##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007or
 o
    
    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
 
 PENNSYLVANIA
    
    95-4091769(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer
Identification No.)
 1003 West Ninth Avenue, Second Floor, King of Prussia, PA
    
    19406(Address of principal executive offices)
    
    (Zip Code)
     
 þ o
 o
 o þ




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##### 



NOTE
ON FORWARD-LOOKING STATEMENTS
 ®
 2




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##### 



ITEM 1.
    
    DESCRIPTION OF BUSINESS
 Overview
       www.sedonacorp.com .
 Additional Information
 investorinfo@sedonacorp.com
 3




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##### 



Description of Business Strategy
       4




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##### 




    
    Targeting the SMB market with a highly-verticalized CRM/MRM application solutionForresters CRM Applications, Worldwide, 2007-2010forecast report, has shown the CRM
spending growing from $10.8 billion in 2007 to $12.9 billion in 2010, a CAGR (Compound
Annual Growth Rate) of approximately 6.5%. In the same report, Forrester projects that the
CRM spending in the financial services market will represent 13.2% of the overall CRM
spending over the next three years.As a significant segment of the overall SMB market, small and mid-size financial services
organizations, represented by community and regional banks, credit unions, savings and
loans, and brokerage firms, with total asset value below $10 billion, 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.
 TOTAL ASSET VALUE
    
    < $100M
    
    $100M  $300M
    
    $300M  $500M
    
    $500M  $1B
    
    $1B  $3B
    
    $3B  $10B
    
    > $10BCOMMUNITY &
REGIONAL BANKS
    
    
    3,425
    
    
    
    2,868
    
    
    
    875
    
    
    
    661
    
    
    
    402
    
    
    
    143
    
    
    
    117CREDIT UNIONS
    
    
    8,343
    
    
    
    727
    
    
    
    183
    
    
    
    152
    
    
    
    72
    
    
    
    9
    
    
    
    2TOTAL NUMBER OF
INSTITUTIONS
    
    
    11,768
    
    
    
    3,595
    
    
    
    1,058
    
    
    
    813
    
    
    
    474
    
    
    
    152
    
    
    
    119
 Source: FDIC & National Credit Union Association  April 2008Unlike most traditional, general-purpose CRM applications, Intarsia is a CRM/MRM application
solution specifically designed and priced to meet the needs of SMBs with multiple
lines-of-business across several vertical industries. Intarsia provides small to mid-size
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
provides those organizations with the ability to effectively identify, acquire, foster and
maintain loyal, profitable customers.Intarsia is designed to assist community and regional banks, credit unions, and brokerage
firms in maximizing profits through effective customer relationship management but which
lack the resources required to develop, implement and maintain a CRM/MRM program on their
own.In addition, the Company continues to evaluate the opportunity of providing a vertical CRM
application solution to other vertical markets as demonstrated by its recent announcement of
Intarsia for the high education market. Forrester projects in its CRM Applications, North
America, 2007-2010 forecastreport, that the CRM spending in the education market will
represent approximately 3% of the overall CRM spending over the next three years.
 5




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##### 




    
    Removing the barriers to purchasing and maintaining a CRM/MRM systemSEDONAs technology is designed to provide prospective customers and distribution partners
with an effective deployment of an enterprise business application in either an In-house or
Software as a Service (SaaS) environment.The SaaS 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/MRM.The SaaS model provides SMBs with an immediately available fully integrated system,
including all of 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 distinctive features of the SaaS model make it attractive to current and future OEM and
reseller partners because:
 
    
    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;
    
    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;
    
    Generates new revenue opportunities through the sale of new integration and
training services as well as software upgrades; and
    
    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.
 
    
    Marketing unique proprietary solution to target markets through multiple sales
distribution channelsHaving strategically targeted a key segment of the vast CRM/MRM market and designed and
priced its CRM/MRM application solution accordingly, SEDONAs sales strategy is to capture a
share of the small to mid-size financial services market using multiple direct and indirect
sales distribution channels and innovative marketing programs to garner awareness and market
leadership.
 6




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##### 




    
    Indirect Sales Distribution ChannelSEDONA has signed several OEM and reseller agreements with leading software and
services providers for the financial services market 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/MRM
technology, as well as multi-year, monthly subscription fees for every sale in a
SaaS environment. These fees are paid to SEDONA whether SEDONAs distribution
partners sell SEDONAs CRM/MRM technology as a component of their partners total
solution or as a stand-alone offering.The solution achieved by branding and integrating SEDONAs Intarsia technology into
its distribution partners core business applications, combined with their marketing
strengths, broad distribution channels and strong reputations, provides SMBs with
the opportunity to enjoy all the benefits of implementing an enterprise-wide CRM/MRM
application.In addition, the Company plans to leverage existing sponsorships by certain
industry-specific associations and sales distribution partnerships to acquire new
customers. It will also expand its indirect sales channel by formalizing new OEM
agreements with core systems providers and sales distribution agreements with
service organizations for the financial services market. SEDONA will also continue
to foster the existing OEM partnerships with leading core system providers by
promoting corporate-wide adoption of its CRM/MRM technology.
    
    Direct Sales Distribution ChannelThe Company is re-establishing a targeted direct sales channel to promote and sell
Intarsia directly to the small to mid-size banking and credit union markets. SEDONA
intends to target community and regional banks that run banking and credit unions
core systems other than the ones provided by the Companys distribution partners.
In addition, beginning in the second half of 2008, the Company plans to utilize a
direct sales channel to promote and sell Intarsia in the higher education market.
 
    
    Staying in the forefront of CRM/MRM technologyThe key to selling CRM/MRM 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/MRM 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 provides financial services organizations with a 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.
 7




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##### 




    
    Analyze customer and prospect data, enabling financial services organizations to
manage critical business performance such as profitability of customers,
households, and products.
    
    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.
    
    Improve coordination and communication between financial services organizations
and their customers, enhancing the ability to deliver effective service and improve
organizational productivity.
    
    Automate business processes that may be critical for the effective management
and monitoring of the relationships and interactions with customers at the
financial services organizations.
    
    Create look-a-like models to effectively identify prospects that share the
same characteristics as the organizations best customers, increasing the
institutions ability to acquire new customers.
    
    Help predict customer retention and make profitable cross-sell (next best
product) recommendations.
    
    Develop personalized sales, marketing, and services programs aimed at retaining
the financial services organizations most profitable customers and turning
unprofitable customers into profitable ones.
    
    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.
  Research & Development
  
    
    Promote and cultivate a culture of team-based development:The Companys 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 application solution. Each project team also provides technical assistance to
the systems integration group.
    
    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.
 8




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##### 



Trademarks and Copyrights
    Major Customer Transactions and Geographic Information
  9




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##### 



2007
    
    2006Company A
    
    
    33
    %
    
    
    18
    %Company C
    
    
    
    
    
    
    17
    %Company D
    
    
    
    
    
    
    13
    %
  2007
    
    2006Company A
    
    
    52
    %
    
    
    65
    %Company B
    
    
    14
    %
    
    
    12
    %
  Backlog
  Competition
   
    
    Harland 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.
    
    Harte-Hanks provides direct and target 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.
 10




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##### 




    
    Marquis is a privately-held company primarily focused on low cost Marketing Customer
Information File (MCIF), sales and services and referral tracking solutions for the
financial services market.
      
    
    Marketing and Sales  The Company has an entrenched marketing and sales distribution
channel through worldwide OEM partnership with leading core services providers for the
financial services market.
    
    Technology  The Companys proven CRM/MRM solution is specifically designed and priced
for the financial services market. It is fully integrated with the financial services
organizations core processing systems and designed to support the business processes and
data requirements of the multiple lines of business of those organizations.
 Employees
   Dependence Upon Key Personnel
  11




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##### 



ITEM 2.
    
    DESCRIPTION OF PROPERTY
      ITEM 3.
    
    LEGAL PROCEEDINGS
   12




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##### 



ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  PART II
 ITEM 5:
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES.
 Market Price of and Dividends of the Companys Common Stock
   High
    
    LowYear ended December 31, 2006:Quarter ended March 31, 2006
    
    $
    0.38
    
    
    $
    0.14Quarter ended June 30, 2006
    
    $
    0.34
    
    
    $
    0.17Quarter ended Sept. 30, 2006
    
    $
    0.29
    
    
    $
    0.17Quarter ended December 31, 2006
    
    $
    0.24
    
    
    $
    0.13Year ended December 31, 2007:Quarter ended March 31, 2007
    
    $
    0.30
    
    
    $
    0.13Quarter ended June 30, 2007
    
    $
    0.33
    
    
    $
    0.17Quarter ended Sept. 30, 2007
    
    $
    0.31
    
    
    $
    0.21Quarter ended December 31, 2007
    
    $
    0.25
    
    
    $
    0.10
 13




---



##### 



Dividends
    Equity Compensation Plans as of December 31, 2007:
  Weighted-Number of Shares to
    
    
    Average
    
    
    Number of Sharesbe
    
    
    Exercise Price of
    
    
    RemainingIssued Upon Exercise
    
    
    Outstanding
    
    
    Availableof
    
    
    Options,
    
    
    for Future IssuanceOutstanding Options,
    
    
    Warrants and
    
    
    under EquityPlan Category
    
    Warrants and Rights
    
    
    Rights
    
    
    Compensation PlansEquity compensation
plans approved by
security holders
(1)
    
    
    14,114,588
    
    
    $
    0.69
    
    
    
    14,587,569Equity compensation
plans not approved
by security holders
(2)
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    14,114,588
    
    
    $
    0.69
    
    
    
    14,587,569
 
 (1)
    
    These plans consist of the 1992 and 2000 Incentive Stock Option Plan which replaced the 1992
plan. The current plan includes a formula that automatically increases the number of
securities available for issuance equal to 20% of the number of shares issued and outstanding.(2)
    
    The Company does not maintain any equity compensation plans that have not been approved by
the stockholders. Recent Sales of Unregistered Securities
  14




---



##### 



ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
        
    
    license fees from direct sales by either the Company or its distribution partners
    
    monthly subscription fees from SaaS sales by our distribution partners
  
    
    professional services fees including set-up and installation fees, training and
mapping fees
    
    annual maintenance fees
  15




---



##### 



Critical Accounting Policies
 Revenue Recognition
  Product License Revenue
    
    
    Persuasive evidence of an arrangement exists, generally by receipt of a signed
contract
    
    Delivery and acceptance of the software has been received
    
    The fee to be paid by the customer is fixed or determinable
    
    Collection of the fee is reasonably assured (Our contracts do not contain
general rights of return)
  Services Revenue
  16




---



##### 




    
    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 related revenue is recognized as training services are provided.
    
    Annual 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
     Income Taxes
  17




---



##### 



Results of Operations
      Cost of Revenues
    Gross Profit
  Investing Activities
  18




---



##### 



Operating Expenses
  Sales, marketing and product support
   Research and Development
   General and Administrative
   Stock-Option Expenses
  19




---



##### 



Interest Expense
  Liquidity and Capital Resources
       20




---



##### 



Obligations
  Payments Due by Period (in thousands)Less than 1
    
    
    
    
    
    3-5
    
    +5Total
    
    year
    
    1-3 years
    
    years
    
    yearsAccounts Payable &
Other Accrued
Liabilities
    
    $
    2,060
    
    
    $
    1,812
    
    
    $
    248
    
    
    
    
    
    
    
    Line of Credit
    
    
    405
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    Current maturities
of long term
debt
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Long term debt
    
    
    2,254
    
    
    
    
    
    
    
    2,254
    
    
    
    
    
    
    
    Building Leases
    
    
    260
    
    
    
    94
    
    
    
    166
    
    
    
    
    
    
    
    TOTAL
    
    $
    4,987
    
    
    $
    1,906
    
    
    $
    3,081
    
    
    
    
    
    
    
    
  Inflation
  21




---



##### 



Financial Risk Management
    Recent Accounting Pronouncements
 SFAS No. 141(R) Business
Combinations
 SFAS No. 160 Non-controlling Interests in
Consolidated Financial Statements . Consolidated Financial Statements,
 SFAS No. 159  The Fair Value Option for Financial
Assets and Financial Liabilities
 22




---



##### 



SFAS No. 157 Fair Value Measurements Effective Date of FASB Statement
No. 157,
 Off-Balance Sheet Arrangements
  Inflation
  ITEM 7.
    
    FINANCIAL STATEMENTS
  Reports of Independent Registered Public Accounting Firms
    
    F-2Consolidated Financial StatementsConsolidated Balance Sheets as of December 31, 2007 and December 31, 2006
    
    F-4Consolidated Statements of Operations for each of the
two years in the period ended December 31, 2007
    
    F-5Consolidated Statements of Stockholders Deficit for each of the
two years in the period ended December 31, 2007
    
    F-6Consolidated Statements of Cash Flows for each of the
two years in the period ended December 31, 2007
    
    F-8Notes to Consolidated Financial Statements
    
    F-9
  23




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##### 



ITEM 8.
    
    CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
      ITEM 8A.
    
    CONTROLS AND PROCEDURES
 Evaluation of Effectiveness of Disclosure Controls and Procedures
   24




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##### 



Internal Control Over Financial Reporting
 Managements Annual Report on Internal Control Over Financial Reporting
    Internal Control  Integrated
Framework
  25




---



##### 



Changes in Internal Control Over Financial Reporting
  ITEM 8B.
    
    OTHER INFORMATION
  26




---



##### 



PART III
 ITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
    Name
    
    Age
    
    Position
    
    SinceDavid R. Vey
    
    
    55
    
    
    Co-Chairman of the Board
    
    
    2003Scott C. Edelman
    
    
    54
    
    
    Co-Chairman of the Board
    
    
    2007Marco A. Emrich
    
    
    55
    
    
    President, Chief Executive Officer, and Director
    
    
    1999David C. Bluestone
    
    
    52
    
    
    Director
    
    
    2005Jack A. Pellicci
    
    
    69
    
    
    Director
    
    
    1996Roger W. Scearce
    
    
    58
    
    
    Director
    
    
    2004Dean V. Bobrowski
    
    
    53
    
    
    Vice President of Sales
    
    
    2007Anita M. Primo
    
    
    40
    
    
    Vice President, Chief Financial Officer and Secretary
    
    
    2003Timothy A. Rimlinger
    
    
    44
    
    
    Vice President, Chief Technology Officer
    
    
    2000
   Directors, Executive Officers and Control Persons
  David R. Vey
 27




---



##### 



Scott C. Edelman
 Marco A. Emrich
 David C. Bluestone
 28




---



##### 



Jack A. Pellicci
 Roger W. Scearce th
 Dean V. Bobrowski
 Anita M. Primo
 29




---



##### 



Timothy A. Rimlinger
 Compliance with Section 16(a) of the Securities Exchange Act- Beneficial Ownership
  Code of Ethics and Business Conduct
  Corporate Governance
 Director Independence
   30




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##### 



Audit Committee
  Nominations & Corporate Governance Committee
   Compensation Committee
  31




---



##### 



Executive Committee
  ITEM 10.
    
    EXECUTIVE COMPENSATION
  Summary Compensation Table
 Annual CompensationOptionName and Principal Position
    
    Fiscal Year
    
    Salary
    
    Bonus
    

Awards
    
    TotalMarco A. Emrich
    
    
    2007
    
    
    $
    225,000
    
    
    $
    
    
    
    $
    
    
    
    $
    225,000President and CEO
    
    
    2006
    
    
    $
    225,000
    
    
    $
    
    
    
    $
    
    
    
    $
    225,000Dean V. Bobrowski
    
    
    2007
    
    
    $
    170,000
    
    
    $
    
    
    
    $
    1,525
    
    
    $
    171,525Vice President of Sales
    
    
    2006
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Anita M. Primo
    
    
    2007
    
    
    $
    110,000
    
    
    $
    
    
    
    $
    1,951
    
    
    $
    111,951V.P. & Chief Financial Officer
    
    
    2006
    
    
    $
    110,000
    
    
    $
    
    
    
    $
    14,162
    
    
    $
    124,162Timothy A. Rimlinger
    
    
    2007
    
    
    $
    130,000
    
    
    $
    
    
    
    $
    
    
    
    $
    130,000V.P. & Chief Technical Officer
    
    
    2006
    
    
    $
    130,000
    
    
    $
    
    
    
    $
    13,132
    
    
    $
    143,132
 Base Salary
  32




---



##### 



Annual Cash Incentive Opportunities
  Long-Term Stock-Based Incentives
     Compensation Committee Interlocks and Insider Participation
  33




---



##### 



OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDStock AwardsEquity
    
    EquityIncentive
    
    IncentivePlan
    
    PlanMarket
    
    Awards:
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    Number
    
    Value
    
    Number
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    of
    
    of
    
    of
    
    payoutPlan
    
    
    
    
    
    
    
    
    
    Shares
    
    Shares
    
    Unearned
    
    Value ofAwards:
    
    
    
    
    
    
    
    
    
    or Units
    
    or Units
    
    Shares,
    
    UnearnedNumber of
    
    Number of
    
    Number of
    
    
    
    
    
    
    
    
    
    of Stock
    
    of Stock
    
    Units or
    
    Shares,Securities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    That
    
    That
    
    Other
    
    Units orUnderlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Have
    
    Have
    
    Rights
    
    OtherUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    Option
    
    Not
    
    Not
    
    That Not
    
    Rights ThatOptions #
    
    Options #
    
    Unearned
    
    Exercise
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    Have NotName
    
    Exercisable
    
    Unexercisable
    
    Options (#)
    
    Price
    
    Date
    
    (#)
    
    ($)
    
    (#)
    
    Vested ($)Marco Emrich
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    $
    2.25
    
    
    
    8/31/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00180,000
    
    
    
    
    
    
    
    
    
    
    $
    1.03
    
    
    
    8/31/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.0075,000
    
    
    
    
    
    
    
    
    
    
    $
    0.15
    
    
    
    12/30/15
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00175,000
    
    
    
    
    
    
    
    
    
    
    $
    2.25
    
    
    
    8/31/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00350,000
    
    
    
    
    
    
    
    
    
    
    $
    2.25
    
    
    
    8/31/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00315,000
    
    
    
    
    
    
    
    
    
    
    $
    1.03
    
    
    
    8/31/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00157,500
    
    
    
    
    
    
    
    
    
    
    $
    1.03
    
    
    
    8/31/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00Dean Bobrowski
    
    
    14,583
    
    
    
    85,417
    
    
    
    
    
    
    $
    0.18
    
    
    
    5/21/17
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    
    100,000
    
    
    $
    0.18
    
    
    
    5/21/17
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00Anita Primo
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    $
    1.72
    
    
    
    11/6/10
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.007,500
    
    
    
    
    
    
    
    
    
    
    $
    0.78
    
    
    
    3/29/11
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.0025,000
    
    
    
    
    
    
    
    
    
    
    $
    1.03
    
    
    
    11/6/10
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.007,500
    
    
    
    
    
    
    
    
    
    
    $
    1.03
    
    
    
    3/29/11
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.0050,000
    
    
    
    
    
    
    
    
    
    
    $
    0.19
    
    
    
    12/1/13
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.0086,227
    
    
    
    
    
    
    
    
    
    
    $
    0.15
    
    
    
    12/30/15
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00Timothy Rimlinger
    
    
    13,500
    
    
    
    
    
    
    
    
    
    
    $
    1.35
    
    
    
    4/21/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.0018,000
    
    
    
    
    
    
    
    
    
    
    $
    1.53
    
    
    
    11/18/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.0016,200
    
    
    
    
    
    
    
    
    
    
    $
    1.03
    
    
    
    11/18/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.0012,150
    
    
    
    
    
    
    
    
    
    
    $
    1.03
    
    
    
    4/21/09
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00101,905
    
    
    
    
    
    
    
    
    
    
    $
    0.15
    
    
    
    12/30/15
    
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.00
 34




---



##### 



Compensation of Directors
 Cash Compensation
   Equity Compensation
   th
 Employment Agreements and Change of Control Arrangements
   35




---



##### 



2007 DIRECTOR COMPENSATION
 Non-Equity
    
    NonqualifiedFees Earned
    
    
    
    
    
    
    
    Incentive
    
    Deferred
    
    Allor Paid in
    
    Stock
    
    Option
    
    Plan
    
    Comp.
    
    Other
    
    Total CashName
    
    Cash
    
    Awards
    

Awards
    
    Comp.
    
    Earnings
    
    Comp.
    
    Comp.David C. Bluestone
    
    $
    1,500
    
    
    $
    
    
    
    $
    2,004
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,500Scott C. Edelman
    
    $
    1,000
    
    
    $
    
    
    
    $
    1,296
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,000Victoria V. Looney
    
    $
    1,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,000Jack Pellicci
    
    $
    2,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,000Roger W. Scearce
    
    $
    1,500
    
    
    $
    
    
    
    $
    1,296
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,500David R. Vey
    
    $
    500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    500
  ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
    
    Each person or group known to the Company who beneficially owns five (5%) percent or
more of the outstanding shares of the Companys common stock;
    
    Each Director and named executive officer; and
    
    The Companys executive officers and members of its Board of Directors as a group.
 36




---



##### 



Amount and Nature ofName of Beneficial Owner
    
    Beneficial Ownership
    
    Percent of ClassMarco A. Emrich
    
    
    1,530,385
    (1)
    
    
    1.53
    %David C. Bluestone
    
    
    220,000
    (1)
    
    
    *Dean V. Bobrowski
    
    
    24,998
    (1)
    
    
    *Scott C. Edelman
    
    
    235,000
    (1)
    
    
    *Jack Pellicci
    
    
    479,574
    (1)
    
    
    *Anita M. Primo
    
    
    266,160
    (1)
    
    
    *Timothy A. Rimlinger
    
    
    280,880
    (1)
    
    
    *Roger W. Scearce
    
    
    260,700
    (1)
    
    
    *David R. Vey
    
    
    52,187,999
    (1,2)
    
    
    44.17
    %All executive officers
and Directors as a
group, (9 persons)
    
    
    55,485,696
    
    
    
    43.08
    %
 
 *
    
    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 from March 24, 2008, upon the
exercise of outstanding options and warrants:Mr. Emrich 455,000 options and 997,500 warrants
Mr. Bluestone  220,000 options
Mr. Edelman  235,000 options
Mr. Bobrowski  24,998 options
Mr. Pellicci  458,250 options
Ms. Primo  201,227 options
Mr. Rimlinger  161,755 options
Mr. Scearce  235,000 options
Mr. Vey  300,000 options and 125,000 warrants(2)
    
    Mr. Vey has a right to acquire 19,223,310 shares within 60 days upon a
notice of conversion related to a $2,691,263 convertible note due October 23,
2008. In addition, the conversion price of the related note was issued at a
discount to the fair market value of the underlying common stock on the date the
notes were issued. 37




---



##### 



ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND, DIRECTOR INDEPENDENCE
  David Vey and Oak Harbor
 Revolving Line of Credit with David Vey
  Bridge Loan with David Vey
   Oak Harbor Note
  38




---



##### 



Convertible Note with David Vey
    39




---



##### 



Intercreditor Agreement
  Interest Expense Related to David Vey and Oak Harbor
  Security Agreement
   Cross Default Provisions of the Notes
  40




---



##### 



Principal sum
    
    Accrued interestInstrument
    
    Payee
    
    Maturity Date
    
    due
    
    at December 31, 2007Promissory Note dated as
of August 17, 2006
    
    Oak Harbor
Investment
Properties, LLC
    
    May 1, 2009
    
    $
    1,040,402
    
    
    $
    115,831Secured Convertible
Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    2,691,263
    
    
    $
    259,557Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    1,213,952
    
    
    $
    117,079Revolving Promissory Note
(Line of Credit) dated as
of September 27, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    405,000
    
    
    $
    30,788
 David Vey and OSI Litigation
   ACEncrypt Solutions, LLC.
  41




---



##### 



PART IV
 ITEM 13. EXHIBITS
  3.1
    
    Articles of Incorporation (2) (Exhibit 3.1)3.2
    
    Bylaws (2) (Exhibit 3.2)3.3
    
    Amendment to Articles of Incorporation (3)3.4
    
    Amendment to Articles of Incorporation (25)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)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)10.35
    
    Warrant issued to Acxiom Corporation Dated April 4, 2001 (8) (Exhibit 10.35)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)10.42
    
    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)
 42




---



##### 



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 12-24-0210.47
    
    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)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)10.64#
    
    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)
 43




---



##### 



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)10.77
    
    Promissory Note dated August 17, 2006 in the principal amount of $1,040,402.22 from SEDONA
to Oak Harbor. (26)10.78
    
    Amended and Restated Security Agreement dated August 17, 2006 between SEDONA and Oak Harbor.
(26)10.79
    
    Exchange Agreement dated August 17, 2006 between SEDONA and Oak Harbor. (26)10.80
    
    Secured Convertible Promissory Note dated October 23, 2006 in the principal amount of
$2,691,263 from Sedona to Vey. (26)10.81
    
    Registration Rights Agreement dated August 17, 2006 between Vey and SEDONA. (26)10.82
    
    Exchange Agreement dated October 23, 2006 between SEDONA and Vey. (26)10.83
    
    Promissory Note dated October 23, 2006 in the principal amount of $1,213,952 from SEDONA to
Vey. (26)10.84
    
    Security Agreement dated October 23, 2006 between Vey and SEDONA. (26)10.85
    
    Revolving promissory note dated September 27, 2006 in the principal amount of $500,000 from
SEDONA to Vey. (26)10.86
    
    Intercreditor Agreement dated October 23, 2006 between Vey and Oak Harbor. (26)10.87
    
    Terms and Conditions Agreement dated September 27, 2006. (26)10.88
    
    Acknowledgment and Receipt among SEDONA, Vey and Oak Harbor. (26)10.89
    
    Assignment of ACEncrypt receivable by SEDONA to Vey. (26)10.90
    
    Waiver dated as of October 23, 2006 from Rucks. (26)10.91
    
    Waiver dated as of October 23, 2006 from Mitchell. (26)10.92
    
    Form of Common Stock and Warrants Purchase Agreement used in connection with the March 2,
2007 private placement by and among the Company and the investor signatory thereto. (28)10.93
    
    Form of Registration Rights Agreements used in March 2, 2007 private placement by and among
the Company and the investor signatory thereto. (28)10.94
    
    Form of Warrants issued to investor used in March 2, 2007 private sale of common stock. (28)10.95
    
    Amendment to promissory note dated September 27, 2006 between SEDONA Corporation and David
Vey in the principal amount of $500,000. (29)10.96
    
    Amendment to promissory note dated October 23, 2006 between SEDONA Corporation and David Vey
in the principal amount of $1,213,952. (29)10.97
    
    Amendment to promissory note dated August 17, 2006 between SEDONA Corporation and Oak Harbor
Investment Properties, L.L.C. in the principal amount of $1,040,402. (29)10.98
    
    Form of Common Stock and Warrants Purchase Agreements used in connection with private
placement transactions entered into during fiscal year 2007 by and among the Company and the
investor signatory thereto. (29)10.99
    
    Form of Registration Rights Agreements used in connection with private placement
transactions entered into during fiscal year 2007 by and among the Company and the investor
signatory thereto. (29)
 44




---



##### 



10.100
    
    Form of Warrants issued to Investors used in connection with private placement transactions
entered into in fiscal year 2007 by and among the Company and the investor signatory thereto.
(29)10.101
    
    Agreement between the Company and Vey Associates, Inc. dated as of September 4, 2007 (30)10.102*
    
    Amendment to promissory note dated August 17, 2006 between SEDONA Corporation and Oak
Harbor Investment Properties, L.L.C. in the principal amount of $1,040,402.10.103*
    
    Amendment to promissory note dated September 27, 2006 between SEDONA Corporation and David
Vey in the principal amount of $500,000.10.104*
    
    Amendment to promissory note dated October 23, 2006 between SEDONA Corporation and David
Vey in the principal amount of $1,213,952.10.105*
    
    Amendment to secured convertible note dated October 23, 2006 between SEDONA Corporation and
David Vey in the principal amount of $2,691,263.10.106*
    
    Amendment to loan agreement dated July 5, 2005 between SEDONA Corporation and William W.
Rucks.10.107*
    
    Amendment to promissory note dated July 1, 2005 between SEDONA Corporation and William W.
Rucks in the principal amount of $250,000.10.108*
    
    Amendment to promissory note dated August 1, 2005 between SEDONA Corporation and William W.
Rucks in the principal amount of $250,000.10.109*
    
    Amendment to promissory note dated September 29, 2005 between SEDONA Corporation and
William W. Rucks in the principal amount of $500,000.10.110*
    
    Amendment to promissory note dated May 31, 2006 between SEDONA Corporation and William W.
Rucks in the principal amount of $300,00010.111*
    
    Amendment to convertible note dated May 31, 2006 between SEDONA Corporation and Charles
Mitchell in the principal amount of $300,000.14.1
    
    Code of Conduct and Business Ethics, adopted by Board of Directors, June 21, 2004 (20)16.1
    
    Letter from McGladrey and Pullen, LLP, dated April 13, 2007 agreeing to the statement of the
Company under 4.01 of its Form 8-K, filed April 19, 2007 (31)16.2
    
    Letter from McGladrey and Pullen, LLP, dated June 20, 2007, agreeing to the statements of the
Company under Item 4.01 of its 8-KA filed on May 21, 2007 and June 20, 2007 (32)23.1*
    
    Consent of Asher & Company, Ltd.23.1*
    
    Consent of McGladrey & Pullen, LLP31.1*
    
    Statement Under Oath of Principal Executive Officer of the Company Pursuant to Section 302
of Sarbanes-Oxley Act of 200231.2*
    
    Statement Under Oath of Principal Financial Officer of the Company Pursuant to Section 302
of Sarbanes-Oxley Act of 200232.1*
    
    Statement Under Oath of Principal Executive Officer of the Company Pursuant to Section 906
of Sarbanes-Oxley Act of 200232.2*
    
    Statement Under Oath of Principal Financial Officer of the Company Pursuant to Section 906
of Sarbanes-Oxley Act of 200299.1
    
    Amendment to Compensation Plan for Directors
 45




---



##### 



99.1
    
    Surety Agreement dated as of November 2, 2006 from Vey. (26)99.1
    
    Amended and Restated Surety Agreement dated as of November 2, 2006 from Vey. (27)
 
 *
    
    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). 46




---



##### 



(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 Mach
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.(25)
    
    Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2006.
 47




---



##### 



(26)
    
    Filed as an Exhibit to the 8-K on November 8, 2006.(27)
    
    Filed as an Exhibit to the 8-K on December 21, 2006.(28)
    
    Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2007.(29)
    
    Filed as an Exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2007.(30)
    
    Filed as an Exhibit to the 8-K on September 10, 2007.(31)
    
    Filed as an Exhibit to the 8-K on April 19, 2007.(32)
    
    Filed as an Exhibit to the 8-K on June 20, 2007.
 48




---



##### 



ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Type of Service
    
    2007
    
    2006Audit Fees
    
    $
    102,000
    
    
    $
    98,500Audit-Related Fees
    
    
    
    
    
    
    Tax Fees
    
    $
    8,056
    
    
    $
    19,835All Other Fees
    
    
    
    
    
    
    
 Audit Fees.
 Audit-Related Fees.
 Tax Fees.
 All Other Fees.
 Pre-Approval of Audit and Non-Audit Services
    49




---



##### 



SIGNATURES
  SEDONA CORPORATIONDATE April 15, 2008
    /S/ Marco A. EmrichMarco A. EmrichChief Executive Officer and President  Signatures
 BY
    
    /S/ David R. Vey

David R. Vey
Chairman of the Board
    
    
    
    Date: April 15, 2008BY
    
    /S/ Marco A. Emrich
    
    
    
    Date: April 15, 2008Marco A. Emrich
President, Chief Executive Officer and
DirectorBY
    
    /S/ David C. Bluestone
    
    
    
    Date: April 15, 2008David C. Bluestone
DirectorBY
    
    /S/ Scott C. Edelman
    
    
    
    Date: April 15, 2008Scott C. Edelman
DirectorBY
    
    /S/ Jack A. Pellicci
    
    
    
    Date: April 15, 2008Jack A. Pellicci
DirectorBY
    
    /S/ Anita M. Primo
    
    
    
    Date: April 15, 2008Anita M. Primo
Chief Financial Officer and Vice President 
Principal Financial and Accounting OfficerBY
    
    /S/ Roger W. Scearce
    
    
    
    Date: April 15, 2008Roger W. Scearce
Director
 50




---



##### 



Reports of Independent Registered Public Accounting Firms
    
    
    F-2Consolidated Financial StatementsConsolidated Balance Sheets as of December 31, 2007 and December 31, 2006
    
    
    F-4Consolidated Statements of Operations for each of the
two years in the period ended December 31, 2007
    
    
    F-5Consolidated Statements of Stockholders Deficit for each of the
two years in the period ended December 31, 2007
    
    
    F-6Consolidated Statements of Cash Flows for each of the
two years in the period ended December 31, 2007
    
    
    F-8Notes to Consolidated Financial Statements
    
    
    F-9
   F-1




---



##### 



/s/   ASHER & COMPANY, Ltd. 
 F-2




---



##### 



Share-Based Payment
  /s/ McGladrey & Pullen, LLP 
 F-3




---



##### 



SEDONA CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS  (In Thousands, Except Share and Per Share Data)
 December 31,2007
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    49
    
    
    $
    7Accounts receivable, net
    
    
    560
    
    
    
    300Prepaid expenses and other current assets
    
    
    68
    
    
    
    117Total current assets
    
    
    677
    
    
    
    424Accounts receivable, non-current
    
    
    325
    
    
    
    270Property and equipment, net of accumulated depreciation and amortization
    
    
    13
    
    
    
    19Other non-current assets
    
    
    3
    
    
    
    3Total non-current assets
    
    
    341
    
    
    
    292Total assets
    
    $
    1,018
    
    
    $
    716Liabilities and stockholders deficitCurrent liabilities:Line of credit
    
    $
    
    
    
    $
    225Current maturities of long-term debt, net of discount
    
    
    8
    
    
    
    2,472Accounts payable
    
    
    593
    
    
    
    531Accrued expenses and other current liabilities
    
    
    1,393
    
    
    
    649Deferred and unearned revenue
    
    
    789
    
    
    
    675Total current liabilities
    
    
    2,783
    
    
    
    4,552Long-term debt, net of discount, less current maturities
    
    
    6,906
    
    
    
    3,982Other non-current liabilities
    
    
    74
    
    
    
    Deferred and unearned revenue
    
    
    325
    
    
    
    270Total long-term liabilities
    
    
    7,305
    
    
    
    4,252Total liabilities
    
    
    10,088
    
    
    
    8,804Stockholders deficit:Class A convertible preferred stock (Liquidation preference $1,000)Authorized shares  1,000,000Series A, par value $2.00, Issued and outstanding shares 500,000
    
    
    1,000
    
    
    
    1,000Common stock, par value $0.001Authorized shares 175,000,000, Issued and outstanding shares 97,649,350 and 90,153,534 in 2007 and 2006, respectively
    
    
    98
    
    
    
    90Additional paid-in-capital
    
    
    64,880
    
    
    
    63,290Accumulated deficit
    
    
    (75,048
    )
    
    
    (72,468
    )Total stockholders deficit
    
    
    (9,070
    )
    
    
    (8,088
    )Total liabilities and stockholders deficit
    
    $
    1,018
    
    
    $
    716
 See accompanying notes to consolidated financial statements.
 F-4




---



##### 



SEDONA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS  (In Thousands, Except Share and Per Share Data)
 For years ended December 31,2007
    
    2006Revenues:Product licenses  unrelated parties
    
    $
    441
    
    
    $
    577Services  unrelated parties
    
    
    774
    
    
    
    598Services  related parties
    
    
    
    
    
    
    240Total revenues
    
    
    1,215
    
    
    
    1,415Cost of revenues:Product licenses
    
    
    
    
    
    
    5Services
    
    
    328
    
    
    
    294Total cost of revenues
    
    
    328
    
    
    
    299Gross profit
    
    
    887
    
    
    
    1,116Expenses:General and administrative
    
    
    1,644
    
    
    
    1,460Stock option expense
    
    
    14
    
    
    
    238Sales, marketing and product support
    
    
    586
    
    
    
    419Research and development
    
    
    601
    
    
    
    727Total operating expenses
    
    
    2,845
    
    
    
    2,844Loss from operations
    
    
    (1,958
    )
    
    
    (1,728
    )Other income (expense):Interest expense
    
    
    (622
    )
    
    
    (524
    )Total other expenses
    
    
    (622
    )
    
    
    (524
    )Net Loss
    
    
    (2,580
    )
    
    
    (2,252
    )Deemed dividends applicable to preferred stockholders
    
    
    (120
    )
    
    
    (120
    )Loss applicable to Common Stockholders
    
    $
    (2,700
    )
    
    $
    (2,372
    )Basic and diluted net loss per share applicable to common shares
    
    $
    (0.03
    )
    
    $
    (0.03
    )Basic and diluted weighted average common shares outstanding
    
    
    93,627,042
    
    
    
    89,640,569
 See accompanying notes to consolidated financial statements.
 F-5




---



##### 



SEDONA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT  (In Thousands, Except Share Data)
 Stock Series A
    
    Stock Series HShares
    
    Amount
    
    Shares
    
    AmountBalance, December 31, 2005
    
    
    500,000
    
    
    $
    1,000
    
    
    
    1,500
    
    
    $
    1,500Common stock issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued for legal expenses related to litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to placement agent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Settlement with Acxiom (Note 14)
    
    
    
    
    
    
    
    
    
    
    (1,500
    )
    
    
    (1,500
    )Common stock issued for accrued interest expense on
convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued for employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of conversion feature of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options and warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss, year ended December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2006
    
    
    500,000
    
    
    $
    1,000
    
    
    
    
    
    
    
    Common stock issued for consulting services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued for legal expenses related to litigation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued to placement agent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Settlement with Acxiom (Note 14)
    
    
    
    
    
    
    Common stock issued for accrued interest expense on
convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued for employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of conversion feature of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value of options and warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss, year ended December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2007
    
    
    500,000
    
    
    $
    1,000
    
    
    
    
    
    
    
    
 See accompanying notes to consolidated financial statements.
 F-6




---



##### 



SEDONA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT  (In Thousands, Except Share Data)
 AdditionalCommon Stock
    
    Paid-In
    
    AccumulatedShares
    
    Amount
    
    Capital
    
    DeficitBalance, December 31, 2005
    
    
    87,324,334
    
    
    $
    87
    
    
    $
    60,646
    
    
    $
    (70,216
    )Common stock issued for consulting services
    
    
    173,265
    
    
    
    
    
    
    
    32
    
    
    
    Common stock issued for legal expenses related to litigation
    
    
    242,262
    
    
    
    
    
    
    
    43
    
    
    
    Common stock issued to placement agent
    
    
    200,000
    
    
    
    1
    
    
    
    42
    
    
    
    Settlement with Acxiom (Note 14)
    
    
    
    
    
    
    
    
    
    
    1,821
    
    
    
    Common stock issued for accrued interest expense on
convertible notes
    
    
    2,062,161
    
    
    
    2
    
    
    
    307
    
    
    
    Common stock issued for employee stock purchase plan
    
    
    151,512
    
    
    
    
    
    
    
    25
    
    
    
    Fair value of conversion feature of debt
    
    
    
    
    
    
    
    
    
    
    136
    
    
    
    Fair value of options and warrants issued
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    Net loss, year ended December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,252
    )Balance, December 31, 2006
    
    
    90,153,534
    
    
    
    90
    
    
    
    63,290
    
    
    
    (72,468
    )Common stock issued for consulting services
    
    
    94,176
    
    
    
    
    
    
    
    18
    
    
    
    Common stock issued in private placement transactions
    
    
    6,862,448
    
    
    
    7
    
    
    
    1,474
    
    
    
    Common stock issued from the exercise of stock options
    
    
    150,506
    
    
    
    
    
    
    
    23
    
    
    
    Common stock issued to employee 401(k) savings plan
    
    
    347,065
    
    
    
    1
    
    
    
    53
    
    
    
    Common stock issued for employee stock purchase plan
    
    
    41,621
    
    
    
    
    
    
    
    8
    
    
    
    Fair value of options and warrants issued
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    Net loss, year ended December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,580
    )Balance, December 31, 2007
    
    
    97,649,350
    
    
    
    98
    
    
    
    64,880
    
    
    
    (75,048
    )
 See accompanying notes to consolidated financial statements.
 F-7




---



##### 



SEDONA CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS  (In Thousands)
 Year ended December 312007
    
    2006Operating activities:Net loss
    
    $
    (2,580
    )
    
    $
    (2,252
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    6
    
    
    
    6Bad debt expense
    
    
    4
    
    
    
    Charge for employer 401(K) stock contribution
    
    
    54
    
    
    
    Common stock issued for legal, consulting services and placement agent
    
    
    18
    
    
    
    118Charge for option or warrant based compensation
    
    
    14
    
    
    
    238Accretion of debt discount
    
    
    55
    
    
    
    36Changes in operating assets and liabilities:Accounts receivable
    
    
    (320
    )
    
    
    (252
    )Prepaid expenses and other current assets
    
    
    49
    
    
    
    6Accounts payable and accrued expenses
    
    
    806
    
    
    
    498Deferred revenue
    
    
    169
    
    
    
    328Net cash used in operating activities
    
    
    (1,725
    )
    
    
    (1,274
    )Financing activities:Repayments of long-term obligations
    
    
    
    
    
    
    (850
    )Issuance of common stock, net
    
    
    
    
    
    
    25Issuance of convertible notes
    
    
    
    
    
    
    755Proceeds from line of credit
    
    
    180
    
    
    
    Proceeds from other non-current liabilities
    
    
    74
    
    
    
    Proceeds from issuance of short-term debenture and notes
    
    
    
    
    
    
    1,300Proceeds from sale of common stock
    
    
    1,490
    
    
    
    Proceeds from the exercise of stock options
    
    
    23
    
    
    
    Net cash provided by financing activities
    
    
    1,767
    
    
    
    1,230Net increase/(decrease) in cash and cash equivalents
    
    
    42
    
    
    
    (44
    )Cash and cash equivalents, beginning of year
    
    
    7
    
    
    
    51Cash and cash equivalents, end of year
    
    $
    49
    
    
    $
    7
 See accompanying notes to consolidated financial statements.
 F-8




---



##### 



SEDONA CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          F-9




---



##### 



â
         F-10




---



##### 



Accounting for the Impairment or Disposal of Long-Lived
Assets
      , Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed.
 F-11




---



##### 



Revenue Recognition
  Product License Revenue
   Services Revenue
  F-12




---



##### 




    
    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.
    
    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-(3) year terms and are renewable annually thereafter.
   Accounting for
Income Tax Uncertainties- an interpretation of FASB Statement No 109"
  Earnings Per Share
 F-13




---



##### 



Share Based Payment
    SFAS No. 141(R) Business
Combinations
 SFAS No. 160 Non-controlling Interests in
Consolidated Financial Statements . Consolidated Financial Statements,
 F-14




---



##### 



SFAS No. 159  The Fair Value Option for Financial
Assets and Financial Liabilities
 SFAS No. 157 Fair Value Measurements Effective Date of FASB Statement
No. 157,
 Off-Balance Sheet Arrangements
    F-15




---



##### 



December 31,2007
    
    2006Machinery and equipment
    
    $
    76
    
    
    $
    76Leasehold improvements
    
    
    15
    
    
    
    15Purchased software for internal use
    
    
    31
    
    
    
    31122
    
    
    
    122Less accumulated depreciation and amortization
    
    
    109
    
    
    
    103$
    13
    
    
    $
    19
     December 31,2007
    
    2006Oak Harbor note
    
    $
    1,040
    
    
    $
    1,040Bridge loan with David Vey
    
    
    1,214
    
    
    
    1,214Convertible note with David Vey, net of discount of $45
and $100 at December 31, 2007 and 2006.
    
    
    2,647
    
    
    
    2,592Convertibles
notes with Rucks and Mitchell
    
    
    1,600
    
    
    
    1,600Line of credit
    
    
    405
    
    
    
    Capital lease obligations
    
    
    8
    
    
    
    86,914
    
    
    
    6,454Less current maturities
    
    
    8
    
    
    
    2,472Long-term debt
    
    $
    6,906
    
    
    $
    3,982
  Years ending
    
    December 31,2008
    
    2009$
    8
    
    
    $
    6,951
 F-16




---



##### 



David Vey and Oak Harbor
 Oak Harbor Note
  Bridge Loan with David Vey
   F-17




---



##### 



Convertible Note with David Vey
    F-18




---



##### 



Intercreditor Agreement
  Interest Expense Related to David Vey and Oak Harbor
  Security Agreement
   Cross Default Provisions of the Notes
  F-19




---



##### 



Principal sum
    
    Accrued interestInstrument
    
    Payee
    
    Maturity Date
    
    due
    
    At December 31, 2007Promissory Note dated as
    
    Oak Harborof August 17, 2006
    
    InvestmentProperties, LLC
    
    May 1, 2009
    
    $
    1,040,402
    
    
    $
    115,831Secured ConvertiblePromissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    2,691,263
    
    
    $
    259,557Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    1,213,952
    
    
    $
    117,079Revolving Promissory Note(Line of Credit) dated asof September 27, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    405,000
    
    
    $
    30,788
 Rucks and Mitchell
   F-20




---



##### 



Common Stock Issuances
 Issuance of Stock for Professional Services:
   F-21




---



##### 



Issuance of Stock Pursuant to Employee Stock Purchase Plan:
   Grant of Stock Pursuant to Employee 401k Plan:
  Stock Option Exercises:
  Financing Activities with David R. Vey and Oak Harbor Investments LLC:
  Private Placement of Common Stock:
 First Quarter 2007
  F-22




---



##### 



Second Quarter 2007
   Third Quarter 2007
  F-23




---



##### 



Fourth Quarter 2007
    F-24




---



##### 



Weighted AverageRemainingWeighted Average
    
    Contractual Term
    
    Aggregate IntrinsicShares
    
    Exercise Price
    
    (Years)
    
    ValueOutstanding at December 31, 2005
    
    
    4,767,710
    
    
    $
    0.80Canceled or expired
    
    
    (1,054,661
    )
    
    
    1.42Granted
    
    
    600,000
    
    
    
    0.21Exercised
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    4,313,049
    
    
    $
    0.59
    
    
    
    4.27
    
    
    $
    21,500Canceled or expired
    
    
    (344,800
    )
    
    
    0.87Granted
    
    
    500,000
    
    
    
    0.18Exercised
    
    
    (150,506
    )
    
    
    0.15Outstanding at December 31, 2007
    
    
    4,317,743
    
    
    $
    0.54
    
    
    
    3.56
    
    
    $
    0
 F-25




---



##### 



Weighted AverageRemainingExercisable at
    
    
    
    
    
    Exercise Price
    
    Weighted Average
    
    Contractual Term
    
    Aggregate IntrinsicYear-end
    
    Options
    
    Range Per Share
    
    Exercise Price
    
    (Years)
    
    Value2006
    
    
    4,146,215
    
    
    $
    0.15 to $5.13
    
    
    $
    0.61
    
    
    
    4.27
    
    
    $
    21,5002007
    
    
    3,722,326
    
    
    $
    0.15 to $5.13
    
    
    $
    0.59
    
    
    
    3.29
    
    
    $
    0
  Ranges
    
    TotalRange of exercise prices
    
    $0.15 to $1.05
    
    $1.35 to $2.25
    
    $2.50 to $5.13
    
    $0.15 to $5.13Options outstanding
    
    
    3,809,743
    
    
    
    415,000
    
    
    
    93,000
    
    
    
    4,317,743Weighted average remaining
contractual life (years)
    
    
    5.08
    
    
    
    1.74
    
    
    
    1.74
    
    
    
    3.56Weighted average exercise price
    
    
    0.33
    
    
    
    1.86
    
    
    
    3.07
    
    
    
    0.54Exercisable
    
    
    3,214,326
    
    
    
    415,000
    
    
    
    93,000
    
    
    
    3,722,326Weighted average exercise price
    
    
    0.36
    
    
    
    1.86
    
    
    
    3.07
    
    
    
    0.59
   Weighted AverageRemainingWeighted Average
    
    Contractual Term
    
    Aggregate IntrinsicShares
    
    Exercise Price
    
    (Years)
    
    ValueOutstanding at December 31, 2005
    
    
    12,134,525
    
    
    $
    1.08Canceled or expired
    
    
    (5,746,644
    )
    
    
    0.92Granted
    
    
    1,200,000
    
    
    
    0.35Exercised
    
    
    
    
    
    
    Outstanding at December 31, 2006
    
    
    7,587,881
    
    
    $
    1.09
    
    
    
    1.84
    
    
    $
    0Canceled or expired
    
    
    (2,754,611
    )
    
    
    0.77Granted
    
    
    4,963,575
    
    
    
    0.26Exercised
    
    
    Outstanding at December 31, 2007
    
    
    9,796,845
    
    
    $
    0.76
    
    
    
    1.51
    
    
    $
    0
 F-26




---



##### 



Weighted AverageRemainingExercisable at
    
    
    
    
    
    Exercise Price
    
    Weighted Average
    
    Contractual Term
    
    Aggregate IntrinsicYear-end
    
    Warrant Shares
    
    Range Per Share
    
    Exercise Price
    
    (Years)
    
    Value2006
    
    
    7,363,830
    
    
    $
    0.35 to $3.75
    
    
    $
    1.07
    
    
    
    1.84
    
    
    $
    02007
    
    
    9,593,280
    
    
    $
    0.1896 to $3.36
    
    
    $
    0.74
    
    
    
    1.51
    
    
    $
    0
  Ranges
    
    TotalRange of exercise prices
    
    $0.1896 to $1.21
    
    $1.53 to $2.25
    
    $2.50 to $3.36
    
    $0.1896 to $3.36Outstanding
    
    
    8,051,845
    
    
    
    1,303,000
    
    
    
    442,000
    
    
    
    9,796,845Weighted average remaining
contractual life (years)
    
    
    1.99
    
    
    
    1.27
    
    
    
    0.66
    
    
    
    1.51Weighted average exercise price
    
    
    0.44
    
    
    
    2.15
    
    
    
    2.56
    
    
    
    0.76Exercisable
    
    
    7,947,130
    
    
    
    1,303,000
    
    
    
    343,150
    
    
    
    9,593,280Weighted average exercise price
    
    
    0.48
    
    
    
    2.15
    
    
    
    2.58
    
    
    
    0.74
   Year Ended December 31,2007
    
    2006Stock
options and warrants
    
    $
    0.10
    
    
    $
    0.11
   F-27




---



##### 



David Vey and OSI Litigation
  F-28




---



##### 



ACEncrypt Solutions, LLC.
     F-29




---



##### 



2008
    
    2009
    
    2010
    
    2011
    
    TotalCorporate Headquarters
    
    $
    83
    
    
    $
    83
    
    
    $
    83
    
    
    $
    
    
    
    $
    249Plymouth, MN
    
    $
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11Total
    
    $
    94
    
    
    $
    83
    
    
    $
    83
    
    
    $
    
    
    
    $
    260
  F-30




---



##### 



Year ending December 31,2007
    
    2006Accrued payroll, benefits and severance
    
    $
    144
    
    
    $
    176Accrued rent
    
    
    7
    
    
    
    5Accrued fees and other expenses to Directors for
professional services and other expenses
    
    
    322
    
    
    
    126Note payable, general insurance
    
    
    60
    
    
    
    95Accrued interest on debt obligations
    
    
    796
    
    
    
    241Miscellaneous
    
    
    64
    
    
    
    6Total
    
    $
    1,393
    
    
    $
    649
        F-31




---



##### 



Total(In thousands)Balance at January 1, 2007
    
    $
    37Settlements / lapses in statutes of limitation
    
    
    (0
    )Balance at December 31, 2007
    
    $
    37
    Year Ended December 312007
    
    2006Cash paid during the year for interest
    
    $
    10
    
    
    $
    110Conversion of accrued interest into common stock
    
    
    
    
    
    
    307Conversion of accrued interest into debt
    
    
    
    
    
    
    281Fair value of conversion feature of debt
    
    
    
    
    
    
    136Settlement with Acxiom for forgiveness of debt
    
    
    
    
    
    
    1,820
   F-32




---



##### 



2007
    
    2006Company A
    
    
    33
    %
    
    
    18
    %Company C
    
    
    
    
    
    
    17
    %Company D
    
    
    
    
    
    
    13
    %
  2007
    
    2006Company A
    
    
    52
    %
    
    
    65
    %Company B
    
    
    14
    %
    
    
    12
    %
  F-33




---



##### 



Extensions
 Principal sumInstrument
    
    Payee
    
    Maturity Date
    
    duePromissory Note dated as
    
    Oak Harbor
    
    May 1, 2009
    
    $
    1,040,402of August 17, 2006
    
    InvestmentProperties, LLCSecured Convertible
    
    David Vey
    
    January 1, 2009
    
    $
    2,691,263Promissory Note dated as
of October 23, 2006Promissory Note dated as
of October 23, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    1,213,952Revolving Promissory Note
(Line of Credit) dated as
of September 27, 2006
    
    David Vey
    
    January 1, 2009
    
    $
    405,000Convertible Note dated as of
May 31, 2006
    
    William Rucks
    
    October 23, 2009
    
    $
    300,000Convertible Promissory Note
dated as of September 29, 2005
    
    William Rucks
    
    January 1, 2009
    
    $
    500,000Convertible Promissory Note
dated as of August 1, 2005
    
    William Rucks
    
    January 1, 2009
    
    $
    250,000Convertible Promissory Note
dated as of July 1, 2005
    
    William Rucks
    
    January 1, 2009
    
    $
    250,000Convertible Note dated as
of May 31, 2006
    
    Charles Mitchell
    
    October 23, 2009
    
    $
    300,000
  F-34