



ITEM 1.  BUSINESS (continued)

Dependence Upon Key Personnel

The Company is dependent upon certain key members of its management team for the
successful operation and development of its business, particularly Marco A.
Emrich, who currently serves as the Company's Chief Executive Officer and
President. The loss of the services of one or more of the Company's management
personnel, including Mr. Emrich, could materially and adversely affect the
operation of the Company. The Company does not carry key man insurance on its
executives.

In addition, in order to continue its operations, the Company must attract and
retain additional technically qualified personnel with backgrounds in
engineering, production, marketing and finance. There is keen competition for
such highly-qualified personnel and consequently there can be no assurance that
the Company will be successful in recruiting or retaining personnel of the
requisite caliber or in the numbers necessary to enable the Company to continue
to conduct its business.

Available Information

Copies of the Company's Form 10-KSB, 10-QSB, 8-K reports, and other filings with
the SEC, and all amendments to these filings, free of charge from the Company's
website at http://www.sedonacorp.com, as soon as reasonably practicable
following the filing of any of these reports with the SEC. Copies may be
obtained free of charge by contacting the Company's Investor Relations
department at http://www:investorinfo@sedonacorp.com. Copies may also be
obtained free of charge via the SEC's internet side, https://www.sec.gov.


ITEM 2.  DESCRIPTION OF PROPERTY

In January 2003, SEDONA entered into a lease for office space at 1003 West 9th
Avenue, Second Floor, King of Prussia, Pennsylvania, 19406. The lease was for
3,403 square feet and extended until December 31, 2005 at an annual base rate of
$68,000 plus a yearly escalation charge of three percent (3%). In April 2004,
the Company required additional space, and added an additional 867 square feet
of space to its King of Prussia office.

The lease extended through December 31, 2005 at an annual rate of $15,000 plus a
yearly escalation charge of three percent (3%). The King of Prussia office
serves as the Company's corporate office. In December 2005, the Company amended
its lease for its corporate office space. The amendment extends the lease on the
4,270 square foot space for a period of five (5) years commencing on January 1,
2006 and expiring December 31, 2010. The annual base rent will be $68,320 or
$16.00 per sq. ft. and will increase $0.50 per sq. ft. in each of the remaining
years. The amended lease will result in savings to the Company in excess of
$15,000 per year over the expiring rates.

The Company will have the option to terminate the lease after January 1, 2009,
with one hundred eighty (180) days prior written notice to the Landlord and
paying a sum equal to the unamortized transaction costs incurred in connection
with the lease amendment, plus three (3) months rent on the term expiration
date.

In November 2003, SEDONA entered into a lease for a 630 square foot facility in
Plymouth, Minnesota. The Minnesota office serves as additional space for
engineering staff. The original lease term was two years and two months, at a
base annual rate of $5,000 plus a yearly escalation charge of three percent. In





                                       14
<PAGE>


ITEM 2.  DESCRIPTION OF PROPERTY   (continued)



December 2005, the Company amended its lease for the Plymouth, Minnesota space
by extending the obligation an additional three years, commencing January 1,
2006 and expiring on December 31, 2008. The base annual rent is $5,000 per year
plus a yearly escalation charge of three percent.

ITEM 3.  LEGAL PROCEEDINGS

On May 5, 2003, SEDONA filed a civil action lawsuit against numerous defendants
in the United States District Court for the Southern District of New York. The
Company seeks damages from the defendants named, and other defendants yet to be
named, in the complaint for allegedly participating in the manipulation of its
common stock, fraud, misrepresentation, failure to exercise fiduciary
responsibility, and/or failure to adhere to SEC trading rules and regulations,
tortuous interference, conspiracy and other actions set forth in the complaint,
but not limited to enforcement of settlement date and affirmative determination.
As of December 31, 2005, no ruling by the United States District Court for the
Southern District of New York has been made with regard to this matter. As this
is an on-going action, no adjustments have been made to the financial statements
related to this matter.

No actions other than matters involved in the ordinary course of business are
currently known by Management and such ordinary course matters are believed by
Management not to have material significance.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2005.











                                       15
<PAGE>


PART II

ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
        HOLDER MATTERS


Market Price of and Dividends of the Company's Common Stock

The following table sets forth, for the periods indicated, the high and low
closing prices of SEDONA's common stock. Until January 8, 2003, the Company's
common stock was quoted on The NASDAQ SmallCap Market under the symbol "SDNA".
Since January 9, 2003, the common stock has been available for trading on the
OTC Bulletin Board under SDNA.OB. The last reported sale price of SEDONA common
stock on March 27, 2006 was $0.30. At that time, there were approximately 6,811
holders of record of SEDONA common stock.

The following table reflects high and low bid information for SEDONA's common
stock for the periods specified, as compiled by the OTC Bulletin Board. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

------------------------------------------- ------------------ -- --------------
                                                  High                  Low
                                            ------------------    --------------

 Year ended December 31, 2004:
-------------------------------------------
 Quarter through March 31, 2004                   $0.80               $0.38
 Quarter ended June 30, 2004                      $0.50               $0.26
 Quarter ended Sept. 30, 2004                     $0.34               $0.20
 Quarter ended Dec. 31, 2004                      $0.54               $0.17

-------------------------------------------
Year ended December 31, 2005:
-------------------------------------------
Quarter ended March 31, 2005                      $0.47               $0.25
Quarter ended June 30, 2005                       $0.27               $0.14
Quarter ended Sept. 30, 2005                      $0.25               $0.14
Quarter ended December 31, 2005                   $0.19               $0.12

-------------------------------------------
Year ended December 31, 2006:
-------------------------------------------
Quarter through March 27, 2006                    $0.35               $0.14
------------------------------------------- ------------------ -- --------------

Dividends

Common Stock:

The Company has never declared or paid any cash dividends on its common stock
and does not anticipate payment of cash dividends on its common stock in the
foreseeable future. It is the current intent of the Company to continue to
retain future earnings, if any, to finance the expansion, development and growth
of its business. Payment of future dividends, if any, will be at the discretion
of the Board of Directors after taking into account various factors, including
the Company's financial condition, operating results, current and anticipated
cash needs and plans for expansion.

In addition, SEDONA's outstanding Series A and Series H Convertible Preferred
Stock has a preference on the payment of any dividends. SEDONA must pay all
accrued and unpaid dividends, if any, on its outstanding preferred stock before
it can pay dividends on its common stock.








                                       16
<PAGE>


ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
        HOLDER MATTERS (CONTINUED)


Equity Compensation Plans as of December 31, 2005:
<TABLE>
<CAPTION>
                                        Equity Compensation Plan Information
-------------------------------------------- ------------------------- -------------------- -----------------------
                                                                                               NUMBER OF SHARES
                                                                                             REMAINING AVAILABLE
                                                                        WEIGHTED-AVERAGE     FOR FUTURE ISSUANCE
                                                                        EXERCISE PRICE OF        UNDER EQUITY
                                              NUMBER OF SHARES TO BE      OUTSTANDING        COMPENSATION PLANS
                                             ISSUED UPON EXERCISE OF        OPTIONS,        (EXCLUDING SECURITIES
                                               OUTSTANDING OPTIONS,       WARRANTS AND         REFLECTED IN 1ST
          PLAN CATEGORY                        WARRANTS AND RIGHTS           RIGHTS                COLUMN)
-------------------------------------------- ------------------------- -------------------- -----------------------
<S>                                          <C>                       <C>                  <C>
Equity compensation plans approved by
   security holders (1)                             16,902,235                $1.01               12,697,157
-------------------------------------------- ------------------------- -------------------- -----------------------
Equity compensation plans not approved by               -                        -                    -
   security holders (2)
-------------------------------------------- ------------------------- -------------------- -----------------------
Total                                               16,902,235                $1.01               12,697,157
-------------------------------------------- ------------------------- -------------------- -----------------------
</TABLE>
(1) These plans consist of the 2000 Incentive Stock Option Plan.
(2) The Company does not maintain any equity compensation plans that have not
    been approved by the stockholders.

Recent Sales of Securities

On December 22, 2005, the Company issued an 8% convertible note to David R. Vey,
the Company's Chairman of the Board, (see "Material Investor" and "Management')
and received aggregate proceeds of $120,000. The note matures on December 22,
2006 and is convertible at any time, at the option of the holder, into 857,142
shares of common stock until such date.

On November 8, 2005, the Company issued 39,100 shares of its common stock to a
consultant in lieu of $7,500 cash compensation for investor relation services
rendered.

On November 8, 2005, the Company issued 95,403 shares of its common stock to an
attorney in lieu of $18,300 cash compensation for services rendered in relation
to the litigation filed by the Company on May 5, 2003.

On November 8, 2005, the Company issued a total of 54,250 shares of its common
stock to employees for shares purchased through the Employee Stock Purchase
Plan. The Company received $8,680 in proceeds.

In January 2006, the Company issued an aggregate of 1,356,800 shares of its
common stock to David R. Vey in lieu of a $203,520 cash payment for interest due
through December 31, 2005 on convertible notes dated January 2003 through March
2005, respectively.

Also in January 2006, the Company issued 705,361 shares of its common stock to
Oak Harbor Investments, a limited liability corporation in which David Vey and
Richard T. Hartley are managing members, in lieu of a $105,804 cash payment for
interest and late charges due through December 31, 2005 on promissory notes
dated January and March 2003, respectively.




                                       17
<PAGE>



ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
        MATTERS (continued)


On February 17, 2006, the Company issued an additional 33,595 shares of its
common stock to a consultant in lieu of $7,500 cash compensation for investor
relation services rendered in 2006.

On February 17, 2006, the Company also issued 127,493 shares of its common stock
to an attorney in lieu of $18,300 cash compensation for services rendered in
relation to the litigation filed by the Company on May 5, 2003.

All of the securities issued in the preceding transactions to David R. Vey,
Richard T. Hartley and Oak Harbor Investments were sold in reliance upon the
exemptions provided in Section 4(2) of the Securities Act of 1933 (the
"Securities Act" and Rule 506 thereunder. The securities issued in the
preceeding transactions to consultants, investor relations services and
attorneys were issued in reliance upon the exemptions provided in Section 4(2)
of the Securities Act of Regulation D involving only sales to accredited
investors.

Preferred Stock

In February 2006, the Company entered into a settlement agreement with Acxiom
Corporation, holder of its Class A Series H, convertible preferred stock. In
consideration of an $850,000 cash payment that is payable by June 30, 2006 or
the cash settlement amount increases to $1,000,000 and 500,000 stock purchase
warrants with an exercise price of $0.30 per share, exercisable for a three year
period, Acxiom agreed to surrender 1,500 shares of Series H Preferred Stock,
valued at $1,500,000, waive its right to accrued but unpaid dividends of
approximately $735,000 related to the Series H Stock. In addition Acxiom will
waive its rights to payment related to an outstanding $953,000 promissory note
issued by SEDONA plus approximately $207,000 in accrued interest. In the event
SEDONA does not pay the obligation by June 30, 2006, the agreement shall be null
and void.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

SEDONA is a software application and services provider that develops and markets
web-based, vertical CRM solutions to small and mid-size businesses. The
Company's CRM application solution, Intarsia(R), enables SMBs to increase the
profitability of their customer portfolio. The Company has strategically
targeted small to mid-size financial services organizations as the first
vertical market to introduce its leading CRM application solution including
community and regional banks, credit unions and insurance companies.

In an effort to rapidly and cost effectively capture a major share of the SMB
market, SEDONA adopted an indirect distribution channel strategy. The Company
licenses its CRM technology to Third Party Alliance Partners (TPAP), who market,
sell, distribute and support SEDONA's technology either as a component of its
TPAP total solution or as a standalone offering.

SEDONA has signed OEM and reseller agreements with several leading software and
services providers for the financial services market, such as Fiserv Solutions,
Inc., Open Solutions Inc., Connecticut Online Computer Center, Inc, FNF/Sanchez
Computer Associates, ACEncrypt Solutions, LLC and Optria LLC, and continues to
work to broaden its distribution channels, expanding its market penetration
within financial services and into new verticals, both domestically and
internationally.




                                       18
<PAGE>



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS (continued)


In fiscal year 2006, the Company plans to re-establish a direct sales channel to
promote and sell Intarsia(R) directly to the small to mid-size banking and
credit union markets. SEDONA will target community and regional banks and
insurance companies that run banking and credit unions core systems other than
the ones provided by the Company's distribution partners.

The following is a discussion and analysis of the Company's results of
operations and financial condition for the years ended December 2005 and 2004
and should be read in conjunction with the Company's audited financial
statements as of December 31, 2005 and 2004 along with the notes to those
financial statements.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition

The Company's software arrangements currently consist of license fees,
installation services and maintenance. The Company has established vendor
specific objective evidence (VSOE) of fair value for its maintenance contracts
based on the price of renewals of existing maintenance contracts. The remaining
value of the software arrangement is allocated to license fee and professional
services based on contractual terms agreed upon by the customer and based on
Company-maintained list prices.

Product License Revenue

Revenues from the sale of product licenses are recognized upon delivery and
acceptance of the software when persuasive evidence of an arrangement exists,
collection is probable and the fee is fixed or determinable. Since the Company's
software product can be implemented on the Company's customers' systems without
significant alterations to the features and the functionality of the software,
or without significant interfacing, the Company's license agreements are written
so that formal written acceptance of the product is received when installation
is complete. Therefore, the timing of license fee revenue recognition coincides
with the completion of the installation and acceptance of the software by the
customer.

The Company primarily utilizes an indirect sales model by distributing its
product through its third party alliance partners (TPAP), for which the Company
receives a royalty payment based on a percentage of the license fee charged by
the TPAP. The royalty fee is recognized by SEDONA when the Company receives
written acknowledgement from the TPAP that royalties have been earned and monies
are owed to SEDONA. In addition, the Company also sells directly to banks and
credit unions. The license fee is recognized by SEDONA in the same manner as the
indirect sales model, whereas license fee revenue is recognized when the Company
receives written acknowledgement from their customer that the license fee has
been earned and monies are owed to SEDONA. For the year ended December 31, 2005,
$159,000 of product license revenue was recognized.

Services Revenue

Services revenue includes revenue from professional services (primarily
installation and training services) and maintenance revenue over periods not
exceeding one year. Installation service revenue, which consists of
implementation planning, hardware and software set-up, data integration
including data aggregation, conversion, cleansing and analysis, and testing and
quality assurance, is accounted for as a separate element of a software
arrangement. Additionally, in certain circumstances, the Company may partner
with third parties to implement its software. In those instances, the
contractual fee for professional services may be paid directly from the customer
to the third party, and the Company recognizes the services fee revenue









                                       19
<PAGE>



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS (continued)


component upon installation and acceptance by the customer. For the year ended
December 31, 2005, $564,000 of service revenues were recognized.

The Company recognizes service revenue as follows:

o        Installation revenue is recognized upon completed installation and
         customer acceptance and is based on a contractual hourly rate. Training
         revenue is not a material element of a contract and revenue is
         recognized as training services are provided.

o        Maintenance revenue is recognized ratably over the life of the related
         contract. The Company establishes the value of maintenance revenue
         based on the price quoted and received for renewals of existing
         maintenance contracts.

Software Development Costs

Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." All costs incurred in the
research and development of new software products are expensed as incurred until
technological feasibility has been established. The costs incurred for testing
and coding of the new software products are capitalized. Amortization of such
costs is the greater of the amount capitalized using (a) the ratio that current
gross revenues for a product bear to the total of current and anticipated future
gross revenues of that product or (b) the straight-line method over the
remaining estimated economic life of the product not to exceed three years.
Amortization commences when the product is available for general release to
customers. The Company capitalizes costs related to purchased software used for
developmental purposes and amortizes such value over three years consistent with
the amortization and capitalization policy discussed above related to
capitalized software costs. During 2005, the Company capitalized no software
development costs related to the Company's Intarsia(R) business application
solution software.

The Company periodically reviews for impairment the carrying value of both
internally developed and purchased software costs. The Company will record an
impairment charge in its operating results if the carrying value exceeds the
future estimated undiscounted cash flows of the related assets.

As of December 31, 2004, all software development costs have been fully
amortized and the Company has not capitalized any additional development costs.

RESULTS OF OPERATIONS

Revenues from operations for the years ended December 31, 2005 and 2004 were
$723,000 and $1,087,000 respectively.

Net revenues for the year ended December 31, 2005 decreased to $723,000 compared
to $1,087,000 for the year ended December 31, 2004. License fee revenue
decreased to $159,000 in 2005 compared to $345,000 reported in 2004 due mainly
to a decrease in continuing royalty payments from one of the Company's
third-party alliance partners. Service fee revenues from the Company's client
base increased $341,000 or 150% over 2004 due to the re-signing of customers
from the Fiserv CCS division in January 2005. The increase was offset by a
decrease in related party revenue from ACEncrypt Solutions. The Company did not
recognize any revenue from the related party in 2005 compared to $519,000 due to
the completion of a development project in 2004. Subsequent to fiscal year 2005,
the Company continues to perform services engagements for ACEncrypt.




                                       20
<PAGE>



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS (continued)


Cost of Revenues

Total cost of revenues decreased to $248,000 or 34% of revenue for the year
ended December 31, 2005 compared to $427,000 or 39% of revenue reported in
December 2004, mainly due to the suspension of the capitalization of software
development costs in the prior year offset by higher service fees related to the
delivery of additional maintenance and professional services.

Gross Profit

For the year ended December 31, 2005, the Company reported a gross profit of
$475,000, or 66 percent of revenue, a 5 percent increase in gross profit over
the same period in 2004.

Operating Expenses

Total operating expenses decreased 6% to $2,992,000 for the year ended December
31, 2005 compared to $3,196,000 reported in 2004. The savings are a result of
the completion and introduction of the Company's new multi-vertical version of
its CRM solution in 2004. The Company also continued to monitor its expenses and
attain savings, whenever possible.

Other Expenses

In 2005, other expenses decreased to $368,000 compared to $386,000 reported in
2004. An increase in interest expense of $110,000 from additional convertible
notes and long-term debt was offset by a $123,000 decrease in the accretion of
debt discounts related to convertible debentures.

Liquidity and Capital Resources

At December 31, 2005, the Company's cash and cash equivalents decreased to
$51,000. The net cash used in operations decreased to $2,054,000 compared to
$2,125,000 in 2004. The decrease in the use of cash was a result of lower
operating expenses in the current year, offset by an increase in accounts
payable and accrued expenses. The Company invested $22,000 in the purchase of
new equipment and software in 2005, compared to a $2,000 investment in equipment
in 2004. Net cash provided by financing activities decreased to $1,989,000 in
2005 compared to $2,206,000 in the prior year. In 2005, proceeds were derived
from the issuance of $1,965,000 in convertible notes compared to proceeds of
$1,295,000 received in 2004. The Company also received $800,000 in proceeds from
a private placement stock sale in 2004 and recognized $100,000 from the exercise
of 200,000 common stock warrants. There were no exercises of common stock
options or warrants in 2005.

The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustment that might
be necessary should the Company be unable to continue in existence. In addition
to the loss of ($2,894,000) in 2005, the Company has incurred a net loss of
approximately ($2,922,000) during the year ended December 31, 2004. The
Company's liabilities also exceed its assets by $6,983,000 at December 31, 2005.
These factors raise substantial doubt about our ability to continue as a going
concern.

The Company will require additional working capital over the next twelve months.
The capital requirements will depend on many factors, including the Company's
rate of revenue growth, the expansion of its marketing and sales activities, the
timing and extent of spending to support product development efforts and
expansion into new vertical markets and the continuing market acceptance of its







                                       21
<PAGE>


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS (continued)


services. The Company's plans include expanding the penetration and acceptance
of its CRM technology into the Company's existing indirect sales distribution
channel and pursuing targeted direct sales opportunities for marketing and
selling its CRM application into vertical markets. Subsequent to year-end the
Company expects to receive proceeds of $600,000 from the issuance of long-term
convertible debentures and plans to raise additional funds through public or
private equity or debt financing to support the implementation of its
operational plan. There can be no assurances however that the Company will be
able to succeed in its plans to obtain such financing.

Obligations and Commitments

The Company has various short term (within 12 months) and long-term (greater
than 12 months) contractual and trade obligations. Below summarizes the timing
of such obligations as of December 31, 2005.
<TABLE>
<CAPTION>
                                                         Payments Due by Period (in thousands)
                                       --------------------------------------------------------------------
                                                            Less than 1         1-3         3-5          +5
                                                   Total           year       years       years       years
                                       ----------------- -------------- ----------- ----------- -----------
     <S>                               <C>               <C>            <C>         <C>         <C>
     Accounts Payable & Other Accrued
     Liabilities                                    $931           $477        $454           -           -
     Promissory Notes                              1,000          1,000           -           -           -
     Short Term Debt                                 953            953           -           -           -
     Interest on Short term debt                     267            267
     Operating/Capital Lease
     Obligations                                       8              8           -           -           -
     Building Leases                                 380             73         307           -           -
                                       ----------------- -------------- ----------- ----------- -----------
     TOTAL                                        $3,539         $2,778        $761         $ -          $-
                                       ================= ============== =========== =========== ===========
</TABLE>
In addition to the obligations listed above, the Company has issued $3,435,000
in convertible notes that mature at various dates through September 2007. The
investors may elect to convert all or a designated part of the principal amount
of the obligations into approximately 15,316,187 shares of Company common stock.

Inflation

Although there can be no assurance that SEDONA's business will not be affected
by inflation in the future, Management believes inflation did not have a
material effect on the Company's results of operations or financial condition
during the periods presented herein.

Financial Risk Management

The Company invests its cash in variable rate money market securities, which are
not subject to interest rate or market risk.




                                       22
<PAGE>



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS (continued)


From time to time, the Company also has issued fixed-rate debt and preferred
stock, which is convertible into its common stock at a predetermined conversion
price. Convertible debt has characteristics that give rise to both interest-rate
risk and market risk because the fair value of the convertible security is
affected by both the current interest-rate environment and the price of the
underlying common stock. For the years ended December 31, 2005 and 2004, the
Company's convertible debt, on an if-converted basis, was not dilutive and, as a
result, had no impact on the Company's net loss per share assuming dilution. In
future periods, the debt may be converted, or the if-converted method may be
dilutive and net income per share -(assuming dilution) would be reduced.

See Notes 3 and 5 to the financial statements for additional information with
respect to the Company's long-term debt and convertible preferred stock.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) revised the
previously issued Statement No. 123, Share Based Payment (Statement No. 123(R)).
The objective of Statement No. 123(R) is to improve financial reporting by
requiring all share based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
value. As permitted by Statement No. 123, the Company currently accounts for
share-based payments to employees using APB No. 25's intrinsic value method and,
as such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method may have an
impact on the Company's results of operations, although it will have no impact
on the overall financial position.

Statement No. 123(R) allows for two adoption methods:

o    The modified prospective method which requires companies to recognize
compensation cost beginning with the effective date of adoption based on (a) the
requirements of Statement No. 123(R) for all share-based payments granted after
the effective date of adoption and (b) the requirements of Statement No. 123(R)
for all awards granted to employees prior to the effective date of adoption that
remain unvested on the date of adoption; or

o    The modified retrospective method which includes the requirements of the
modified prospective method described above, but also requires restatement of
prior period financial statements using amounts previously disclosed under the
pro forma provisions of Statement No. 123.

The Company currently plans to use the modified prospective method to recognize
compensation cost beginning in January 2006. The impact of adoption of Statement
No. 123(R) will depend on levels of share-based payment granted in the future.
However, had the Company adopted Statement No. 123(R) in prior periods, the
impact of that standard would have approximated the impact of Statement No 123
as described in the disclosure of pro forma net loss and loss per share in Note
1 to the financial statements. The Company currently anticipates that the impact
of adopting Statement No 123(R) will result in recording approximately $165,000
of stock compensation expense in 2006, but such amount could fluctuate depending
on the levels of share-based payments granted.

In May 2005, the FASB issued Statement No 154, Accounting Changes and Error
Corrections- A Replacement of APB Opinion No. 20 and FASB Statement No. 3
(Statement No. 154.) Statement No. 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Statement No.
154 requires retrospective application for any change in accounting principle




                                       23
<PAGE>



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS (continued)


to prior periods' financial statements. Statement No. 154 is effective for the
first fiscal period beginning after December 15, 2005. The Company does not
expect the implementation of Statement No. 154 to have a significant impact on
its consolidated financial statements.

Off-Balance Sheet Arrangements

SEDONA had no off-balance sheet arrangements during 2005 and 2004.

ITEM 7.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
              See Index on F-1.

ITEM 8.       CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURES

              None.


ITEM 8A.      CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures that is
designed to ensure that information required to be disclosed by the Company in
this Form 10-KSB, and in other reports required to be filed under the Securities
Exchange Act of 1934, is recorded, processed, summarized and reported within the
time periods specified in the rules and forms for such filings.

The Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures (as defined pursuant to
Rule 13a-15(e) under the Securities Exchange Act of 1934), based on their
evaluation of such controls and procedures as of the end of the period covered
by this report, are effective to ensure that information required to be
disclosed by the Company in the reports it files under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to the
Company's Management, including its Chief Executive Officer and its Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

During SEDONA's 2005 fiscal year, there were no significant changes in the
Company's internal controls or other factors that occurred which had
significantly affected or could significantly affect these controls.


ITEM 8B. OTHER INFORMATION

On December 6, 2005, the Company signed a convertible debenture with the
Chairman of the Board, David R. Vey. Mr. Vey lent the Company a total of
$95,000. In addition on December 22, 2005, Mr. Vey lent the Company an
additional $120,000. Mr. Vey and the Company agreed that the Company would issue
two convertible notes to Mr. Vey to evidence such loans. The Company issued the
convertible notes, in the principal amounts of $95,000 and $120,000,
respectively. The Company issued the convertible notes under the exemptions from
registration provided by Section 4 (2) of and under Rule 506 of Regulation D
promulgated under the Securities Act of 1933. The convertible notes are filed as
Exhibits 10.74 and 10.75 to this current report on Form 10-KSB and are hereby
incorporated by reference. The Company used the amount of the loans for working
capital.






                                       24
<PAGE>



ITEM 8B. OTHER INFORMATION (continued)


Mr. Vey may, at his option, convert the unpaid principal balance, together with
the accrued and unpaid interest, of the convertible notes into shares of the
Company's common stock. The number of shares into which the convertible notes
may be converted was based upon the closing market price of the Company's common
stock on the date of investment.

The maturity date of each convertible notes is September 28, 2006 and December
22, 2006, respectively. The total number of shares issuable upon conversion of
the principal balance is 452,321 and 857,142, respectively.

The convertible notes will bear interest on the principal outstanding at a rate
of eight percent (8%) per year from the date of the convertible notes until the
earlier of maturity or the date upon which the unpaid balance is paid in full.
The principal and accrued and unpaid interest underlying the convertible notes
must be paid in full on or before maturity. The maturity of the convertibles
notes may be extended by mutual consent of Mr. Vey and the Company. The Company
must file a registration statement in a timely manner of any such conversion, to
register such converted shares for resale under the Securities Act of 1933. The
Company has the right to prepay any part of or the entire balance of each
convertible notes without penalty; however, the investor has the right to
convert the convertible note to shares within five (5) days after notice by the
Company of its intent to prepay the convertible note.

In the event of default under the convertible note, which will occur if the
Company fails to make payments when due and payable or breaches any of the
conditions, covenants, representations or warranties set forth in the
convertible notes when due or required or within any period of time permitted
thereunder for cure of any such default or non-performance, will result in the
unpaid principal and interest to become immediately due and payable unless
waived by the investor.


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT

The following table presents the names and positions of the persons who serve as
SEDONA's directors, executive officers and key employees, their ages as of March
25, 2006 and the length of time they have served in such positions:
<TABLE>
<CAPTION>
--------------------------- ------- --------------------------------------------------------------- --------
Name                        Age     Position                                                        Since
--------------------------- ------- --------------------------------------------------------------- --------
<S>                         <C>     <C>                                                             <C>
David R. Vey                53      Chairman of the Board                                           2003
Marco A. Emrich             53      President, Chief Executive Officer, and Director                1999
David C. Bluestone          50      Director                                                        2005
Scott C. Edelman            52      Director                                                        2004
Victoria V. Looney          48      Director                                                        2003
Jack A. Pellicci            67      Director                                                        1996
Roger W. Scearce            56      Director                                                        2004
Anita M. Primo              38      Vice President, Chief Financial Officer and Corporate           2003
                                    Secretary
Timothy A. Rimlinger        41      Vice President, Chief Technology Officer                        2000
--------------------------- ------- --------------------------------------------------------------- --------
</TABLE>




                                       25
<PAGE>




ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
        (continued)

All Directors hold office until the next Annual Meeting of the Shareholders of
the Company and until their successors are elected and qualified.

All Officers serve at the discretion of the Board of Directors subject to the
terms of their employment agreements.

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and Officers, and persons who beneficially own more than 10% of its
common stock to file reports on their ownership and changes in ownership with
the Securities and Exchange Commission and to furnish the Company with copies of
any reports that they file. Based solely on review of the copies of these
reports received or written representations that no reports on Form 5 were
required, the Company believes that, for the year ended December 31, 2005, all
reporting persons complied on a timely basis with the filing requirements
applicable to them, except as follows: David Vey filed a Form 4 on March 24,
2005 to report shares of 828,514 derivative securities acquired in three
separate transactions at various dates from January to March 2005. In addition,
Mr. Vey filed a Form 4 on April 18, 2005 to report 757,120 derivative securities
acquired in three separate transactions from March 25, 2005 to April 14, 2005.
On January 3, 2006, Mr. Vey filed a Form 4 to report 857,142 derivative
securities acquired on December 22, 2005.

On June 1, 2004, the Board of Directors adopted a Code of Conduct and Business
Ethics pursuant to Section 406 of the Sarbanes-Oxley Act that applies to the
Company's principal executive officer, principal financial officer, principal
accounting officer or controller, and any other persons performing similar
functions. The code is posted on the Company's internet website at
HTTPS://WWW.SEDONACORP.COM. Copies may be obtained by following the instructions
in Item 1. Available Information.

SEDONA has an audit committee comprised of Roger W. Scearce, David C. Bluestone
and Jack A. Pellicci. Mr. Roger Scearce is a member of the Audit Committee and
serves as the Audit Committee's financial expert, as such term is defined in the
SEC Regulations S-B Item 401(e).

The business experience, principal occupation and employment of the Company's
Directors, Executive Officers and Key Employees have been as follows:

David R. Vey has served as Chairman of the Board since May 2003 and has been a
Director of the Company since March 2003. Mr. Vey founded Vey Development, Inc.
a privately held residential and commercial real estate development company,
with primary real estate holdings in Louisiana and has served as President since
1983. Mr. Vey is a managing member in Oak Harbor Investments. Mr. Vey holds a
Bachelor of Arts, Landscape Architecture and a Bachelor of Science, Forest
Management from Louisiana State University. Mr. Vey is the brother of Victoria
V. Looney, a Director.

Marco A. Emrich has over 25 years of software industry experience and has served
as Chief Executive Officer and President of SEDONA Corporation since September
1999. Prior to joining SEDONA Corporation, he served as President and CEO of
Cambridge-based e-commerce application service provider empresa Inc., where he
devised and executed a strategic-level plan for the incorporation and launch of
the Company in the untapped e-commerce application outsourcing market. Prior to
empresa Inc., Mr. Emrich was President, CEO and Chairman of CenterLine Software,
Inc., a software application and services provider of Application Delivery
Management System (ADMS) solutions for network-centric, multi-tier distributed
business applications. Mr. Emrich also held positions as President of
Stuttgart-based application development software provider Cinmark Systems Inc.,





                                       26
<PAGE>




ITEM 9.       DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE
              REGISTRANT  (continued)

and Senior Executive of Cincom Systems, Inc. and Digital Equipment Corporation's
Information Network Technology Group. Mr. Emrich holds a Bachelor's degree in
Electrical Engineering with specialization in Systems Engineering from
Pontifical Catholic University of Rio De Janeiro, Brazil.

David C. Bluestone was elected to the Board of Directors in August 2005. Mr.
Bluestone has been with Keybank, N.A. since October 1996, where he is currently
a Senior Real Estate Credit Officer with responsibility for structuring and
approval of credit exposure for commercial real estate relationships,
maintaining asset quality and portfolio management, and has held the position of
Team Leader, Chicago Real Estate Loan Production Officer. Prior to Keybank, Mr.
Bluestone served as Senior Relationship Manager with Mellon Bank N.A.'s Real
Estate Department and Section Manager, Credit Review Department from September
1986 to October 1996 with emphasis on new and restructuring of existing
multi-million dollar real estate transactions, new business development, as well
as underwriting, credit, financial, market and valuation analysis. From
September 1982 to August 1986, he was a Real Estate Representative and Project
Manager for The Southland Corporation. Mr. Bluestone holds a Masters of Business
Administration from University of California, and a Bachelors of Landscape
Architecture from Louisiana State University.

Scott C. Edelman has served as a Director of the Company since August 2004.
Since July 2002, he has served as the Chief Executive Officer of CellzDirect, a
privately held bioscience company that provides bio/pharmaceutical companies
with quality cell products and contract laboratory services focused primarily on
drug metabolism and toxicology. Mr. Edelman has managed numerous small- to
intermediate-sized technology companies with a variety of domestic and
international distribution channel strategies. Prior to CellzDirect, Mr. Edelman
served as President and Chief Executive Officer of GroupSystems.com, a
collaborative tools software vendor specializing in group dynamics and
collaborative team decision-making from January 1999 to July 2002. Mr. Edelman
holds a Bachelor of Science degree in Business Administration from Pennsylvania
State University.

Victoria V. Looney has served as a Director of the Company since March 2003. In
2001, Ms. Looney co-founded ACEncrypt Solutions LLC, a privately-held technology
and business development firm providing customized security and business
management software tools to Corporate and Government approved buyers. Prior to
founding ACEncrypt, Ms. Looney was Vice President of Sales at GroupSystems.com
from 1999 to 2001 and earlier held positions with IDCertify, as Vice President
of Business Development, from 1998 to 1999. Post college graduation, Ms. Looney
worked as a congressional staff director in the U.S. House of Representatives
and later as a project manager for the U.S. Department of State - Agency for
International Development. Ms. Looney was recruited by and held Business
Development Management Positions for CitiCorp, Rosenbluth International and EDS.
Ms. Looney is a graduate of The School of International Service, College of
Public and International Affairs, of the American University in Washington, DC
where she received Baccalaureate in International Studies. Mr. Vey appointed Ms.
Looney to the Board pursuant to our financing agreement with Mr. Vey, in which
he was entitled to appoint up to 30% of the members of the Board of Directors
within 90 days of March 8, 2003. Ms. Looney is the sister of the Chairman of the
Board, Mr. David Vey.

Jack A. Pellicci has served as a Director since 1996. Jack Pellicci leads the
Business Development and Program Management Group for Oracle's North American
Public Sector where he is responsible for positioning Oracle's products and
solutions with customers and partners to generate and then capture new business
in the Federal/State and Local/Provincial Government markets in the US and
Canada. Mr. Pellicci joined Oracle in 1992 after retiring from the U.S. Army as





                                       27
<PAGE>




ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
        (continued)

a Brigadier General with 30 years experience leading and training people,
managing technology and improving productivity in command and staff assignments
in both peace and war.

Mr. Pellicci is a member of the Board of Directors of the Open Geospatial
Consortium (OGC), a worldwide organization leading the initiative for
interoperability of geospatial information and location-based services. He also
serves as a Director on the Board of the Fairfax County Chamber of Commerce, the
United Services Organization (USO) of Metropolitan Washington, and serves on the
External Research Advisory Committee for the University of Texas at Dallas and
the Homeland Security Institute Advisory Board at Purdue University. He
currently serves as a Corporate Fellow for the National Governors Association,
and is a Fellow with the Council on Excellence in Government and serves as a
member of the council's CIO-SAGE Program. He is a graduate of the U.S. Military
Academy at West Point with a Bachelor of Engineering degree, and received a
Master of Mechanical Engineering degree from Georgia Institute of Technology.

Roger W. Scearce has served as a Director of the Company since August 2004. Mr.
Scearce is a senior partner with Vanguard Advisors, LLC. Vanguard's mission is
to provide world-class advisory and consulting services to business and
government leaders. He is a founding member and has been with Vanguard since May
2003. Prior to forming Vanguard, Mr. Scearce was a Senior Vice President with
American Management Systems (AMS), from April 1999 to April 2003, where he led
their Department of Defense (DoD) Strategic Account Group. While at AMS, Mr.
Scearce also served as the Deputy Program Manager, DoD Financial Management
Enterprise Architecture as a key executive member of "Team IBM" in support of
the DoD's Business Management Modernization Program. Before joining AMS, Mr.
Scearce was a career military officer, rising to the rank of Brigadier General,
U.S. Army. His last active duty assignment was Deputy Director of the Defense
Finance and Accounting Service. Mr. Scearce managed the day-to-day finance and
accounting operations and activities of the Defense Department worldwide.
Earlier leadership roles and assignments included serving as Commandant of the
U.S. Army Finance School and Chief of the U.S. Army Finance Corps; and Commander
266th Theater Finance Command, U.S. Army, Europe. Mr. Scearce graduated from
Florida Southern College with a Bachelor of Science degree in Accounting and
earned an MBA from Syracuse University. He is a past National Vice President of
the American Society of Military Comptrollers and past President of the
Association of Syracuse Army Comptrollers. He is also an active member of the
Association of Government Accountants. Mr. Scearce is the immediate past
Chairman of the Board of Directors of Andrews Federal Credit Union, Andrews AFB,
Maryland, where he still serves as a Director.

Anita M. Primo has served as Chief Financial Officer since December 2003. She
also serves as Corporate Secretary since the retirement of Michael Mulshine in
July 2003. Ms. Primo previously served as the Company's Controller since
December 2000. Prior to joining SEDONA, Ms. Primo was Vice President of Finance
and Administration for the Zoological Society of Philadelphia from 1998 to 2000.
She also served as Controller and Treasurer for Action Manufacturing, a major
manufacturer of precision ordnance products for the U.S. Government, U.S.
approved foreign governments and numerous domestic and international commercial
firms from 1989 to 1998.

Timothy A. Rimlinger served as Vice President of Engineering since July 2000 and
Chief Technology Officer since December 2003. Mr. Rimlinger is responsible for
the design, implementation and delivery for all of the Company's products.
Previously, he served as Director of Technology Development since joining the
Company in January 1996. Before joining SEDONA, he was Senior Development
Engineer at GE Aerospace and Lockheed Martin from 1985 to 1996.





                                       28
<PAGE>


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
        (continued)

David Vey was also entitled to appoint up to 30% of the members of SEDONA's
Board of Directors within 90 days after the date of the financing arrangement in
March 2003. Victoria Looney, who is the sister of David Vey, was appointed to
the Board in 2003 at the request of Mr. Vey. Mr. Vey's right to appoint
additional board members was terminated as of February 2, 2004, when Mr. Vey
elected to convert the above reference note into 10,000,000 shares of the
Company's common stock. See "Certain Relationships and Related Transactions."

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth certain compensation information awarded to,
earned by, or paid for services rendered to the Company in all capacities during
the two years ended December 31, 2005 and 2004 for the Company's President and
Chief Executive Officer, and the Company Vice Presidents, who are the only
executive officers whose salary and bonus for such years exceeded $100,000:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                                              LONG TERM
                                                                                             COMPENSATION
                                                     ANNUAL COMPENSATION                         AWARDS
--------------------------------------------------------------------------------------------------------------------------
                                                                                               SECURITIES
                                           FISCAL                            OTHER ANNUAL      UNDERLYING      ALL OTHER
NAME AND PRINCIPAL POSITION                 YEAR       SALARY      BONUS     COMPENSATION   OPTIONS/WARRANTS  COMPENSATION
--------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>       <C>           <C>       <C>             <C>               <C>
Marco A. Emrich                            2005      $225,000    $  0            $ 0            75,000            $0
--------------------------------------------------------------------------------------------------------------------------
     President and CEO                     2004       233,654       0              0               0               0
--------------------------------------------------------------------------------------------------------------------------
Alyssa S. Dver ++                          2005      $140,000    $  0            $ 0               0              $0
--------------------------------------------------------------------------------------------------------------------------
     V.P. & Chief Marketing Officer        2004         +           0              0               0               0
--------------------------------------------------------------------------------------------------------------------------
Anita M. Primo                             2005      $110,000    $  0            $ 0            86,227            $0
--------------------------------------------------------------------------------------------------------------------------
     V.P. & Chief Financial Officer        2004       114,230       0              0               0               0
--------------------------------------------------------------------------------------------------------------------------
Timothy A. Rimlinger                       2005      $130,000    $  0            $ 0           101,905            $0
--------------------------------------------------------------------------------------------------------------------------
     V.P. & Chief Technology Officer       2004      $135,000       0              0               0               0
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

       +   Compensation did not exceed $100,000 annually

       ++  Alyssa S. Dver employment with SEDONA terminated December 20, 2005

Base Salary

Base salaries for all Executive Officers, including the Company's Chief
Executive Officer, are reviewed by the Compensation Committee on an annual
basis. In determining appropriate base salaries, the Compensation Committee
considers external competitiveness, the roles and responsibilities of the
individual, the internal equity of compensation relationships, and the
contributions of the individual to the Company's success.

Annual Cash Incentive Opportunities

The Compensation Committee believes that Executives should be rewarded for their
contributions to the success and profitability of SEDONA and, as such, approves
the annual cash incentive awards. Incentive awards are linked to the achievement
of revenue and net income goals by SEDONA and/or specific business units, and
the achievement by the Executives of certain assigned objectives. The individual




                                       29
<PAGE>



ITEM 10. EXECUTIVE COMPENSATION (continued)


objectives set for the Company's Executive Officers are generally objective in
nature and include such goals as revenue, profit and budget objectives, and
increased business unit productivity. The Compensation Committee believes that
these arrangements tie the Executive's performance closely to key measures of
the success of SEDONA or the Executive's business unit. All Executive Officers,
including the Chief Executive Officer, are eligible to participate in this
program.

Long-Term Stock-Based Incentives

The Compensation Committee also believes that it is essential to link the
interests of Executive and Shareholder together. As such, from time to time, the
Compensation Committee grants stock options to Executive Officers and other
employees under the Plan. In determining actual awards, the Compensation
Committee considers the externally competitive market, the contributions of the
individual to the Company's success, and the need to retain the individual over
time. All Executive Officers, including the Chief Executive Officer, are
eligible to participate in this program.

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction
to public companies for compensation over $1,000,000 paid to its Named Executive
Officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. Although no Named Executive
Officer received compensation exceeding this limit in 2005, the Company has
limited the number of shares of common stock subject to options, which may be
granted, to the Company's employees in a manner that complies with the
performance-based requirements of Section 162(m). While the Compensation
Committee does not currently intend to qualify its annual incentive awards as a
performance-based plan, it will continue to monitor the impact of Section
162(m).

Compensation Committee Interlocks and Insider Participation

The Company's Compensation Committee consists of Ms. Looney, Mr. Pellicci, and
Mr. Edelman. None of the executive officers has served as a director or member
of the compensation committee (or other committee serving an equivalent
function) of any other entity, whose executive officers served as a director of
or member of our Compensation Committee.

STOCK PURCHASE OPPORTUNITIES

Option Grants

The following table sets forth information with respect to the named Executive
Officers concerning individual grants of stock purchase opportunities made
during the year ended December 31, 2005.
<TABLE>
<CAPTION>
                              OPTIONS GRANTED IN FISCAL 2005
---------------------------- ------------- ------------------ ------------- -------------
                                               PERCENT OF
                               NUMBER OF          TOTAL
                              SECURITIES         OPTIONS
                              UNDERLYING         GRANTED        EXERCISE OR
                               OPTIONS        TO EMPLOYEES      BASE PRICE   EXPIRATION
NAME                          GRANTED (#)       IN 2005           ($/SH)         DATE
---------------------------- ------------- ------------------ ------------- -------------
<S>                          <C>           <C>                <C>           <C>

Marco A. Emrich                    75,000         7%                 $0.15    12-2015
Alyssa S. Dver                          -          -                     -      N/A
Anita M. Primo                     86,227         8%                 $0.15    12-2015
Timothy A. Rimlinger              101,905         9%                 $0.15    12-2015
---------------------------- ------------- ------------------ ------------- -------------
</TABLE>







                                       30
<PAGE>



ITEM 10. EXECUTIVE COMPENSATION (continued)

Options Exercised and Unexercised

The following table sets forth information with respect to the named Executive
Officers concerning the exercise of options for the year ended 2005 and the
unexercised options held as of December 31, 2005.
<TABLE>
<CAPTION>
                                     AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
                                            AND FISCAL YEAR END OPTION VALUES

-------------------------- -------------- ----------- -------------------------------- --------------------------------
                                                           NUMBER OF SECURITIES             VALUE OF UNEXERCISED
                                                          UNDERLYING UNEXERCISED                IN-THE-MONEY
                              SHARES                      OPTIONS AND WARRANTS AT                OPTIONS AT
                           ACQUIRED ON      VALUE            DECEMBER 31, 2005                DECEMBER 31, 2005
NAME                         EXERCISE      REALIZED    EXERCISABLE    UNEXERCISABLE    EXERCISABLE     UNEXERCISABLE
-------------------------- -------------- ----------- -------------- ----------------- ------------- ------------------
<S>                        <C>            <C>         <C>            <C>               <C>           <C>
Marco A. Emrich                  0            0         1,377,500         75,000            0                0
Alyssa S. Dver                   0            0          290,000            0               0                0
Anita M. Primo                   0            0          89,988          111,239            0                0
Timothy R. Rimlinger             0            0          133,000         101,905            0                0
-------------------------- -------------- ----------- -------------- ----------------- ------------- ------------------
</TABLE>

COMPENSATION OF DIRECTORS

Under the Company's 2000 Incentive Stock Option Plan, each of the Company's
non-employee Directors, on the first business day of January of 2002 and on the
first business day of January in each succeeding year, shall receive as
compensation for service to the Board of Directors, a grant of an option to
purchase common stock, at the then current fair market value, as determined in
accordance with the Plan, as follows: a 30,000 share option grant for service to
the Board of Directors during the preceding year; plus, a 5,000 share option
grant for serving as the Chairman of the Board of Directors or of a Committee of
the Board of Directors during the preceding year. If, however, an Eligible
Director shall become eligible for an option grant after the first regularly
scheduled Meeting to the Board of Directors during any calendar year, the
Compensation Committee shall determine the size of such option grant by
multiplying 30,000 shares (and/or 5,000 shares) by a fraction which is
determined by dividing the number of regularly scheduled Board of Directors
meetings remaining in the calendar year by four.

In addition, any new Director elected to the Company's Board of Directors will
be granted an option to purchase 50,000 shares of common stock, at the then
current fair market value. The option was adjusted from 25,000 shares by action
of the Board in March 2002. The shares underlying this option will vest at the
rate of 10,000 shares per year for five years, on the anniversary date of the
new Director's election to the Company's Board of Directors.

If unexercised, each option shall expire on the tenth anniversary of the date of
grant and shall vest and become fully exercisable upon grant, with the exception
that the new Directors' options shall vest over five years. Once vested, options
shall remain fully exercisable until the earlier of: (i) the expiration of their
ten-year term; (ii) three years following the optionee's separation from Board
of Directors service for any reason; or (iii) one year following the death of
the optionee.

In March 2002, the Board increased the annual retainer to be paid to each of the
Company's non-employee Directors, beginning in January 2003 and thereafter, from
$5,000 to $10,000 as cash compensation for such Director's services for the
preceding year. At the same time, the Board increased the fee to be paid to each
of the Company's non-employee Directors for attendance at Board of Directors and
Committee Meetings for 2002 and thereafter from $500 to $750, with multiple
meetings held on the same day to count as one. The amounts were subject to







                                       31
<PAGE>



ITEM 10. EXECUTIVE COMPENSATION (continued)


annual review and possible adjustment at the discretion of the Board of
Directors. By action of the Board on January 9, 2003, the non-employee
Directors' annual retainer fee for services to the Board in 2002 was reduced to
its prior level of $5,000, and the fees to be paid to non-employee Directors for
each attendance at Board of Directors and Committee Meetings for 2002 and
thereafter was reduced to its prior level of $500 per meeting. In addition, any
Director's cash compensation obligations that may accrue would be paid in cash
only if the Company is current in all of its cash obligations, or on a change of
control, assuming that all current cash obligations had been met. As of December
31, 2005, there was a total of $115,642 accrued compensation due to current and
past members of the Board of Directors for prior service. During 2005, the
Company issued 175,000 and 170,000 stock options, respectively, to its current
and past members for 2003 and 2004 service to the Board. The options were issued
at an exercise price of $0.44 per share for the 2003 options and $0.32 for the
2004 options.

During 2005, the Board of Directors amended the Compensation of its Directors as
follows:

Effective August 11, 2005, as of the date of each annual shareholder meeting,
each existing board member will be granted the option to purchase 100,000
incentive stock options at the fair market value on the date of grant. The
options will vest and become fully exercisable upon grant. During 2005, the
Company issued 600,000 stock purchase options with an exercise price of $0.21
per share.

In addition, any new Director elected to the Company's Board of Directors will
be granted an option to purchase 50,000 shares of common stock, at the then
current fair market value. The shares underlying these options will vest at the
rate of 10,000 shares per year for five years, on the anniversary date of the
new Director's election to the Company's Board of Directors. In 2005, Scott
Edelman and Roger Scearce were issued 50,000 options each for joining the Board
in 2004. David Bluestone also received a grant of 50,000 stock purchase options
in August 2005 for being elected to the Board of Directors at its 2005 Annual
Meeting of Shareholders.

If unexercised, each option shall expire on the tenth anniversary of the date of
grant and shall vest and become fully exercisable upon grant, with the exception
that the new Directors' options shall vest over five years. Once vested, options
shall remain fully exercisable until the earlier of: (i) the expiration of their
term; (ii) three years following the optionee's separation from Board of
Directors service for any reason; or (iii) one year following the death of the
optionee.

Also, any board member participating on a board committee will be reimbursed
$500 per year for their participation, with the exception of the members of the
Audit Committee who will be reimbursed $1,000 per year for their participation
in that committee. The reimbursement will be made at the end of the twelve month
period following participation in the various board committees administered from
the annual shareholders' meeting date each year. Through December 31, 2005, the
Company accrued $3,750 related to this compensation.

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

On June 25, 2004, the Company entered into an employment agreement with Marco A.
Emrich, its Chief Executive Officer and President. The agreement has a term of
two years. Mr. Emrich serves under the terms of this agreement with an annual
base salary of $225,000. Mr. Emrich can also earn up to $100,000 annually in the
form of a cash bonus, subject to quarterly measurements. In addition, under Mr.
Emrich's original employment agreement signed on September 15, 1999, Mr. Emrich
received 200,000 options and 175,000 warrants each with an exercise price of
$2.25, which will vest monthly over a four-year period. In September 1999, he
also was granted 350,000 warrants with an exercise price of $2.25, which will
vest monthly over a four-year period, and certain acceleration provisions based
on stock price performance. In the event of "Change of Control", as defined in
the employment agreement, within 12 months of the date of such Change of Control








                                       32
<PAGE>



ITEM 10. EXECUTIVE COMPENSATION (continued)


33% of any unvested options and warrants will accelerate, and after 12 months of
such date, 50% of any unvested options and warrants will accelerate. In July
2001, Mr. Emrich was granted 472,500 warrants with an exercise price of $1.03,
which will vest based on the same schedule as the warrants listed above. Also in
July 2001, Mr. Emrich received 180,000 options with an exercise price of $1.03,
which will vest based on the same schedule as the options listed above. In 2005,
Mr. Emrich received an additional 75,000 options with an exercise price of
$0.15, which will vest on December 30, 2006.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of
the common stock as of March 25, 2006 with respect to:

     o   Each person or group known to the Company who beneficially owns five
         percent or more of the outstanding shares of the Company's common
         stock;

     o   Each Director and named Executive Officer; and

     o   The Company's Executive Officers and Members of its Board of Directors
         as a group.

Except as indicated in the footnotes to the table, the persons named in the
table have sole voting and investment power with respect to all shares
beneficially owned. The business address of each person named in the table below
is c/o SEDONA Corporation, 1003 West Ninth Avenue, Second Floor, King of
Prussia, Pennsylvania 19406.

Beneficial ownership is determined in accordance with SEC rules and generally
includes voting or investment power with respect to securities. Shares of common
stock subject to options that are currently exercisable or exercisable within 60
days of the date of this prospectus are deemed outstanding for the purpose of
computing the percentage ownership of any person. These shares, however, are not
considered outstanding when computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
------------------------------------------ ---------------------------------------- ------------------------
                                               AMOUNT AND NATURE OF BENEFICIAL
NAME OF BENEFICIAL OWNER                                  OWNERSHIP                    PERCENT OF CLASS
------------------------------------------ ---------------------------------------- ------------------------
<S>                                        <C>                                      <C>
Marco A. Emrich                                      1,455,385         (1)                   1.60%
------------------------------------------ -------------------- ------------------- ------------------------
David C. Bluestone                                     100,000         (1)                     *
------------------------------------------ -------------------- ------------------- ------------------------
Scott C. Edelman                                       125,000         (1)                     *
------------------------------------------ -------------------- ------------------- ------------------------
Victoria V. Looney                                     247,500         (1)                     *
------------------------------------------ -------------------- ------------------- ------------------------
Jack Pellicci                                          402,868         (1)                     *
------------------------------------------ -------------------- ------------------- ------------------------
Anita M. Primo                                         136,234         (1)                     *
------------------------------------------ -------------------- ------------------- ------------------------
Timothy A. Rimlinger                                   294,556         (1)                     *
------------------------------------------ -------------------- ------------------- ------------------------
Roger W. Scearce                                       150,700         (1)                     *
------------------------------------------ -------------------- ------------------- ------------------------
David R. Vey                                        44,268,340        (1,2)                 43.71%
------------------------------------------ -------------------- -------------------- -----------------------
All Executive Officers and Directors as
a group, (9 persons)                                47,180,583                              42.65%
========================================== ==================== ==================== =======================
</TABLE>




                                       33
<PAGE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         (continued)

         *        Owner holds less than 1% of the class.

         (1)      Unless otherwise indicated, each person possesses sole voting
                  and investment power with respect to the shares identified in
                  the table as beneficially owned. The table includes shares
                  which the following directors and executive officers have a
                  right to acquire within 60 days upon the exercise of
                  outstanding options and warrants: Mr. Emrich -380,000 options
                  and 997,500 warrants Mr. Bluestone - 100,000 options Mr.
                  Edelman - 125,000 options Ms. Looney - 190,000 options Mr.
                  Pellicci - 381,544 options Ms. Primo - 95,193 options Mr.
                  Rimlinger - 133,000 options Mr. Scearce - 125,000 options Mr.
                  Vey - 190,000 options and 1,781,023 warrants

          (2)     Mr. Vey has a right to acquire 9,757,632 shares within 60 days
                  upon a notice of conversion related to $2,435,000 in
                  convertible notes due between November 2004 and December 2006.
                  The conversion prices of the related notes were all issued at
                  or above fair market value of the underlying common stock on
                  the date the notes were issued.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


The Company entered into the following financing agreements to provide working
capital with Mr. David R. Vey, Chairman of the Board of Directors as of March
25, 2006. Mr. Vey is a selling shareholder who owned more than 5% of the
Company's outstanding common stock.

In December 2002, Mr. Vey committed to fund a total of $1,420,000. The payments
were made available to the Company on various funding dates through March 2003.
In December 2002, the Company received proceeds of $100,000 in the form a
convertible note. In January 2003, the Company received proceeds of $820,000 in
the form of $220,000 in convertible note and a $600,000 promissory note. The
promissory note accrued interest at a rate of 7% and matured on January 15,
2004. The convertible notes accrued interest at rates ranging from 7% to 8% and
were convertible at the option of Mr. Vey into 13,000,000 shares of Company
common stock. The notes matured at various dates in December 2003 and January
2004. As of January 30, 2004, Mr. Vey elected to convert the above referenced
convertible notes into 13,000,000 shares of the Company's common stock of which
3,000,000 shares were issued upon conversion by December 31, 2003 and the
remaining were issued upon conversion in 2004.

Additionally, the Company received $500,000 in March 2003, in the form of a
$400,000 promissory note and a $100,000 convertible note. These instruments have
terms similar to those of the earlier investment, and matured in March 2004. The
$100,000 note was convertible into 10,000,000 shares of the Company's common
stock. As of February 2, 2004, Mr. Vey elected to convert the above referenced
note into 10,000,000 shares of the Company's common stock.

From June 2003 through December 2003, the Company received $620,000 in proceeds
and issued 8% convertible notes. The notes were issued for a one-year term and
are convertible at the option of Mr. Vey at various dates from June 2004 to
December 2004 into 2,699,219 shares of the Company's common stock. In October
2004, the Company issued 1,975,318 shares of its common stock to Mr. Vey who




                                       34
<PAGE>


ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  (continued)

elected to convert $445,000 of the above referenced convertible notes into
Company common stock. The remaining $175,000 of convertible notes remains
outstanding as of December 31, 2005.

In June 2003, Mr. Vey exercised a warrant received in August 2002, as part of a
private placement transaction, to purchase 500,000 shares of the Company's
common stock at an exercise price of $0.35 per share providing $175,000 in
proceeds.

From January 1, 2004 through December 31, 2004, the Company received $1,295,000
in loan proceeds from Mr. Vey and issued him 8% convertible notes. The notes
were issued for a one-year term and are convertible at the option of Mr. Vey at
various dates from June 2005 to November 2005 into 4,784,880 shares of the
Company's common stock.

In January 2004, Mr. Vey purchased 212,766 shares of the Company's common stock
for $100,000 in a private placement transaction. He was also granted common
stock warrants to purchase an additional 106,383 shares of the Company's common
stock at an exercise price of $0.70 per share. The warrants had not been
exercised as of December 31, 2005.

In December 2004, the Company issued 69,125 shares of its common stock to
Richard T. Hartley and David R. Vey in lieu of $13,825 cash payment for interest
due through September 30, 2004 on convertible notes dated January and March
2003. The Company also issued 295,589 shares to Mr. Vey in lieu of a $59,117
cash payment for interest due through September 30, 2004 on convertible notes
dated December 2002, January, June, July and September 2003, respectively.

The Company issued 677,450 shares of its common stock to Oak Harbor Investments,
a limited liability corporation in which David Vey and Richard T. Hartley are
managing members, in lieu of $135,490 cash payment for interest and late charges
due through September 30, 2004 on promissory notes dated January and March 2003,
respectively.

From January 2005 through December 2005, the Company issued eleven 8%
convertible notes to Mr. Vey and received aggregate proceeds of $965,000. The
convertible notes were issued at fair market value on the transaction date. The
notes were issued for a one-year term and are convertible at the option of the
holder into 4,248,850 shares of the Company's common stock.

In January 2006, the Company issued an aggregate of 1,356,800 shares of its
common stock to Mr. Vey in lieu of a $203,520 cash payment for interest due
through December 31, 2005 on convertible notes dated January 2003 through March
2005, respectively.

Also in January 2006, the Company issued 705,361 shares of its common stock to
Oak Harbor Investments, in lieu of a $105,804 cash payment for interest and late
charges due through December 31, 2005 on promissory notes dated January and
March 2003, respectively.

All of the Company's assets are pledged as collateral for the above referenced
promissory notes issued to Mr. Vey and Oak Harbor Investments.

Mr. Vey was also entitled to appoint up to 30% of the members our Board of
Directors within 90 days after the date of the financing arrangement in March
2003. Ms. Looney, who is the sister of David Vey, was appointed to the Board in
2003 at the request of Mr. Vey. Mr. Vey's right to appoint the Board members was
extinguished as of February 2, 2004, when Mr. Vey elected to convert the above
referenced note into 10,000,000 shares of the Company's common stock.








                                       35
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)

In September 2003, the Company sold a licensing agreement to ACEncrypt
Solutions, LLC. The President of ACEncrypt Solutions, LLC, Victoria Looney, is a
member of the Board of Directors of SEDONA Corporation. David R. Vey, Chairman
of the Board of Directors of SEDONA Corporation also has a financial interest in
ACEncrypt Solutions. The total fee for the license agreement was $1,000,000,
which included delivery of the current version of Intarsia(R) plus the cost of
other contract defined milestones related to the development of derivative
products for the healthcare market. The Company recognized $475,000 of revenue
from this transaction in the third quarter of 2003 related to sale of
Intarsia(R), in accordance with SOP 97-2. The balance of the contract has been
recognized as revenue in 2004 based upon the delivery of the remaining
milestones in the agreement. The Company has also recognized $6,000 of services
revenue related to maintenance services in 2003. The balance of $19,000 has been
recognized as revenue in 2004 as services were performed.

In March 2002, the Company entered into an agreement to purchase substantially
all of the assets of Lead Factory, Inc. for a combination of stock warrants and
cash. Alyssa Dver, the Company's Chief Marketing Officer through December 2005
founded Lead Factory. The terms of the sale included issuance of 100,000,
ten-year warrants, at an exercise price of $0.72 per share upon the signing of
the agreement. The Company also accrued $50,000 in royalties earned under the
terms of the agreement during the third quarter of 2003. As of December 31,
2004, all royalty obligations have been satisfied. Lead Factory, a Boston-based
company which designs, builds, and markets computer software and services to aid
sales and marketing persons with customer prospecting, initially became a
partner in 2000 when SEDONA acquired a 10% equity interest, which interest the
Company had subsequently fully reserved. This purchase agreement supercedes all
earlier agreements with Lead Factory.


















                                       36
<PAGE>

                                     PART IV


ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

The following is a list of exhibits filed as part of this Annual Report on Form
10-KSB. Where indicated by footnote, exhibits, which have been previously filed,
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parenthesis.

3.1        Articles of Incorporation (2) (Exhibit 3.1)

3.2        Bylaws (2) (Exhibit 3.2)

3.3        Amendment to Articles of Incorporation (3)

4.1        Statement of Designation of Class A, Series F Convertible Preferred
           Stock (4) (Exhibit 4.0)

4.2        Certificate of Designations, Preferences and Rights of Class A,
           Series H Preferred Stock (5) (Exhibit 4.1)

4.3        5% Convertible Note due March 22, 2001 (8) (Exhibit 99.3)

10.1       Series F Convertible Preferred Stock and Warrants Purchase Agreement,
           dated May 24, 1999, by and between the Company, Oscar Tang,
           individually, and The Tang Fund (6) (Exhibit 4.0)

10.12      Convertible Notes and Warrants Purchase Agreement, dated November 22,
           2000 (7) (Exhibit 99.2)

10.22      Lease between Teachers Insurance and Annuity Association and the
           Company (9) (Exhibit 99.1)

10.25#     2000 Incentive Stock Plan (10) (Appendix A)

10.26#     2000 Employee Stock Purchase Plan (10) (Appendix B)

10.27#     Employment Agreement, dated September 15, 1999, between the Company
           and Marco A. Emrich (11) (Exhibit 10.1)

10.30      Shareholder/Investor Relations Compensation Agreement between the
           Company and Osprey Partners, dated January 3, 1997, with amendments
           dated January 27, 2000 and December 13, 2000 (14) (Exhibit 10.30)

10.31      Finder's Fee Agreement between the Company and Osprey Partners, dated
           February 24, 1999 (8) (Exhibit 10.31)

10.35      Warrant issued to Acxiom Corporation Dated April 4, 2001 (8) (Exhibit
           10.35)



                                       37
<PAGE>


ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
         (continued)

10.36      Form of Common Stock and Warrants Purchase Agreements used in August
           2001 to September 2002 private placements by and among the Company
           and the investors signatory thereto (12) (Exhibit 10.1)

10.37      Form of Registration Rights Agreements used in August 2001 to
           September 2002 private placements by and among the Company and the
           investors signatory thereto. (12) (Exhibit 10.2)

10.38      Form of Notes dated September and October 2001 by and among the
           Company and investors signatory thereto. (12) (Exhibit 10.3)

10.38      Form of Warrants issued to investors used in August 2001 to September
           2002 private sales of common stock and notes. (12) (Exhibit 10.4)

10.39      Agreement and related Promissory Note dated February 14, 2002 related
           to retirement of November 2000 Convertible Notes and Warrants. (13)

10.40      Agreement for purchase of assets of Lead Factory, Inc. dated March
           29, 2002. (13)

10.42      Convertible note dated December 6, 2002 (14)

10.43      Convertible note dated January 03, 2003 (14)

10.44      Convertible note dated January 10, 2003 (14)

10.45      Promissory note dated January 10, 2003 (14)

10.46      Convertible note dated March 13, 2003 (14)

10.47      Promissory note dated March 13, 2003 (14)

10.48      Addendum dated March 31, 2004 to Master Software License Agreement by
           and between the Company and Fiserv Solutions Inc. dated March 28,
           2002 (15)

10.49      Office lease agreement dated 12-24-02

10.47      Convertible note dated June 4, 2004 (16)

10.54      Convertible note by the Company in favor of David R. Vey dated June
           4, 2004 (16)

10.55      Convertible note by the Company in favor of David R. Vey dated July
           7, 2004 (17)

10.56      Convertible note by the Company in favor of David R. Vey dated
           September 15, 2004 (17)

10.57      Convertible note by the Company in favor of David R. Vey dated
           October 8, 2004 (17)

10.58      Convertible note by the Company in favor of David R. Vey dated
           November 18, 2004 (18)

10.59      Convertible note by the Company in favor of David R. Vey dated
           January 13, 2005 (19)

10.60      Convertible note by the Company in favor of David R. Vey dated
           January 31, 2005 (19)







                                       38
<PAGE>



ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
         (continued)

10.61      Convertible note by the Company in favor of David R. Vey dated March
           16, 2005 (19)

10.62#     Employment Agreement dated June 25, 2004 between Company and Marco A.
           Emrich (20)

10.63#     Employment Agreement dated July 7, 2004 between Company and Alyssa S.
           Dver (20)

10.64#     Employment Agreement dated July 20, 2004 between Company and Anita M.
           Primo (20)

10.65#     Employment Agreement dated July 20, 2004 between Company and Timothy
           Rimlinger (20)

10.66      Convertible note by the Company in favor of David R. Vey dated March
           25, 2005 (21)

10.67      Convertible note by the Company in favor of David R. Vey dated March
           30, 2005 (21)

10.68      Convertible note by the Company in favor of David R. Vey dated April
           14, 2005 (21)

10.69      Convertible note by the Company in favor of David R. Vey dated April
           22, 2005 (22)

10.70*     Amended Facility Lease for King of Prussia, PA dated January 1, 2005
           (24)

10.71*     Amended Facility Lease for Plymouth, MN dated January 1, 2005 (24)

10.72*     Convertible note by the Company in favor of David R. Vey dated
           December 6, 2005(24)

10.73*     Convertible note by the Company in favor of David R. Vey dated
           December 6, 2005(24)

10.74*     Convertible note by the Company in favor of David R. Vey dated
           December 6, 2005(24)

10.75*     Convertible note by the Company in favor of David R. Vey dated
           December 6, 2005(24)

10.76*     Convertible note and related documents by the Company in favor of
           William J. Rucks dated July 1, 2005, August 1, 2005 and September 30,
           2005 (23)(24)

14.1       Code of Conduct and Business Ethics, adopted by Board of Directors,
           June 21, 2004 (20)

23.1       Consent of McGladrey & Pullen, LLP

31.1*      Statement Under Oath of Principal Executive Officer of the Company
           Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2*      Statement Under Oath of Principal Financial Officer of the Company
           Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1*      Statement Under Oath of Principal Executive Officer of the Company
           Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2*      Statement Under Oath of Principal Financial Officer of the Company
           Pursuant to Section 906 of Sarbanes-Oxley Act of 2002









                                       39
<PAGE>

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
         (continued)

99.1*      Amendment to Compensation Plan for Directors

--------------------------------------------------------------------------------

*          Filed herewith.
#          Executive Compensation Plans and Arrangements.


(1)        Filed as an Exhibit to the Registration Statement on Form S-3, filed
           May 23, 2000 (File No. 333-37678).

(2)        Filed as an Exhibit to the Company's Current report on Form 8-K,
           dated June 15, 1992.

(3)        Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
           year ended December 31, 1995.

(4)        Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended March 31, 1999.

(5)        Filed as an Exhibit to the Registration Statement on Form S-3 filed
           June 5, 2000 (File No. 333-38578).

(6)        Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended June 30, 1999.

(7)        Filed as an Exhibit to the Current Report on Form 8-K filed November
           28, 2000.

(8)        Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
           year ended December 31, 2000.

(9)        Filed as an Exhibit to the Current Report on Form 8-K filed August
           31, 2000.

(10)       Filed as an Appendix to the Company's Definitive Proxy Statement for
           the 2000 Annual Meeting of Shareholders filed May 17, 2000.

(11)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended September 30, 1999.

(12)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended September 30, 2001.

(13)       Filed as an Exhibit to the Annual Report on Form 10-K for fiscal year
           ended December 31, 2001.

(14)       Filed as an Exhibit to the Annual Report on Form 10-K/A for the
           fiscal year ended December 31, 2002.

(15)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended March 31, 2004.

(16)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended June 30, 2004.






                                       40
<PAGE>


ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
         (continued)

(17)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended September 30, 2004.

(18)       Filed as an Exhibit to the 8-K on November 24, 2005.

(19)       Filed as an Exhibit to the 8-K on March 17, 2005.

(20)       Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
           year ended December 31, 2004.

(21)       Filed as an Exhibit to the 8-K on April 19, 2005.

(22)       Filed as an Exhibit to the 8-K on April 27, 2005.

(23)       Filed as an Exhibit to the 8-K on July 11, 2005.

(24)*      Filed as an Exhibit to the Annual Report on Form 10-KSB for the
           fiscal year ended December 31, 2005.






















                                       41
<PAGE>


 ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES



---------------------------------------- -------------------- ------------------
TYPE OF SERVICE                                 2005                   2004
---------------------------------------- -------------------- ------------------
AUDIT FEES                                      $95,065               $95,554
---------------------------------------- -------------------- ------------------
AUDIT-RELATED FEES                                   --                 6,386
---------------------------------------- -------------------- ------------------
TAX FEES                                        $10,475                31,150
---------------------------------------- -------------------- ------------------
ALL OTHER FEES                                       --                    --
---------------------------------------- -------------------- ------------------

Audit Fees. This category includes: the audit of the Company's Annual Financial
Statements; the timely review of the interim financial statements included in
the Company's quarterly reports on Form 10-Q for the periods ended March 31,
June 30 and September 30, 2005 and 2004; and services that are normally provided
by the independent auditors in connection with engagements for those fiscal
periods. This category may also include advice on audit and accounting matters
that arose during, or as a result of, the audit or review of interim financial
statements. This category also includes services in connection with statutory
and regulatory filings or engagements.

Audit-Related Fees. This category consists of assurance and related services by
the independent auditors that are reasonably related to the performance of the
audit or review of the Company's financial statements and are not reported above
under "Audit Fees". The services for the fees disclosed under this category
include financial information systems design and implementation services
rendered by the independent auditor.

Tax Fees. This category consists of professional services rendered by the
independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.

All Other Fees. This category includes services rendered by the independent
auditors other than for services reported above.

PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES

All audit and non-audit services provided by McGladrey & Pullen LLP to the
Company are pre-approved by the Audit Committee. The Audit Committee utilizes
the following procedures in pre-approving all audit and non-audit services. At
or before the first meeting of the Audit Committee each year, the Audit
Committee is presented with a proposal of the cost for audit and non-audit
services expected to be performed by McGladrey & Pullen LLP during the year.
Quarterly, the Audit Committee is presented with the total fees assessed for
such services during the quarter with a comparison to the amounts previously
presented. An explanation of any variances is presented, if necessary. The Audit
Committee is also presented with an update of any new audit or non-audit
services to be performed. The Audit Committee reviews the update and approves
the services outlined therein if such services are acceptable to the Audit
Committee.

To ensure the prompt response of any unexpected matters, the Audit Committee may
delegate to a designated member or members of the Audit Committee the authority
to amend or modify the audit and non-audit services and fees; provided however,
that such additional or amended services may not affect McGladrey & Pullen LLP's
independence under applicable SEC rules. The member or members off the Audit
Committee must report any such action taken to the Audit Committee at its next
scheduled meeting.

All audit and non-audit related services and fees in fiscal year 2005 were
pre-approved by the Audit Committee.








                                       42
<PAGE>



SIGNATURES


Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                           SEDONA CORPORATION

April 14, 2006                             /S/ Marco A. Emrich
--------------                             -------------------
DATE                                       Marco A. Emrich
                                           Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures
----------
<S>        <C>                                                                 <C>
BY /S/     David R. Vey                                                        Date April 14, 2006
           ------------------------------------------------------              ----------------------
           David R. Vey
           Chairman of the Board

BY /S/     Marco A. Emrich                                                     Date  April 14, 2006
           ---------------------------------------------------                 ----------------------
           Marco A. Emrich
           President, Chief Executive Officer and
           Director

BY /S/     David C. Bluestone                                                  Date  April 14, 2006
           --------------------------------------------------                  ----------------------
           David C. Bluestone
           Director

BY /S/     Scott C. Edelman                                                    Date  April 14, 2006
           --------------------------------------------------                  ----------------------
           Scott C. Edelman
           Director

BY /S/     Victoria V. Looney                                                  Date  April 14, 2006
           ---------------------------------------------------                 ----------------------
           Victoria V. Looney
           Director

BY /S/     Jack A. Pellicci                                                    Date  April 14, 2006
           ------------------------------------------------------              ----------------------
           Jack A. Pellicci
           Director

BY /S/     Anita M. Primo                                                      Date  April 14, 2006
           ----------------------------------------------------                ----------------------
           Anita M. Primo
           Chief Financial Officer and Vice President
           Principal Financial and Accounting Officer

BY /S/     Roger W. Scearce                                                    Date  April 14, 2006
           ---------------------------------------------------                 ----------------------
           Roger W. Scearce
           Director
</TABLE>






                                       43
<PAGE>

                   Index to Financial Statements and Schedule



                                    Contents



Report of Independent Registered Public Accounting Firm......................F-2

Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2005 and 2004.................F-3
Consolidated Statements of Operations for each of the
     two years in the period ended December 31, 2005.........................F-4
Consolidated Statements of Stockholders' Deficit for each of the
     two years in the period ended December 31, 2005.........................F-5
Consolidated Statements of Cash Flows for each of the
     two years in the period ended December 31, 2005.........................F-7
Notes to Consolidated Financial Statements...................................F-8

All other schedules have been omitted because they are inapplicable, not
required, or the required information is included elsewhere in the financial
statements and notes thereto.



















                                       F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
SEDONA Corporation
King of Prussia, Pennsylvania

We have audited the accompanying consolidated balance sheets of SEDONA
Corporation and its subsidiary as of December 31, 2005 and December 31, 2004,
and the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SEDONA Corporation
and its subsidiary as of December 31, 2005 and December 31, 2004, and the
results of their operations and their cash flows for each of the two years in
the period then ended in conformity with US generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that SEDONA
Corporation will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred substantial
operating losses, has negative working capital and stockholders' equity and
anticipates that it will require additional debt and/or equity financing in
2006, which may not be readily available. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
relating to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.


                                                /s/ McGladrey & Pullen, LLP

Bethesda, Maryland
March 25, 2006





                                       F-2
<PAGE>
<TABLE>
<CAPTION>
                                     SEDONA CORPORATION AND SUBSIDIARY
                                        CONSOLIDATED BALANCE SHEETS
                              (In Thousands, Except Share and Per Share Data)

                                                                                        DECEMBER 31,
ASSETS                                                                              2005           2004
<S>                                                                               <C>             <C>
Current assets:
   Cash and cash equivalents                                                      $     51        $    138
   Accounts receivable, net of allowance for doubtful accounts of $0                   254             334
   and $0
   Prepaid expenses and other current assets                                           124             145
                                                                                  ------------------------
Total current assets                                                                   429             617
                                                                                  ------------------------
Accounts receivable, non-current                                                        63               -
Property and equipment, net of accumulated depreciation and
amortization                                                                            25              21
Non-current assets - other                                                               3               3
                                                                                  ------------------------
Total non-current assets                                                                91              24
                                                                                  ------------------------
Total assets                                                                      $    520        $    641
                                                                                  ========================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                               $    263        $    166
   Accrued expenses and other current liabilities                                      668             584
   Deferred revenue                                                                    554             517
   Current maturities of long-term debt                                                961               8
   Interest payable on current maturities of long-term debt                            267              78
   Interest payable with common stock                                                  292               -
   Short-term debt - notes                                                           3,435           2,470
                                                                                  ------------------------
Total current liabilities                                                            6,440           3,823

Long-term debt, less current maturities                                              1,000             953
Interest payable                                                                         -             123
Deferred revenue                                                                        63               -
                                                                                  ------------------------
Total long-term liabilities                                                          1,063           1,076
                                                                                  ------------------------
Total liabilities                                                                    7,503           4,899
                                                                                  ------------------------

Stockholders' deficit:
Class A convertible preferred stock (Liquidation preference $2,500)
   Authorized shares - 1,000,000
   Series A, par value $2.00, Issued and outstanding - 500,000                       1,000           1,000
   Series H, par value $2.00, Issued and outstanding shares - 1,500                  1,500           1,500

Common stock, par value $0.001
   Authorized shares -175,000,000, Issued and outstanding shares -
    87,324,334 and 86,640,561 in 2005 and 2004, respectively                            87              86
   Additional paid-in-capital                                                       60,646          60,478
   Accumulated deficit                                                             (70,216)        (67,322)
                                                                                  ------------------------
Total stockholders' deficit                                                         (6,983)        (4,258)
                                                                                  ------------------------
Total liabilities and stockholders' deficit                                       $    520        $    641
                                                                                  ========================
</TABLE>


See accompanying notes.








                                       F-3
<PAGE>

<TABLE>
<CAPTION>
                                   SEDONA CORPORATION AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF OPERATIONS
                            (In Thousands, Except Share and Per Share Data)

                                                                     --------------------------------
                                                                       FOR YEARS ENDED DECEMBER 31,
                                                                     --------------------------------
                                                                        2005                2004
                                                                     --------------------------------
<S>                                                                  <C>                  <C>
REVENUES:
   Product licenses - unrelated parties                              $       159          $       345
   Services-unrelated parties                                                564                  223
   Services- related parties                                                   -                  519
                                                                     --------------------------------
Total revenues                                                               723                1,087
COST OF REVENUES:
   Product licenses                                                           28                  351
   Services                                                                  220                   76
                                                                     --------------------------------
Total cost of revenues                                                       248                  427
                                                                     --------------------------------
Gross profit                                                                 475                  660
EXPENSES:
   General and administrative                                              1,442                1,665
   Sales and marketing                                                       638                  429
   Research and development                                                  912                1,102
                                                                     --------------------------------
Total operating expenses                                                   2,992                3,196
                                                                     --------------------------------
LOSS FROM OPERATIONS                                                      (2,517)              (2,536)
                                                                     --------------------------------
OTHER INCOME (EXPENSE):
   Interest expense                                                         (368)                (258)
   Convertible debenture expense                                               -                 (123)
   Other                                                                      (9)                  (5)
                                                                     --------------------------------
Total other expenses                                                        (377)                (386)
                                                                     --------------------------------

Net Loss                                                                  (2,894)              (2,922)
Deemed dividends applicable to preferred stockholders                       (270)                (299)
                                                                     --------------------------------
Loss applicable to Common Stockholders                               $    (3,164)         $    (3,221)
                                                                     ================================

Basic and diluted net loss per share applicable to common
shares                                                               $     (0.04)          $    (0.04)
                                                                     ================================

Basic and diluted weighted average common shares
outstanding                                                           86,959,403           79,257,088
                                                                     ================================
</TABLE>

See accompanying notes.








                                       F-4
<PAGE>
<TABLE>
<CAPTION>
                                     SEDONA CORPORATION AND SUBSIDIARY
                             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                     (In Thousands, Except Share Data)

                                                                -----------------------------------------
                                                                   STOCK SERIES A      STOCK SERIES H
                                                                  Shares    Amount    Shares    Amount
                                                                -----------------------------------------
<S>                                                             <C>          <C>      <C>       <C>
                                                                -----------------------------------------
Balance, December 31, 2003                                         500,000   $ 1,000     1,500     $1,500
                                                                =========================================

Common stock issued for consulting services                              -         -         -         -
Common stock issued for legal expenses related to litigation             -         -         -         -
Conversion of debenture into common stock                                -         -         -         -
Exercise of common stock warrants                                        -         -         -         -
Issuance of common stock                                                 -         -         -         -
Conversion of preferred stock and related dividends into common          -         -         -         -
stock
Fair value of options & warrants                                         -         -         -         -
Fair value of convertible feature of debentures                          -         -         -         -
Preferred stock dividends                                                -         -         -         -
Net loss, year ended December 31, 2004                                   -         -         -         -
                                                                -----------------------------------------
Balance, December 31, 2004                                         500,000   $ 1,000     1,500     $1,500
                                                                =========================================

Common stock issued for consulting services                              -         -         -         -
Common stock issued for legal expenses related to litigation             -         -         -         -
Conversion of debenture into common stock                                -         -         -         -
Exercise of common stock warrants                                        -         -         -         -
Common stock issued for employee profit sharing contribution             -         -         -         -
Conversion of preferred stock and related dividends into common          -         -         -         -
stock
Fair value of options & warrants                                         -         -         -         -
Fair value of convertible feature of debentures                          -         -         -         -
Preferred stock dividends                                                -         -         -         -
Net loss, year ended December 31, 2005                                   -         -         -         -
                                                                -----------------------------------------
Balance, December 31, 2005                                         500,000   $ 1,000     1,500     $1,500
                                                                =========================================
</TABLE>

See accompanying notes.



                                       F-5
<PAGE>


<TABLE>
<CAPTION>

                                              SEDONA CORPORATION AND SUBSIDIARY
                                       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                              (In Thousands, Except Share Data)

                                                                ------------------------------------------------------------
                                                                                                  ADDITIONAL
                                                                        COMMON STOCK               PAID-IN      ACCUMULATED
                                                                       Shares         Amount       CAPITAL        DEFICIT
                                                                ------------------------------------------------------------
<S>                                                              <C>                  <C>         <C>           <C>
Balance, December 31, 2003                                           61,131,513        $  61      $ 58,551       $ (64,400)
                                                                ============================================================

Common stock issued for consulting services                              92,735            -            30                -
Common stock issued for legal expenses related to
litigation                                                              228,562            -            73                -
Conversion of debenture into common stock                            21,975,318           22           623                -
Exercise of common stock warrants                                       200,000            -           100                -
Issuance of common stock                                              1,834,044            2           855                -
Common stock issued for accrued interest expense on
convertible notes                                                     1,042,164            1           207                -
Common stock issued for employee stock purchase plan                    136,225            -            23                -
Fair value of options & warrants                                              -            -            16                -
Net loss, year ended December 31, 2004                                        -            -             -          (2,922)
                                                                ------------------------------------------------------------
Balance, December 31, 2004                                           86,640,561        $  86       $60,478        $(67,322)
                                                                ============================================================

Common stock issued for consulting services                             150,032            -            37                -
Common stock issued for legal expenses related to
litigation                                                              272,431            1            60                -
Issuance of common stock                                                122,732            -            39                -
Common stock issued for employee stock purchase plan                    138,578            -            24                -
Fair value of options & warrants                                              -            -             8                -
Net loss, year ended December 31, 2005                                        -            -             -          (2,894)
                                                                ------------------------------------------------------------
Balance, December 31, 2005                                          87,324, 334        $  87       $60,646       $ (70,216)
                                                                ============================================================
</TABLE>

See accompanying notes.










                                       F-6
<PAGE>
<TABLE>
<CAPTION>
                                SEDONA CORPORATION AND SUBSIDIARY
                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                          (In Thousands)

                                                                        YEAR ENDED DECEMBER 31
                                                                         2005            2004
                                                                       -------------------------
<S>                                                                    <C>              <C>
OPERATING ACTIVITIES:
Net loss                                                               $  (2,894)       $ (2,922)
Adjustments to reconcile net loss to net cash used in operating
activities:
   Depreciation                                                               19              47
   Amortization                                                                -             351
   Charge for employer 401(K) stock contribution                              39              55
   Common stock issued for legal and consulting services                      97             103
   Charge for option or warrant based compensation                             8              16
   Amortization of deferred financing fees and debt discount                   -             123
Changes in operating assets and liabilities:
   Accounts receivable                                                        17           (155)
   Prepaid expenses and other current assets                                  21             (7)
   Other non-current assets                                                    -              36
   Accounts payable and accrued expenses                                     539              25
   Deferred revenue                                                          100             203
                                                                       -------------------------
Net cash used in operating activities                                     (2,054)         (2,125)

INVESTING ACTIVITIES:
Purchase of property and equipment                                           (22)             (2)
                                                                       -------------------------
Net cash used in investing activities                                        (22)             (2)

FINANCING ACTIVITIES:
Repayments of long-term obligations                                            -            (12)
Issuance of common stock, net                                                 24             823
Proceeds from exercise of common stock warrants/options                        -             100
Proceeds from issuance of short-term debenture and notes                   1,965           1,295
                                                                       -------------------------
Net cash provided by financing activities                                  1,989           2,206
                                                                       -------------------------
Net increase (decrease) in cash and cash equivalents                         (87)             79
Cash and cash equivalents, beginning of year                                 138              59
                                                                       -------------------------
Cash and cash equivalents, end of year                                 $      51        $    138
                                                                       =========================
</TABLE>

See accompanying notes.






                                       F-7
<PAGE>

                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


                     Years ended December 31, 2005 and 2004

1. Accounting Policies

Description of Business

SEDONA is a software application and services provider that develops and markets
web-based, vertical Customer Relationship Management (CRM) solutions to small
and mid-size businesses (SMBs). The Company's CRM application solution,
Intarsia(R), enables SMBs to increase the profitability of their customer
portfolio and enhance shareholder value. The Company has strategically targeted
small to mid-size financial services organizations as the first vertical market
to introduce its leading CRM application solution including community and
regional banks, credit unions and insurance companies.

As of December 2002, SEDONA sold its existing customer base and related services
to Fiserv Customer Contact Solutions, allowing the Company to focus on its end
user indirect business model and providing users of Intarsia(R) with Fiserv's
resources to support and grow the Intarsia(R) product line. However, as a result
of the Company's decision to re-establish a direct sales channel, beginning
January 2005, SEDONA re-signed maintenance agreements with several customers
from the Fiserv CCS business unit. The agreements were re-signed during December
2004 and SEDONA began providing services under the maintenance agreements in
January 2005.

As of December 31, 2002, SEDONA has implemented an indirect sales distribution
model, under which the Company licenses its CRM technology to Third Party
Alliance Partners (TPAP), who market, sell, distribute and support SEDONA's
technology either as a component of the Company's TPAP total solution or as a
standalone offering.

Basis of Financial Statement Presentation

The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustment that might
be necessary should the Company be unable to continue in existence. In addition
to the loss of ($2,894,000) in 2005, the Company has incurred net losses of
approximately ($2,922,000) during the year ended December 31, 2004. The
Company's liabilities also exceed its assets by $6,983,000 at December 31, 2005.
These factors raise substantial doubt about our ability to continue as a going
concern.

The Company will require additional working capital over the next twelve months.
The capital requirements will depend on many factors, including, the Company's
rate of revenue growth, the expansion of its marketing and sales activities, the
timing and extent of spending to support product development efforts and
expansion into new vertical markets and the continuing market acceptance of its
services. The Company's plans include expanding the penetration and acceptance
of its CRM technology into the Company's existing indirect sales distribution
channel and pursuing targeted direct sales opportunities for marketing and
selling its CRM application into vertical markets. Subsequent to year-end the
Company expects to receive proceeds of $600,000 from the issuance of long-term
convertible debentures and plans to raise additional funds through public or
private equity or debt financing to support the implementation of its
operational plan. There can be no assurances however that the Company will be
able to succeed in its plans to obtain such financing.





                                       F-8
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements

1. Accounting Policies (continued)

Principles of Consolidation

The Company's consolidated financial statements include the accounts of its
wholly owned subsidiary, SEDONA(R)GeoServices, Inc. All significant
inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Financial Statement Presentation

Certain reclassifications have been made to the 2004 financial statement
presentation to conform to the 2005 presentation. These reclassifications have
no effect on the previously reported net loss.

Cash and Cash Equivalents

The Company considers all unencumbered highly liquid investments with maturities
of three months or less when purchased to be cash equivalents.

Accounts Receivable

Trade receivables are generated primarily from our customers and alliance
partners. Receivables are carried at original invoice amount less an estimate
made for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. A valuation allowance is provided for known and anticipated
credit losses, as determined by Management in the course of regularly evaluating
individual customer receivables. Receivables are written off when deemed
uncollectible. Recoveries of receivables previously written off are recorded
when received. As of December 31, 2005 and 2004, accounts receivable include
$135,190 for 2006 maintenance services which is included with deferred revenue
and $302,600 for the 2005 maintenance services, respectively. The amount will be
amortized over the maintenance period and recognized as revenue on a monthly
basis in the upcoming year.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
respective assets, which range from three to seven years.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to credit risk,
consist of cash equivalents, accounts receivable and notes receivable. The
Company's policy is to limit the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as being
creditworthy. Concentration of credit risk, with respect to accounts and notes
receivable, is limited due to the Company's credit evaluation process. The
Company does not generally require collateral from its customers. The Company's
customers consist primarily of corporate entities.







                                       F-9
<PAGE>

                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements

1. Accounting Policies (continued)

Fair Value of Financial Instruments

The carrying amounts reported in the balance sheets for cash, accounts and notes
receivable, accounts payable and short-term debt approximate fair value because
of the immediate or short-term maturity of these financial instruments. The
carrying amounts of the Company's long-term debt is also estimated to
approximate fair value due to the relatively short maturity period and interest
rate being charged.

Software Development and Purchased Software Costs

Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. All costs incurred in the
research and development of new software products are expensed as incurred until
technological feasibility has been established. The costs incurred for testing
and coding of the new software products are capitalized. Amortization of such
costs is the greater of the amount capitalized using (a) the ratio that current
gross revenues for a product bear to the total of current and anticipated future
gross revenues of that product or (b) the straight-line method over the
remaining estimated economic life of the product not to exceed three years.
Amortization commences when the product is available for general release to
customers. The Company capitalizes costs related to purchased software used for
developmental purposes and amortizes such value over three years consistent with
the amortization and capitalization policy discussed above related to
capitalized software costs.

The Company periodically reviews for impairment the carrying value of both
internally developed and purchased software costs. The Company will record
impairment in its operating results if the carrying value exceeds the future
estimated undiscounted cash flows of the related assets.

During 2005 and 2004, the Company capitalized no software development costs
related to the Company's Intarsia(R) business application solution software.
During 2005 and 2004, $0, and $351,000, respectively, were charged to expense
relating to amortization of software development costs.

Revenue Recognition

Revenue Recognition

The Company's software arrangements currently consist of license fees,
installation services and maintenance. The Company has established vendor
specific objective evidence (VSOE) of fair value for its maintenance contracts
based on the price of renewals of existing maintenance contracts. The remaining
value of the software arrangement is allocated to license fee and professional
services based on contractual terms agreed upon by the customer and based on
Company-maintained list prices.








                                      F-10
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements

1. Accounting Policies (continued)

Product License Revenue

Revenues from the sale of product licenses are recognized upon delivery and
acceptance of the software when persuasive evidence of an arrangement exists,
collection is probable and the fee is fixed or determinable. Since the Company's
software product can be implemented on the Company's customers' systems without
significant alterations to the features and the functionality of the software,
or without significant interfacing, the Company's license agreements are written
so that formal written acceptance of the product is received when installation
is complete. Therefore, the timing of license fee revenue recognition coincides
with the completion of the installation and acceptance of the software by the
customer.

The Company primarily utilizes an indirect sales model by distributing its
product through its third-party alliance partners (TPAP), for which the Company
receives a royalty payment based on a percentage of the license fee charged by
the TPAP. The royalty fee is recognized by SEDONA when the Company receives
written acknowledgement from the TPAP that royalties have been earned and monies
are owed to SEDONA. In addition, the Company also sells directly to banks and
credit unions. The license fee is recognized by SEDONA in the same manner as the
indirect sales model, whereas license fee revenue is recognized when the Company
receives written acknowledgement from their customer that the license fee has
been earned and monies are owed to SEDONA. For the year ended December 31, 2005,
$159,000 of total product license revenue was recognized compared to $345,000 in
the year ended December 31, 2004.


Services Revenue

Services revenue includes revenue from professional services (primarily
installation and training services) and maintenance revenue over periods not
exceeding one year. Installation service revenue, which consists of
implementation planning, hardware and software set-up, data integration
including data aggregation, conversion, cleansing and analysis, and testing and
quality assurance, is accounted for as a separate element of a software
arrangement. Additionally, in certain circumstances, the Company may partner
with third parties to implement its software. In those instances, the
contractual fee for professional services may be paid directly from the customer
to the third party, and the Company recognizes the license fee revenue component
upon installation and acceptance by the customer.

     o   Installation revenue is recognized upon completed installation and
         customer acceptance and is based on a contractual hourly rate. Training
         revenue is not a material element of a contract and revenue is
         recognized as training services are provided.

     o   Maintenance revenue is recognized ratably over the life of the related
         contract. The Company establishes the value of maintenance revenue
         based on the price quoted and received for renewals of existing
         maintenance contracts. Typically, maintenance contracts are entered
         into for initial three-year terms and are renewable annually
         thereafter.

For the year ended December 31, 2005, $564,000 of related and unrelated service
revenue was recognized compared to $742,000 in the year ended December 31, 2004.








                                      F-11
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements

1. Accounting Policies (continued)

Income Taxes

The Company accounts for income taxes under the liability method. Deferred tax
liabilities are recognized for taxable temporary differences and deferred tax
assets are recognized for deductible temporary differences and tax loss and
credit carryforwards. A valuation allowance is established to reduce deferred
tax assets if some, or all, of such deferred tax assets are not likely to be
realized.

Net Loss Per Common Share

Basic loss per share is calculated by dividing the net loss applicable to common
stockholders by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing the net loss by the
weighted average common shares outstanding plus the dilutive effect of stock
options, warrants and convertible securities. As the Company incurred losses in
2005 and 2004, the effect of stock options, warrants and convertible securities
were anti-dilutive and were therefore not included in the calculation of diluted
earnings per share.

Stock-Based Compensation

The Company uses the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations for its stock option plans. Accordingly, compensation cost
related to option grants to employees is measured as the excess, if any, of the
fair value of the Company's shares at the date of the grant over the option
exercise price and such cost is charged to operations over the related option
vesting period. SFAS No. 123, Accounting for Stock-Based Compensation, requires
that companies record compensation cost for equity-based compensation to
non-employees based on fair values. Accordingly the Company records compensation
cost for options granted to non-employees using a fair value based method over
the related option vesting period.

SFAS No. 123 requires the disclosure of pro forma net income (loss) and earnings
(loss) per share had the Company adopted the fair value method since the
Company's inception. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. If the computed values of the Company's
stock-based awards to employees had been amortized to expense over the vesting
period of the awards, net loss would have been (in thousands, except per unit
information):

------------------------------- --------------------------------
                                    YEAR ENDED DECEMBER 31,
                                --------------------------------
                                     2005             2004
------------------------------- ---------------- ---------------
Net loss
    As reported                    $ (2,894)       $ (2,922)
    Pro forma                      $ (3,066)       $ (2,973)
------------------------------- ---------------- ---------------
Net loss applicable to
common shares
    As reported                    $ (0.03)         $ (0.04)
    Pro forma                      $ (0.04)         $ (0.04)
------------------------------- ---------------- ---------------










                                      F-12
<PAGE>

                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


1. Accounting Policies (continued)

Assumptions used in calculating the fair value of the options and warrants
granted in 2005 and 2004 are as follows:

---------------------------------- --------------------- -------------------
                                           2005                 2004
---------------------------------- --------------------- -------------------
Risk-free interest rate:              3.71% - 4.39%        1.67% - 4.27%
---------------------------------- --------------------- -------------------
Expected average volatility:               102%                 114%
---------------------------------- --------------------- -------------------
Expected holding period:                3-10 years           2-10 years
---------------------------------- --------------------- -------------------
Expected dividend yield:                    0%                   0%
---------------------------------- --------------------- -------------------

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) revised the
previously issued Statement No. 123, Share Based Payment (Statement No. 123(R)).
The objective of Statement No. 123(R) is to improve financial reporting by
requiring all share based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
value. As permitted by Statement No. 123, the Company currently accounts for
share-based payments to employees using APB No. 25's intrinsic value method and,
as such, generally recognizes no compensation cost for employee stock options
Accordingly, the adoption of Statement 123(R)'s fair value method may have an
impact on the Company's results of operations, although it will have no impact
on the overall financial position.

Statement No. 123(R) allows for two adoption methods:

o    The modified prospective method which requires companies to recognize
compensation cost beginning with the effective date of adoption based on (a) the
requirements of Statement No. 123(R) for all share-based payments granted after
the effective date of adoption and (b) the requirements of Statement No. 123(R)
for all awards granted to employees prior to the effective date of adoption that
remain unvested on the date of adoption; or

o    The modified retrospective method which includes the requirements of the
modified prospective method described above, but also requires restatement of
prior period financial statements using amounts previously disclosed under the
pro forma provisions of Statement No. 123.

The Company currently plans to use the modified prospective method to recognize
compensation cost beginning in January 2006. The impact of adoption of Statement
No. 123(R) will depend on levels of share-based payment granted in the future.
However, had the Company adopted Statement No. 123(R) in prior periods, the
impact of that standard would have approximated the impact of Statement No 123
as described in the disclosure of pro forma net loss and loss per share in Note
1 to the financial statements. The Company currently anticipates that the impact
of adopting Statement No 123(R) will result in recording approximately $165,000
of stock compensation expense in 2006, but such amount could fluctuate depending
on the levels of share-based payments granted.

In May 2005, the FASB issued Statement No 154, Accounting Changes and Error
Corrections- A Replacement of APB Opinion No. 20 and FASB Statement No. 3
(Statement No. 154.) Statement No. 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Statement No.
154 requires retrospective application for any change in accounting principle to
prior periods' financial statements. Statement No. 154 is effective for the
first fiscal period beginning after December 15, 2005. The Company does not
expect the implementation of Statement No. 154 to have a significant impact on
its consolidated financial statements.








                                      F-13
<PAGE>



                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements

1. Accounting Policies (continued)

Segment Information

The Company is organized and operates as one operating segment wherein it
develops and markets web-based, vertical customer relationship management (CRM)
solutions for small and medium sized businesses and uses one measure of
profitability to manage its business. In accordance with FASB Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS No.
131"), the chief operating decision-maker has been identified as the President
and Chief Executive Officer, who reviews operating results to make decisions
about allocating resources and assessing performance for the entire company.
Since the Company operates in one segment and provides one group of similar
products and services, all financial segment and product line information
required by SFAS No. 131 can be found in the consolidated financial statements.
Major customer and geographic area revenue disclosures are presented in Note 15.

2. Property and Equipment

Property and equipment consist of the following (in thousands, except per unit
information):
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                          2005            2004
                                                                 -------------------------------
         <S>                                                     <C>                  <C>
         Machinery and equipment                                         $  76        $  1,005
         Furniture and fixtures                                              -              13
         Leasehold improvements                                             15              33
         Purchased software for internal use                                31             177
                                                                 -------------------------------
                                                                           122           1,228
         Less accumulated depreciation and amortization                     97           1,207
                                                                 -------------------------------
                                                                         $  25          $   21
                                                                 ===============================
</TABLE>

3. Long-Term Debt

Long-term debt consists of obligations with original maturities of one year or
more, as follows (in thousands, except per unit information):
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                          2005            2004
                                                                 -------------------------------
         <S>                                                             <C>           <C>
         Note payable - CIMS acquisition Due 2006 (Note 14)             $  953          $  953

         Note payable - Due July 2007                                    1,000               -
         Interest payable                                                    -             123
         Capital lease obligations (Note 10)                                 8               8
         Deferred revenue                                                   63               -
                                                                 -------------------------------
                                                                         2,024           1,084
         Less current maturities                                           961               8
                                                                 -------------------------------
         Long-term debt                                                 $1,063          $1,076
                                                                 ===============================
</TABLE>








                                      F-14
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


4. Convertible Notes

Material Investor
-----------------
As described below, during the period December 2002 through March 25, 2006, the
Company entered into the following transactions with a single investor, Mr.
David R. Vey, that, on an if- converted basis, gave Mr. Vey a 44% ownership
interest in the Company. In March 2003, Mr. Vey became a member of the Board of
Directors. He was appointed Chairman of the Board of Directors in May 2003.

In December 2002, Mr. Vey committed to fund a total of $1,420,000. The payments
were made available to the Company on various funding dates through March 2003.
In December 2002, the Company received proceeds of $100,000 in the form of a
convertible note. In January 2003, the Company received proceeds of $820,000 in
the form of a $220,000 convertible note and a $600,000 promissory note. The
promissory note accrued interest at a rate of 7% and matured on January 15,
2004. The convertible notes accrued interest at rates ranging from 7% to 8% and
were convertible at the option of Mr. Vey into 13,000,000 shares of Company
common stock. The notes matured at various dates in December 2003 and January
2004. In January 2004, Mr. Vey elected to convert the above referenced notes
into 13,000,000 shares of the Company's common stock of which 3,000,000 shares
were received upon conversion by December 31, 2003.

Additionally, the Company received $500,000 in March 2003, in the form of a
$400,000 promissory note and a $100,000 convertible note. These instruments have
terms similar to those of the earlier investment, and matured in March 2004. The
note was convertible into 10,000,000 shares of the Company's common stock. As of
February 2, 2004, Mr. Vey elected to convert the above referenced notes into an
additional 10,000,000 shares of the Company's common stock.

The Company has accounted for the value of the conversion feature of these
instruments, which was limited to the amount of aggregate proceeds received of
$1,420,000 ($100,000 in December 2002 and $1,320,000 in January and March 2003),
as additional paid in capital and debt discount. This amount was accreted over
the life of the promissory and term notes as additional interest expense.
Expense recognized for the years ended December 31, 2004 and 2003 was $123,000
and $1,290,000, respectively. There was no expense related to this conversion
feature for the year ended December 31, 2005, as it had been fully expensed in
prior years.

During 2002, the Company issued to a third party as a finder's fee in lieu of
cash fees, 1,610,000 warrants at a price of $0.40 per share for the above equity
transactions and repriced a prior warrant to purchase 150,000 shares from $1.50
per share to $0.10 per share.

From June 2003 through December 2003, the Company received $620,000 in proceeds
and issued 8% convertible notes. The notes were issued for a one-year term and
are convertible at the option of Mr. Vey at various dates from June 2004 to
December 2004 into 2,699,219 shares of the Company's common stock. In October
2004, the Company issued 1,975,318 shares of its common stock to Mr. David Vey
who elected to convert $445,000 of the above referenced convertible notes into
Company common stock. The remaining $175,000 of convertible notes remains
outstanding as of December 31, 2005.








                                      F-15
<PAGE>



                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


4. Convertible Notes (continued)

In June 2003, Mr. Vey exercised a warrant received in August 2002, as part of a
private placement transaction, to purchase 500,000 shares of the Company's
common stock at an exercise price of $0.35 per share providing $175,000 in
proceeds.

In January 2004, Mr. Vey purchased 212,766 shares of the Company's common stock
for $100,000 in a private placement transaction. He was also granted common
stock warrants to purchase an additional 106,383 shares of the Company's common
stock at an exercise price of $0.70 per share.

From January 1, 2004 through December 31, 2004, the Company received $1,295,000
in proceeds and issued 8% convertible notes to David R. Vey. The notes were
issued for a one- year term and are convertible at the option of Mr. Vey at
various dates from June 2005 to November 2005 into 4,784,880 shares of the
Company's common stock.

In December 2004, the Company issued an aggregate of 69,125 shares of its common
stock to Richard T. Hartley and David R. Vey in lieu of $13,825 cash payment for
interest due through September 30, 2004 on convertible notes dated January and
March 2003. The Company also issued 295,589 shares to David R. Vey in lieu of
$59,117 cash payment for interest due through September 30, 2004 on convertible
notes dated December 2002, January, June, July and September 2003, respectively.

During December 2004, the Company issued 677,450 shares of its common stock to
Oak Harbor Investments in lieu of $135,490 cash payment for interest and late
charges due through September 30, 2004 on promissory notes dated January and
March 2003, respectively.

From January 2005 through December 2005, the Company issued eleven 8%
convertible notes to Mr. David R. Vey and received aggregate proceeds of
$965,000. The convertible notes were issued at fair market value on the
transaction dates. The notes were issued for a one-year term and are convertible
at the option of the holder into 4,248,850 shares of the Company's common stock.

The Company also entered into a private placement transaction with an investor
to provide the Company with $1,000,000 of working capital financing. The
agreement provides for the investor to lend the Company $1,000,000 in two
tranches of $250,000 each and one tranche of $500,000. On July 1, 2005, the
investor lent the Company the initial $250,000. On August 2, 2005, the investor
lent the Company the second tranche of $250,000. The final tranche of $500,000
was received on September 30, 2005, upon the Company meeting certain conditions.
As evidence of such loans, the Company issued to the investor a convertible note
dated as of the date of each loan, in the principal amount of each loan. The
convertible notes shall mature and are payable 24 months after the date of each
loan, unless theretofore converted. The convertible notes bear interest on the
principal outstanding at a rate of 8% per year annually in arrears from the date
of the convertible notes until the earlier of maturity or the date upon which
the unpaid balance is paid in full or is converted into shares of common stock.
The investor may, at his option, at any time after each loan, elect in writing
to convert all or a designated part of the unpaid principal balance, together
with the accrued and unpaid interest, of each convertible note into shares. The
number of shares into which the principal may be converted is equal to $0.18 per
share. The number of shares issuable upon conversion of the $1,000,000 principal
balance of the convertible notes is 5,555,555. Accrued and unpaid interest may
be paid in cash or, at the election of the investor, in shares at a conversion
price of $0.18 per share. The conversion price for principal is protected by








                                      F-16
<PAGE>

                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


4. Convertible Notes (continued)


full-ratchet anti-dilution, with the exemption of stock options issued to the
Company's employees and directors only. As additional consideration, the
investor shall be granted one (1) four-year warrant for every two (2) converted
shares. The exercise price of the warrant shall be $0.30 per share. In addition,
the Company granted the investor a twelve (12) month extension on the expiration
date of 525,266 stock purchase warrants issued from prior financings.

The Company has reviewed the terms of its convertible notes payable and has
concluded that they are conventionally convertible as the holders may only
realize the value of the conversion option by exercising the option and
receiving the entire proceeds in a fixed number of shares.

Subsequent to fiscal year end 2005, the Company issued an aggregate of 1,356,800
shares of its common stock to David R. Vey in lieu of a $203,520 cash payment
for interest due through December 31, 2005 on convertible notes dated January
2003 through March 2005, respectively.

In January 2006, the Company issued 705,361 shares of its common stock to Oak
Harbor Investments, a limited liability corporation in which David Vey and
Richard T. Hartley are managing members, in lieu of a $105,804 cash payment for
interest and late charges due through December 31, 2005 on promissory notes
dated January and March 2003, respectively.

All of the securities issued in the preceding transactions to David R. Vey,
Richard T. Hartley and Oak Harbor Investments were sold in reliance upon the
exemptions provided in Section 4(2) of the Securities Act of 1933 (the
"Securities Act" and Rule 506 thereunder.

All of the Company's assets are pledged as collateral for the promissory notes
referenced above.

5. Stockholders' Equity

Class A Convertible Preferred Stock

Series A and H

Class A preferred stock is issuable in various series and is convertible in
accordance with the terms of the issued series. The Board of Directors has the
authority to fix by resolution all other rights. The Class A, Series A,
preferred shares pay quarterly dividends, when declared, at the rate of twelve
percent (12%) per annum, have cumulative rights, and have a liquidation
preference at the par value of the preferred shares. Each share is convertible
at the election of the holder into one share of common stock at any time. Each
holder has the same right to vote each share on all corporate matters as the
holder of one share of common stock.

In conjunction with the CIMS acquisition transaction completed in April 2000
(see Note 14 below), 1,500 shares of Class A Series H preferred stock with a
face value of $1,500,000 (book value $1,300,000) were issued as part of the
transaction consideration. The Series H preferred stock yields 8% in semi-annual
cash dividends, when declared, and is convertible at the Company's option for
the first 33 months of its 36-month life. In November 2003, the Company
restructured the terms of the Class A Series H preferred stock. The new terms
extend the conversion date of the Series H Preferred Stock by thirty-six months,
until April 1, 2006.









                                      F-17
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


5. Stockholders' Equity (continued)

Also, upon thirty (30) day written notice any time after the Original Issuance
Date, or the closing of a consolidation, merger or mandatory share exchange in
which the Corporation is not the surviving entity and in which the only
consideration to be received by the holders of the Corporation's common stock is
cash, the Corporation may, in its sole discretion, but shall not be obligated to
redeem, in whole but not in part, the then issued and outstanding shares of
Series H Convertible Preferred Stock, at a price equal to one hundred and
twenty-eight percent (128%) of the Stated Value, plus all accrued but unpaid
dividends, provided that a registration statement permitting resale of any
shares of Common Stock issuable upon conversion by the holder is then effective.

In February 2006, the Company entered into a settlement agreement with Acxiom
Corporation, holder of its Class A Series H, convertible preferred stock. In
consideration of an $850,000 cash payment that is payable by June 30, 2006 or
the cash settlement amount increases to $1,000,000 and 500,000 stock purchase
warrants with an exercise price of $0.30 per share, exercisable for a three year
period, Acxiom agreed to surrender 1,500 shares of Series H Preferred Stock,
valued at $1,500,000, waive its right to accrued but unpaid dividends of
approximately $735,000 related to the Series H Stock. In addition Acxiom will
waive its rights to payment related to an outstanding $953,000 promissory note
issued by SEDONA plus approximately $207,000 in accrued interest. In the event
SEDONA does not pay the obligation by June 30, 2006, the agreement shall be null
and void.

The Company ceased to declare preferred stock dividends as of January 1, 2001 on
the issued and outstanding series of its Class A Convertible Preferred Stock.
Cumulative but undeclared dividends on both Series A and Series H Preferred
Stock at December 31, 2005 equaled $1,319,354 or $2.63 per share. To the extent
such dividends are declared and paid they will then be reflected appropriately
in the Company's financial statements. Subsequent to December 31, 2005, the
Company reached an agreement with the holder of its Series H Preferred Stock
that resulted in the elimination of the cumulative but undeclared dividends at
December 31, 2005 totaling $719,354 and the surrender of the 1,500 shares of its
Series H Preferred Stock.

Common Equity

During 2005, the Company issued 150,032 shares of its common stock to two
consultants in lieu of $37,000 cash compensation for investor relation services
rendered. The Company issued 272,431 shares of its common stock to an attorney
in lieu of $61,000 cash compensation for services rendered in relation to the
litigation filed by the Company on May 5, 2003.

For the year ended December 31, 2005, the Company issued a total of 138,579
shares of its common stock to employees for shares purchased through the
Employee Stock Purchase Plan. The purchases were valued at $23,806.

Also in 2005, the Company issued a total of 122,732 shares of its common stock
as matching contribution to its employee 401(k) plan. The contribution was
valued at $39,274.








                                      F-18
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


5. Stockholders' Equity (continued)

Subsequent to December 31, 2005, the Company issued an additional 33,595 shares
of its common stock to a consultant in lieu of $7,500 cash compensation for
investor relation services rendered in 2006. The Company also issued 127,493
shares of its common stock in the first quarter of 2006 to an attorney in lieu
of $18,300 cash compensation for services rendered in relation to the litigation
filed by the Company on May 5, 2003.

6. Stock Options and Warrants

Long-Term Incentive Plans

During 2000, the Stockholders of the Company approved the 2000 Incentive Stock
Option Plan (the "2000 Plan"). This plan has replaced the 1992 Long-Term
Incentive Plan (the "1992 Plan") under which no further options will be issued.
Significant provisions of the 2000 Plan include: reserving 15% of the
outstanding shares for awards that may be outstanding at any one time, rather
authorizing restricted stock, deferred stock, stock appreciation rights,
performance awards settleable in cash or stock, and other types of awards based
on stock or factors influencing the value of stock; adding provisions so that
options and other performance-based awards will qualify for tax deductions; and,
specifying obligations relating to non-competition and proprietary information
that may be imposed on optionees.

Options outstanding under the Long-Term Incentive Plan and the 2000 Plan have
been granted to Officers, Directors, Employees, and others and expire between
January 2006 and December 2013. All options were granted at or above the fair
market value on the grant date. Transactions under this Plan were as follows:
<TABLE>
<CAPTION>
   ---------------------------------------------- ---------------------------- -------------------------
                                                                                   Weighted Average
                                                            Shares                  Exercise Price
                                                  ---------------------------- -------------------------
   <S>                                            <C>                          <C>
   Outstanding at December 31, 2003                        3,230,057                     $1.45
   Canceled or expired                                      (295,345)                     1.77
   Granted                                                    50,000                      0.19
   Exercised                                                       -                         -
                                                  ---------------------------- -------------------------
   Outstanding at December 31, 2004                         2,984,712                    $1.46
   Canceled or expired                                       (439,000)                    2.06
   Granted                                                  2,221,998                     0.17
   Exercised                                                        -                        -
                                                  ---------------------------- -------------------------
   Outstanding at December 31, 2005                         4,767,710                    $0.80
   ---------------------------------------------- ---------------------------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
   -------------------------- ---------------------- ---------------------------- -----------------------
        Exercisable at                                     Exercise Price            Weighted Average
           Year-end                  Options               Range Per Share            Exercise Price
   -------------------------- ---------------------- ---------------------------- -----------------------
   <S>                        <C>                    <C>                          <C>
             2004                   2,813,964              $0.17 to $5.13                 $ 1.55
   -------------------------- ---------------------- ---------------------------- -----------------------
             2005                   3,407,860              $0.15 to $5.13                 $ 1.07
   -------------------------- ---------------------- ---------------------------- -----------------------
</TABLE>





                                      F-19
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


6. Stock Options and Warrants (continued)

The following table summarizes information about stock options outstanding at
December 31, 2005:
<TABLE>
<CAPTION>
                                       ------------------------------------------------------- ------------------
                                                               Ranges                                Total
   ----------------------------------- ------------------------------------------------------- ------------------
   Range of exercise prices             $0.15 to $1.16     $1.35 to $2.25    $2.50 to $5.13     $0.15 to $5.13
   ----------------------------------- ------------------ ----------------- ------------------ ------------------
   <S>                                 <C>                <C>               <C>                <C>
   Options outstanding                         3,909,730           437,750            420,230          4,767,710
   Weighted average remaining
   contractual life (years)                         2.33               .76                .57               3.66
   Weighted average exercise price                 $0.80             $0.44              $1.87              $3.05
   Exercisable                                 2,549,880           437,750            420,230          3,407,860
   Weighted average exercise price                 $1.07             $0.61              $1.87              $3.05
   ----------------------------------- ------------------ ----------------- ------------------ ------------------
</TABLE>

Warrants

Warrants outstanding have been granted to Officers, Directors, Stockholders and
others to purchase common stock at prices ranging from $0.30 to $3.75 per share
and expiring between January 2006 and March 2012. All warrants were granted at
or above the fair market value on the grant date. Transactions under the plan
were as follows:
<TABLE>
<CAPTION>
   ---------------------------------------------- ---------------------------- --------------------------
                                                                                   Weighted Average
                                                            Shares                  Exercise Price
                                                  ---------------------------- --------------------------
<S>                                               <C>                          <C>
   Outstanding at December 31, 2003                       15,326,656                    $1.18
   Canceled or expired                                      (542,993)                    1.74
   Granted                                                   851,064                     0.70
   Exercised                                                (200,000)                    0.50
                                                  ---------------------------- --------------------------

   Outstanding at December 31, 2004                       15,434,727                    $1.14
   Canceled or expired                                    (3,425,202)                    1.32
   Granted                                                   125,000                     0.35
   Exercised                                                       -                        -
                                                  ---------------------------- --------------------------

   Outstanding at December 31, 2005                       12,134,525                    $1.08
   ---------------------------------------------- ---------------------------- --------------------------
</TABLE>
<TABLE>
<CAPTION>
   --------------------------- --------------------- ---------------------------- -----------------------
         Exercisable at                                    Exercise Price            Weighted Average
            Year-end              Warrant Shares           Range Per Share            Exercise Price
   --------------------------- --------------------- ---------------------------- -----------------------
   <S>                         <C>                   <C>                          <C>
              2004                  15,195,900             $0.30 to $3.75                 $1.13
              2005                  11,895,698             $0.30 to $3.75                 $1.07
   --------------------------- --------------------- ---------------------------- -----------------------
</TABLE>





                                      F-20
<PAGE>

                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


6. Stock Options and Warrants (continued)

The following table summarizes information about common stock warrants
outstanding at December 31, 2005:
<TABLE>
<CAPTION>
                                        --------------------------------------------------------- -------------------
                                                                 Ranges                                 Total
   ------------------------------------ -------------------- ----------------- ------------------ -------------------
   Range of exercise prices               $0.30 to $1.25       $1.31 to $2.25   $2.50 to $3.75        $0.30 to $3.75
   ------------------------------------ -------------------- ----------------- ------------------ -------------------
   <S>                                  <C>                  <C>               <C>                <C>
   Outstanding                                    9,403,319         1,413,000          1,318,206          12,134,525
   Weighted average remaining
    contractual life (years)                            1.5               3.2                1.4                 1.8
   Weighted average exercise price                    $0.67             $2.09              $3.00               $1.08
   Exercisable                                    9,263,342         1,413,000          1,219,356          11,895,698
   Weighted average exercise price                    $0.66             $2.09              $3.04               $1.07
   ------------------------------------ -------------------- ----------------- ------------------ -------------------
</TABLE>

The Company estimates the fair value of each common stock option and warrant to
purchase common stock at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 2005 and 2004: no dividends paid for all years; average expected
volatility of 102% for 2005 and 114% for 2004; risk-free interest rates range
from 1.0% to 5%, expected lives range from 2.00 to 10.00 years.

Utilizing the above assumptions, the weighted average fair market value of
employee stock options and warrants granted are as follows:

----------------------------------- --------------------------------
                                        YEAR ENDED DECEMBER 31,
                                    --------------------------------
                                         2005             2004
----------------------------------- ---------------- ---------------
    Stock options and warrants           $0.18           $0.67
----------------------------------- ---------------- ---------------

During 2005, there were a total of 263,132 common stock options with an exercise
price of $0.15 per share granted to Officers of the Company. The exercise price
of these options equaled the fair market value or more of the common stock at
the time of such grant. Additionally, 125,000 warrants were issued related to
investors; as described in Note 4, these were granted on behalf of a material
investor. There were no options granted to other investors during 2005.

Options to Directors and Officers

Included in the options and warrants granted above are the following:

During 2005, 263,132 options of the Company's common stock were granted to three
Officers of the Company. These options were issued at or above fair market value
of the common stock on the grant date at a weighted average exercise price of
$0.15 per share, expiring in December 2015. As of December 31, 2005, none of
these options were exercised.








                                      F-21
<PAGE>

                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


6. Stock Options and Warrants (continued)

During 2004, 50,000 options of the Company's common stock were granted to an
Officer of the Company. These options were issued at or above fair market value
of the common stock on the grant date at a weighted average exercise price of
$0.19 per share, expiring no later than December 2013. As of December 31, 2005,
none of these options were exercised.

Shares reserved for future issuance of common stock approximate 12,697,157 as of
December 31, 2005.

7. Contingencies

In June 2000, the Company entered into a contract with a software vendor to
incorporate a component of that vendor's software into SEDONA's Intarsia(R). By
April 2001, Management determined that the project had become infeasible due to
the lack of support by the vendor and the vendors unwillingness to meet certain
contract commitments. The Company notified the vendor of its concerns on several
occasions and ultimately delivered a notice of breach to the vendor, as required
for the termination of the underlying contract. As the vendor failed to respond
or cure the breach within the time permitted under the agreement, the Company
considers the contract to be terminated in accordance with its terms and has
concluded that it is not appropriate to continue to accrue certain minimum
payments under the contract. Should the dispute end unfavorably, it would result
in minimum royalty payments of $2,850,000.

On May 5, 2003, the Company filed a civil action lawsuit against numerous
defendants in the United States District Court for the Southern District of New
York. The Company seeks damages from the defendants named, and other defendants
yet to be named, in the complaint for allegedly participating in the
manipulation of its common stock, fraud, misrepresentation, failure to exercise
fiduciary responsibility, and/or failure to adhere to SEC trading rules and
regulations, tortuous interference, conspiracy and other actions set forth in
the complaint, but not limited to enforcement of settlement date and affirmative
determination. As of December 31, 2005, no ruling by the United States District
Court for the Southern District of New York has been made with regard to this
matter. As this is an on-going action, no adjustments have been made to the
financial statements related to this matter.

No actions other than matters involved in the ordinary course of business are
currently known by Management and such other matters are believed by Management
not to have material significance.








                                      F-22
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


8. Related Party Transactions

In September 2003, the Company sold a licensing agreement to ACEncrypt
Solutions, LLC. The President of ACEncrypt Solutions, LLC, Victoria Looney, is a
member of the Board of Directors of SEDONA Corporation. David R. Vey, Chairman
of the Board of Directors of SEDONA Corporation also has a financial interest in
ACEncrypt Solutions. The total fee for the license agreement is $1,000,000,
which includes delivery of the current version of Intarsia(R) plus the cost of
other contract defined milestones related to the development of derivative
products for the healthcare market. The Company was recognized $475,000 of
revenue from this transaction in the third quarter of 2003 related to the sale
of Intarsia(R), in accordance with SOP 97-2. The balance of the contract has
been recognized as revenue in 2004 based upon the delivery of the remaining
milestones in the agreement. The Company also recognized $6,000 of services
revenue related to maintenance services in 2003. The balance of $19,000 was
recognized as revenue in 2004 as services were performed.

In March 2002, the Company entered into an agreement to purchase substantially
all of the assets of Lead Factory, Inc. for a combination of stock warrants and
cash. The Company's Chief Marketing Officer, Alyssa Dver, founded Lead Factory.
The terms of the sale included issuance of 100,000, ten-year warrants, at an
exercise price of $0.72 per share upon the signing of the agreement. The Company
also accrued $50,000 in royalties earned under the terms of this agreement
during the third quarter of 2003. As of December 31, 2004, all royalty
obligations have been satisfied. Lead Factory, a Boston-based company which
designs, builds, and markets computer software and services to aid sales and
marketing persons with customer prospecting, initially became a partner in 2000
when we acquired a 10% equity interest, which interest we had subsequently fully
reserved. This purchase agreement supercedes all earlier agreements with Lead
Factory.

9. Profit Sharing Plan

Starting in fiscal year 1999, a 401(k) Plan was made available to all eligible
SEDONA employees, but there were no contribution matches by the Company.

During 2001, the plan was modified to allow the Board of Directors to consider,
on an annual basis, a discretionary match for the Plan participants in the form
of Company stock at a rate of up to 50% of employee contributions but not in
excess of 3% of employee base compensation. In 2005 the match formula was
changed to comply with current safe harbor rules. All employees receive a
matching stock contribution equal to 3 (three) percent of their annual salary
into the plan; the match may not to exceed IRS established limits.

In 2004, the Board approved a matching contribution which was valued at $56,000
and resulted in the issuance of 131,916 shares of the Company's common stock to
the plan's trustee for the benefit of plan participants, valued at a closing
price of $0.42 per share. In 2005, the Board approved a matching contribution
which was valued at $39,000 and resulted in the issuance of 122,732 shares of
the Company's common stock to the plan's trustee for the benefit of plan
participants, valued at a closing price of $0.32 per share.









                                      F-23
<PAGE>

                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


10. Commitments

The Company has employment agreements with certain key employees, which expire
at various dates through 2006. The agreements have automatic renewal provisions,
which allow the contracts to continue from year-to-year until either party gives
notice to the other, at least six months prior to expiration. The agreements
provide for minimum salary levels, plus any additional compensation as directed
by the Board of Directors.

The Company leases certain office equipment under various non-cancelable
operating and capital lease arrangements, which expire from 2002 to 2005. The
Company entered into a lease for its corporate headquarters in December 2002,
which commenced January 1, 2003 for a three-year term. In April 2004, the
Company expanded its lease space at its corporate headquarters, as fully
described in Item 2 - Description of Property, above. In December 2005, the
Company renewed its lease obligation for its corporate headquarters for an
additional five years. In November 2003, the Company entered into a three-year
lease for an engineering facility in Plymouth, Minnesota. In December 2005, the
Company renewed its lease obligation for its Minnesota space for an additional
three years. Future minimum lease payments under these lease obligations total
$379,500 and are all due per the table below.
<TABLE>
<CAPTION>
                                         FUTURE MINIMUM BUILDING LEASE PAYMENTS
                                                      IN THOUSANDS
----------------------------------------------------------------------------------------------------------------------
                               2006            2007            2008           2009            2010          TOTAL
-------------------------- --------------- -------------- --------------- -------------- --------------- -------------
<S>                        <C>             <C>            <C>             <C>            <C>             <C>
Corporate Headquarters          $68             $70            $72             $75            $77            $362
Plymouth, MN                    $ 5             $ 6            $ 6             -               -             $ 17
    Total                       $73             $76            $78             $75            $77            $379
-------------------------- --------------- -------------- --------------- -------------- --------------- -------------
</TABLE>
Rent expense for 2005 was $104,000 compared to 2004 which totaled $101,000.

Future minimum lease payments under capital lease obligations consist of $9,000
due in 2005, of which $1,000 is related to interest.

11. Other Accrued Liabilities and Accounts Payable

Other accrued liabilities comprise the following (in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------- --------------------------------
                                                              Year ending December 31,
                                                               2005             2004
                                                          --------------- ----------------
<S>                                                       <C>             <C>
Accrued payroll, benefits and severance                       $ 245            $ 132
Accrued rent                                                      -                3
Accrued fees and other expenses to Directors                    217              176
for professional services and other expenses
Accrued legal expenses related to Litigation (see Note           43              104
7, contingencies)
Note payable, general insurance                                 105              116
Miscellaneous                                                    58               53
                                                          --------------- ----------------
Total                                                          $668            $ 584
--------------------------------------------------------- --------------- ----------------
</TABLE>








                                      F-24
<PAGE>

                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


12. Income Taxes

No provision for federal and state income taxes has been recorded as the Company
has incurred net operating losses for the years ended December 31, 2005 and 2004
and the Company has provided a valuation allowance against all net operating
loss carryforwards.

At December 31, 2005 and 2004, the Company had a recorded net deferred tax asset
of $25.7 million and $24.8 million, respectively, which primarily related to net
operating loss carryforwards for federal and state income tax purposes and
certain other reserves. The Company provided valuation allowances for the full
amount of the deferred tax assets as the Company believes sufficient uncertainty
exists regarding its realization.

At December 31, 2005 and 2004, the Company had recorded current deferred tax
assets of $186,000 and $293,000, respectively, which related primarily to
accruals which may be recognized in the future for tax purposes. Additionally,
at December 31, 2005 and 2004, the Company had recorded non-current deferred tax
liabilities of $0 and $6,000, respectively, which related primarily to basis
differences in capitalized software and property, plant and equipment.

At December 31, 2005 and 2004, the Company had approximately $63.9 million and
$61.3 million, respectively, in federal net operating loss carryforwards that
expire in various years through 2025. Additionally, the Company has
approximately $42.2 million and $40.4 million respectively, of state net
operating loss carryforwards that expire in various years beginning in 2006
through 2013.

The timing and manner, in which the Company will utilize the net operating loss
carryforwards in any year, or in total, may be limited by the Internal Revenue
Service Code, Section 382. Such limitations may have an impact on the ultimate
realization and timing of these net operating loss carryforwards.

13. Supplemental Disclosures of Cash Flow Information
    (in thousands)
<TABLE>
<CAPTION>
--------------------------------------------- -------------------------------------------
                                                           Year Ended December 31
                                                        2005                    2004
                                              ------------------- -----------------------
<S>                                           <C>                 <C>
Cash paid during the year for interest        $         18              $          6
Conversion of debenture and accrued
interest into common stock                                 -                     853
--------------------------------------------- ------------------- -----------------------
</TABLE>








                                      F-25
<PAGE>


                        SEDONA Corporation and Subsidiary
                   Notes to Consolidated Financial Statements


14. 2000 CIMS Purchase

In April 2000, the Company consummated a transaction to purchase the Customer
Information Management Systems (CIMS) business unit of Acxiom Corporation for
total potential consideration of $4,350,000. Five-year warrants amounting to an
aggregate of $550,000 were issued, $1,300,000 (with face value of $1,500,000)
was paid in preferred stock, a minimum of $1,000,000 due in October 2003 (the
"Required Payment"), or earlier, if certain performance hurdles were met, and
the remaining $1,500,000 will be paid contingent on the performance of the
business unit acquired ("the Contingent Payment"). Through March 2004, the
Company had paid $47,000 related to the Required Payment. There was no
contingent payment of $1,500,000 due based on performance of the business unit
acquired. The performance period for both the Required Payment and the
Contingent Payment expired in April 2003.

In November 2003, the Company restructured the agreement with Acxiom. The
Company has issued a promissory note for the $953,000 Required Payment, at an
interest rate of 8% per annum. All unpaid principal and interest are due no
later than May 26, 2006. The restructured terms include: extension of the
conversion date of the Series H Preferred Stock by thirty-six months, until
April 1, 2006; payment of trade payables due totaling $132,000, which are
accrued net of a credit due back to the Company of $78,000, all of which has
been paid; and agreement to provide $262,000 worth of services to Acxiom, if
requested by Acxiom. The Company believes that there is a remote possibility
that the Company may have to provide future services related to this agreement.

In February 2006, the Company entered into a settlement agreement with Acxiom
Corporation, holder of its Class A Series H, convertible preferred stock. In
consideration of an $850,000 cash payment that is payable by June 30, 2006 or
the cash settlement amount increases to $1,000,000 and 500,000 stock purchase
warrants with an exercise price of $0.30 per share, exercisable for a three year
period, Acxiom agreed to surrender 1,500 shares of Series H Preferred Stock,
valued at $1,500,000, waive its right to accrued but unpaid dividends of
approximately $735,000 related to the Series H Stock. In addition Acxiom will
waive its rights to payment related to an outstanding $953,000 promissory note
issued by SEDONA plus approximately $207,000 in accrued interest. In the event
that SEDONA does not pay the cash settlement amount by June 30, 2006, the
agreement shall be null and void.

15. Major Customer Transactions and Geographic Information

As of December 2002, SEDONA sold its existing customer base and related services
to Fiserv Customer Contact Solutions (CCS), allowing SEDONA to focus on its
indirect business model and providing users of Intarsia(R) with Fiserv's
resources to support and grow the Intarsia(R) product line. However, as a result
of the Company's decision to re-establish a direct sales channel, beginning
January 2005, SEDONA re-signed maintenance agreements with several customers
from the Fiserv CCS business unit. The agreements were re-signed during December
2004 and SEDONA began providing services under the maintenance agreements in
January 2005.

Revenues from one of the Company's major alliance partners, Fiserv Solutions
Inc. accounted for thirteen (13%) of total sales in 2005. In 2004, three
alliance partners accounted for ninety-one percent (91%) of total sales.

Substantially, all of the Company's revenues are from customers in the United
States and all long-lived assets are located in the United States.







                                      F-26
<PAGE>



EXHIBIT INDEX

1.1        Placement Agent Agreement with Ladenburg Thalmann & Co., Inc., dated
           January 24, 2000 (1) (Exhibit 1.1)

1.2        Amendment dated March 8, 2000 to Placement Agent Agreement with
           Ladenburg Thalmann & Co., Inc. (1) (Exhibit 1.2)

3.1        Articles of Incorporation (2) (Exhibit 3.1)

3.2        Bylaws (2) (Exhibit 3.2)

3.3        Amendment to Articles of Incorporation (3)

4.1        Statement of Designation of Class A, Series F Convertible Preferred
           Stock (4) (Exhibit 4.0)

4.2        Certificate of Designations, Preferences and Rights of Class A,
           Series H Preferred Stock (5) (Exhibit 4.1)

4.3.1      5% Convertible Note due March 22, 2001 (8) (Exhibit 99.3)

10.1       Series F Convertible Preferred Stock and Warrants Purchase Agreement,
           dated May 24, 1999, by and between the Company, Oscar Tang,
           individually, and The Tang Fund (6) (Exhibit 4.0)

10.12      Convertible Notes and Warrants Purchase Agreement, dated November 22,
           2000 (7) (Exhibit 99.2)

10.13      Commitment Warrant, dated November 22, 2000 (7) (Exhibit 99.4)

10.14      Additional Warrant, dated November 22, 2000 (7) (Exhibit 99.5)

10.15      Warrant issued to Ladenburg Thalmann & Co., Inc., dated November 22,
           2000 (7) (Exhibit 99.6)

10.19      Stock Purchase Agreement between AMRO International S.A. and the
           Company, dated January 23, 2001 (8) (Exhibit 10.19)

10.20      Stock Purchase Warrant issued to AMRO International S.A., dated
           January 23, 2001 (8) (Exhibit 10.20)

10.21      Warrant issued to Ladenburg Thalmann & Co., Inc., dated January 23,
           2001 (8) (Exhibit 10.21)

10.22      Lease between Teachers Insurance and Annuity Association and the
           Company (9) (Exhibit 99.1)

10.25#     2000 Incentive Stock Plan (10) (Appendix A)

10.26#     2000 Employee Stock Purchase Plan (10) (Appendix B)

10.27#     Employment Agreement, dated September 15, 1999, between the Company
           and Marco A. Emrich (11) (Exhibit 10.1)








                                      F-27
<PAGE>



EXHIBIT INDEX (continued)

10.28#     Employment Agreement, dated January 1, 2000, between the Company and
           William K. Williams (8) (Exhibit 10.28)

10.30      Shareholder/Investor Relations Compensation Agreement between the
           Company and Osprey Partners, dated January 3, 1997, with amendments
           dated January 27, 2000 and December 13, 2000 (14) (Exhibit 10.30)

10.31      Finder's Fee Agreement between the Company and Osprey Partners, dated
           February 24, 1999 (8) (Exhibit 10.31)

10.32      Disbursement Agreement between the Company and ZipFinancial.com, Inc.
           dated December 29, 2000. (8) (Exhibit 10.32)

10.33      Promissory Note payable to the Company by ZipFinancial.com, Inc.
           dated December 29, 2000. (8) (Exhibit 10.34)

10.32      Security Agreement between the Company and ZipFinancial.com, Inc.
           dated December 29, 2000. (8) (Exhibit 10.32)

10.35      Warrant issued to Acxiom Corporation Dated April 4, 2001 (8) (Exhibit
           10.35)

10.39      Form of Common stock and Warrants Purchase Agreements used in August
           2001 to September 2002 private placements by and among the Company
           and the investors signatory thereto. (12) (Exhibit 10.1)

10.40      Form of Registration Rights Agreements used in August 2001 to
           September 2002 private placements by and among the Company and the
           investors' signatory thereto. (12) (Exhibit 10.2)

10.38      Form of Notes dated September and October 2001 by and among the
           Company and investors signatory thereto. (12) (Exhibit 10.3)

10.41      Form of Warrants issued to investors used in August 2001 to September
           2002 private sales of common stock and notes. (12) (Exhibit 10.4)

10.39      Agreement and related Promissory Note dated February 14, 2002 related
           to retirement of November 2000 Convertible Notes and Warrants. (13)

10.40      Agreement for purchase of assets of Lead Factory, Inc. dated March
           29, 2002. (13)

10.42      Convertible note dated December 6, 2002 (14)

10.43      Convertible note dated January 03, 2003 (14)

10.44      Convertible note dated January 10, 2003 (14)

10.45      Promissory note dated January 10, 2003 (14)

10.46      Convertible note dated March 13, 2003 (14)

10.47      Promissory note dated March 13, 2003 (14)

10.48      Addendum dated March 31, 2004 to Master Software License Agreement by
           and between the Company and Fiserv Solutions Inc. dated March 28,
           2002 (15)






                                      F-28
<PAGE>



EXHIBIT INDEX (continued)

10.49      Office lease agreement dated 12-24-02

10.48      Convertible note dated June 4, 2004 (16)

10.54      Convertible note by the Company in favor of David R. Vey dated June
           4, 2004 (16)

10.55      Convertible note by the Company in favor of David R. Vey dated July
           7, 2004 (17)

10.56      Convertible note by the Company in favor of David R. Vey dated
           September 15, 2004 (17)

10.57      Convertible note by the Company in favor of David R. Vey dated
           October 8, 2004 (17)

10.58      Convertible note by the Company in favor of David R. Vey dated
           November 18, 2004 (18)

10.59      Convertible note by the Company in favor of David R. Vey dated
           January 13, 2005 (18)

10.60      Convertible note by the Company in favor of David R. Vey dated
           January 31, 2005 (18)

10.61      Convertible note by the Company in favor of David R. Vey dated March
           16, 2005 (18)

10.62#     Employment Agreement dated June 25, 2004 between Company and Marco A.
           Emrich

10.63#     Employment Agreement dated July 7, 2004 between Company and Alyssa S.
           Dver

10.64#     Employment Agreement dated July 20, 2004 between Company and Anita M.
           Primo

10.65#     Employment Agreement dated July 20, 2004 between Company and Timothy
           Rimlinger

10.66      Convertible note by the Company in favor of David R. Vey dated March
           25, 2005 (21)

10.70      Convertible note by the Company in favor of David R. Vey dated March
           30, 2005 (21)

10.71      Convertible note by the Company in favor of David R. Vey dated April
           14, 2005 (21)

10.72      Convertible note by the Company in favor of David R. Vey dated April
           22, 2005 (22)

10.70*     Amended Facility Lease for King of Prussia, PA dated January 1, 2005
           (24)

10.71*     Amended Facility Lease for Plymouth, MN dated January 1, 2005 (24)

10.72*     Convertible note by the Company in favor of David R. Vey dated
           December 6, 2005(24)

10.73*     Convertible note by the Company in favor of David R. Vey dated
           December 6, 2005(24)

10.74*     Convertible note by the Company in favor of David R. Vey dated
           December 6, 2005(24)

10.75*     Convertible note by the Company in favor of David R. Vey dated
           December 6, 2005(24)

10.76*     Convertible note and related documents by the Company in favor of
           William J. Rucks dated July 1, 2005, August 1, 2005 and September 30,
           2005 (23)(24)

14.1       Code of Conduct and Business Ethics, Adopted by the Board of
           Directors, June 21, 2004




                                      F-29
<PAGE>



EXHIBIT INDEX (continued)

23.1       Consent of McGladrey & Pullen LLP

31.1*      Statement Under Oath of Principal Executive Officer of the Company
           Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2*      Statement Under Oath of Principal Financial Officer of the Company
           Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1*      Statement Under Oath of Principal Executive Officer of the Company
           Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2*      Statement Under Oath of Principal Financial Officer of the Company
           Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

--------------------------------------------------------------------------------

*      Filed herewith.
#      Executive Compensation Plans and Arrangements.


(1)        Filed as an Exhibit to the Registration Statement on Form S-3, filed
           May 23, 2000 (File No. 333-37678).

(2)        Filed as an Exhibit to the Company's Current report on Form 8-K,
           dated June 15, 1992.

(3)        Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
           year ended December 31, 1995.

(4)        Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended March 31, 1999.

(5)        Filed as an Exhibit to the Registration Statement on Form S-3 filed
           June 5, 2000 (File No. 333-38578).

(6)        Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended June 30, 1999.

(7)        Filed as an Exhibit to the Current Report on Form 8-K filed November
           28, 2000.

(8)        Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
           year ended December 31, 2000.

(9)        Filed as an Exhibit to the Current Report on Form 8-K filed August
           31, 2000.

(10)       Filed as an Appendix to the Company's Definitive Proxy Statement for
           the 2000 Annual Meeting of Shareholders filed May 17, 2000.

(11)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended September 30, 1999.

(12)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended September 30, 2001.

(13)       Filed as an Exhibit to the Annual Report on Form 10-K for fiscal year
           ended December 31, 2001.







                                      F-30
<PAGE>



EXHIBIT INDEX (continued)

(14)       Filed as an Exhibit to the Annual Report on Form 10-K/A for the
           fiscal year ended December 31, 2002.

(15)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended March 31, 2004.

(16)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended June 30, 2004.

(17)       Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
           fiscal quarter ended September 30, 2004.

(18)       Filed as an Exhibit to the 8-K on November 24, 2005.

(19)       Filed as an Exhibit to the 8-K on March 17, 2005.

(20)       Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
           year ended December 31, 2004.

(21)       Filed as an Exhibit to the 8-K on April 19, 2005.

(22)       Filed as an Exhibit to the 8-K on April 27, 2005.

(23)       Filed as an Exhibit to the 8-K on July 11, 2005.

(24)*      Filed as an Exhibit to the Annual Report on Form 10-KSB for the
           fiscal year ended December 31, 2005.













                                      F-31