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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, DC 20549****FORM 10-QSB**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934****For the quarterly period ended June 30, 2007**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934****For the transition period from            to****Commission file number 0-15864****SEDONA Corporation**(Exact name of small business issuer as specified in its charter)   PENNSYLVANIA 95-4091769   (State or other jurisdiction of (IRS Employerincorporation or organization) Identification No.)   1003 W. 9th Avenue, Second Floor, King of Prussia, PA 19406   (Address of principal executive offices) (Zip Code)Issuer’s telephone number, including area code (610) 337-8400.Check whether the issuer (1) filed all reports required to be filed by Section 13 and 15(d)of the Securities Exchange Act of 1934 during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES þ NO o.Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.) YES o NO þ.At August 13, 2007, there were 98,037,312 shares outstanding of the registrant’s commonstock, par value $0.001 per share.Transitional Small Business Disclosure Format: YES o NO þ.  
 

 
**SEDONA CORPORATION AND SUBSIDIARIES**       INDEX   PAGE PART I. FINANCIAL INFORMATION         Item 1. Condensed Consolidated Financial Statements         Condensed Consolidated Balance Sheets — June 30, 2007 (Unaudited) and December 31, 2006  4      Condensed Consolidated Statements of Operations — (Unaudited) three months ended June 30, 2007 and 2006  5      Condensed Consolidated Statements of Operations — (Unaudited) six months ended June 30, 2007 and 2006  6      Condensed Consolidated Statements of Cash Flows — (Unaudited) six months ended June 30, 2007 and 2006  7      Notes to the Condensed Consolidated Financial Statements – June 30, 2007  8-17      Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  17-21      Item 3. Controls and Procedures  22      PART II. OTHER INFORMATION         Item 1 through Item 6.  23      SIGNATURE PAGE  24      EXHIBIT INDEX  25      CERTIFICATIONS  26-29  Certification Section 302 Certification Section 302 Certification Section 906 Certification Section 906
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**NOTE ON FORWARD-LOOKING STATEMENTS**This Form 10-QSB contains forward-looking statements which are statements other than historicalinformation or statements of current condition. Some forward-looking statements may be identifiedby use of terms such as “may”, “will”, “should”, “could”, “would”, “plan”, “estimates”,“projects”, “predicts”, “potential”, “believes”, “anticipates”, “intends”, or “expects”. Theseforward-looking statements relate to the plans, objectives, and expectations of SEDONA®Corporation (the “Company”, SEDONA Corp.” or “SEDONA”) for future operations. In light of therisks and uncertainties inherent in all forward-looking statements, the inclusion of suchstatements in this Form 10-QSB should not be regarded as a representation by the Company or anyother person that the objectives or plans of the Company will be achieved or that any of theCompany’s operating expectations will be realized. The Company’s revenues and results ofoperations are difficult to forecast and could differ materially from those projected in theforward-looking statements contained herein as a result of certain factors including, but notlimited to, dependence on strategic relationships, ability to raise additional capital, ability torecruit and retain qualified professionals, customer acquisition and retention, and rapidtechnological change. These factors should not be considered exhaustive; the Company undertakesno obligation to release publicly the results of any future revisions it may make toforward-looking statements to reflect events or circumstances after the date hereof or to reflectthe occurrence of unanticipated events.
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**PART I. FINANCIAL INFORMATION****Item 1. Financial Statements****SEDONA CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEETS***(In thousands, except share and per share data)*           June 30, December 31,  2007 2006  (Unaudited)    **Assets**        Current assets:        Cash and cash equivalents $33  $7 Accounts receivable  366   300 Prepaid expenses and other current assets  52   117   —        Total current assets  451   424      Accounts receivable, non-current  318   270 Property and equipment, net of accumulated depreciation and amortization  16   19 Non-current assets – other  3   3    Total non-current assets  337   292      Total assets $788  $716               **Liabilities and stockholders’ deficit**        Current liabilities:        Current maturities of long-term debt $2,108  $1,258 Short-term debt – notes and line of credit  962   1,439 Accounts payable  700   531 Accrued expenses and other current liabilities  896   649 Deferred and unearned revenue  495   675    Total current liabilities  5,161   4,552               Long-term debt, less current maturities, net of debt discount of $72  3,767   3,982 Deferred revenue  318   270      Total long-term liabilities  4,085   4,252      Total liabilities  9,246   8,804               Stockholders’ (deficit):        Class A convertible preferred stock: liquidation preference $1,000        Authorized shares – 1,000,000        Series A, par value $2.00, Issued and outstanding shares – 500,000  1,000   1,000 Common stock, par value $0.001        Authorized shares -175,000,000, Issued and outstanding shares –92,133,811and 90,153,534 in 2007 and 2006, respectively  92   90 Additional paid-in-capital  64,190   63,290 Accumulated deficit  (73,740)  (72,468)     Total stockholders’ deficit  (8,458)  (8,088)   Total liabilities and stockholders’ deficit $788  $716      *See accompanying notes.*
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**SEDONA CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS***(In thousands, except share and per share data)*(Unaudited)           Three Months Ended  June 30,  2007 2006   **Revenues:**        Product licenses-unrelated parties $107  $72 Services-unrelated parties  198   190 Services-related parties  —   48     —*Total revenues*  305   310               **Cost of revenues:**        Product licenses  —   — Services  83   84    *Total cost of revenues*  83   84    *Gross profit*  222   226          **Expenses:**        General and administrative  418   355 Sales, marketing and customer services  125   123 Research and development  139   160      *Total operating expenses*  682   638      *Loss from operations*  (460)  (412)              **Other expense:**        Interest expense  (145)  (126)   *Total other expense*  (145)  (126)     Net loss  (605)  (538)Deemed dividends applicable to preferred stockholders  (30)  (30)   Net Loss applicable to Common Stockholders $(635) $(568)              Basic and diluted net loss per share applicable to common shares $(0.01) $(0.01)              Basic and diluted weighted average common shares outstanding  91,570,159   89,689,362    *See accompanying notes.*
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**SEDONA CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS***(In Thousands, except share and per share data)*(Unaudited)           Six Months Ended  June 30,  2007 2006**Revenues:**        Product licenses $223  $234 Services- unrelated parties  407   304 Services- related parties  —   240     *Total revenues*  630   778              **Cost of revenues:**        Product licenses  —   5 Services  190   143     *Total cost of revenues*  190   148     *Gross profit*  440   630          **Expenses:**        General and administrative  852   794 Sales, marketing and customer services  230   189 Research and development  329   374     *Total operating expenses*  1,411   1,357     *Loss from operations*  (971)  (727)             **Other expense:**        Interest expense  (301)  (231)    *Total other expense*  (301)  (231)    Net Loss  (1,272)  (958)Deemed dividends applicable to preferred stockholders  (60)  (60)    Net loss applicable to Common Stockholders $(1,332) $(1,018)              Basic and diluted net loss per share applicable to common shares $(0.01) $(0.01)              Basic and diluted weighted average common shares outstanding  90,919,348   89,314,102      *See accompanying notes.*
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**SEDONA CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW***(In thousands, except share and per share data)*(Unaudited)           Six Months Ended  June 30,  2007 2006**Operating activities:**        Net cash used in operating activities $(960) $(888)         **Financing activities:**        Issuance of convertible notes  —   755 Issuance of short term promissory note  —   975 Proceeds from line of credit  130   — Proceeds from sale of common stock  833   16 Proceeds from the exercise of stock options  23   — Repayments of long-term obligations  —   (850)   Net cash provided by financing activities  986   896      Net increase in cash and cash equivalents  26   8 Cash and cash equivalents, beginning of period  7   51    Cash and cash equivalents, end of period $33  $59      *See accompanying notes.*
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**SEDONA CORPORATION AND SUBSIDIARY****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**Note #1: GeneralThe accompanying consolidated financial statements are unaudited and include the accounts of SEDONACorporation and subsidiaries (“SEDONA” or the “Company”). All significant intercompanytransactions and balances have been eliminated.The consolidated financial statements included herein for the six months ended June 30, 2007 and2006 are unaudited. In the opinion of Management, all adjustments (consisting of normal recurringaccruals) have been made which are necessary to present fairly the financial position of theCompany in accordance with accounting principles generally accepted in the United States. Theresults of operations experienced for the six month period ended June 30, 2007 are not necessarilyindicative of the results to be experienced for the year ended December 31, 2007.The financial statements of the Company have been prepared assuming the Company will continue as agoing concern, which contemplates the realization of assets and the satisfaction of liabilities inthe normal course of business. Accordingly, the financial statements do not include any adjustmentthat might be necessary should the Company be unable to continue in existence. In addition to theloss of $1,272,000 realized during the six months ended June 30, 2007, the Company incurredsubstantial losses from operations of approximately $2,252,000 during the year ended December 31,2006. These factors raise substantial doubt about the Company’s ability to continue as a goingconcern.The Company will require additional working capital over the next twelve months. The capitalrequirements will depend on many factors, including the Company’s rate of revenue growth, theexpansions of its marketing and sales activities, the timing and extent of spending to supportproduct development efforts and expansion into new vertical markets and the continuing marketacceptance of its services. The Company’s operating plan includes expanding the penetration andacceptance of its CRM technology into the Company’s existing indirect sales distribution channeland pursuing targeted direct sales opportunities for marketing and selling its CRM applicationsolution into community and regional banks, credit unions, insurance companies and other verticalmarkets such as the recently established continuing education market. Subsequent to June 30,2007, the Company received $469,000 in net proceeds from sale of securities in various privateplacements and plans to raise additional funds as needed through public and/or private equity ordebt financing to support the implementation of its operating plan through the second quarter of2008; however, there can be no assurances that the Company will be able to succeed in obtainingsuch financing.The statements and related notes have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission. Accordingly, certain information and footnote disclosuresnormally included in financial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been omitted pursuant to such rules and regulations.The accompanying notes should therefore be read in conjunction with the Company’s December 31, 2006annual financial statements on Form 10-KSB filed on April 17, 2007.
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Note #2: Property and EquipmentProperty and equipment consists of:           Six Months Ending Year Ending  June 30, 2007 December 31, 2006     Machinery and equipment $77,276  $77,276 Leasehold improvements  14,712   14,712 Purchased software for internal use  30,822   30,822         122,810   122,810 Less accumulated depreciation and amortization  106,965   104,175      $15,845  $18,635      Note #3: Stockholders’ Equity and Other Financing ActivitiesIssuance of Stock for Professional Services:During the first half of 2007, the Company issued 94,176 shares of its Common Stock to a consultantin lieu of $17,500 cash compensation for professional services rendered.Issuance of Stock Pursuant to Employee Stock Purchase Plan:In June 2007, the Company issued a total of 41,621 shares of its common stock to employees forcommon shares purchased through its Employee Stock Purchase Plan. The purchase was valued at$7,909. The plan provides employees the option to purchase common stock at a 15% discount to itsfair market value. The Company recorded $1,374 of compensation expense related to common stockpurchase of $7,909.Grant of Stock Pursuant to Employee 401k Plan:In January 2007, the Company issued a total of 115,027 shares of its common stock to employees as amatching contribution under the employee 401(k) plan. The contribution was valued at $19,555.Stock Option Exercises:During the second quarter of 2007, 150,506 shares of the Company’s common stock were issued due tothe exercise of common stock purchase options. The Company received proceeds of $22,576 related tothe option exercises.Private Placement of Common Stock:On March 2, 2007, the Company sold 1,578,947 shares of its common stock to an accredited investorin a private placement transaction in exchange for $300,000 of working capital at a price of $0.19per share. The terms of sale provide that one half of the shares shall be restricted from tradinguntil the shares are registered, and the first to occur of the following events: (1) the Company’scommon stock trades at a market price of $0.60 per share or greater; or (2) Six (6) months fromFebruary 23, 2007 have elapsed. The remaining one half of the shares shall be restricted fromtrading until the shares are registered and the first to occur of the following events: (1) theCompany’s common stock trades at a market price of $1.00 per share or greater or (2) Twelve (12)months from February 23, 2007 have elapsed. In addition the Company issued the investor three (3)year warrants to purchase 789,473 shares of common stock at an exercise price of $0.285. The commonshares underlying these warrants shall be restricted until registration of the shares is completedand six (6) months from February 23, 2007 has elapsed. The Company shall have no call rights onthese warrants. The warrants were issued to the investor on April 23, 2007.The Company used a placement agent in connection with the above described transaction. On March 2,2007, the placement agent received compensation in the amount of $15,000. In addition, the agentwas entitled to receive 600,000 three (3) year warrants to purchase common stock of the Company atan exercise price of $0.285 per share. The warrants were issued to the placement agent on April23, 2007.
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In addition, during the second quarter of 2007, the Company sold 3,408,501 shares of its commonstock to accredited investors in various private placement transactions in exchange for $575,000 ofworking capital at prices ranging from $0.16 to $0.19 per share. The terms of sale provide thatone half of the shares shall be restricted from trading until the shares are registered, and thefirst to occur of the following events: (1) the Company’s common stock trades at a market price of$0.40 per share or greater; or (2) Six (6) months from the signature date of the term sheet haveelapsed. The remaining one half of the shares shall be restricted from trading until the Sharesare registered or whichever of the following events occurs first: (1) the Company’s common stocktrades at a market price of $0.50 per share or greater or (2) Twelve (12) months from the signaturedate of the term sheet has elapsed. In addition, the Company granted the investors three (3) yearwarrants to purchase 1,704,248 shares of common stock at exercise prices ranging from $0.23 to$0.29 per share. The common shares underlying these warrants shall be restricted untilregistration of the shares is completed and six (6) months from the signature date of the termsheet has elapsed. The Company shall have no call rights on these warrants.The Company paid a placement agent in connection with the above described transaction. The agentearned compensation in the amount of $34,500 related to the private placements.The Company did not register the issuance of the shares of common stock to the accredited investorswith the SEC under the Securities Act of 1933, as amended (the “Securities Act”), in reliance onexemptions from the registration requirements of the Securities Act. The Company and the accreditedinvestors entered into a registration rights agreement pursuant to which the Company agreed toregister for resale the shares issued to the accredited investors. Under the registration rightsagreement, the Company agreed to use its reasonable best efforts to cause the registrationstatement to be declared effective under the Securities Act as soon as reasonably practicable andto keep the registration statement continuously effective until such time as the common stock is nolonger deemed to be registrable securities. However, there are no specific penalty provisions inconnection with the registration rights agreement and, therefore, the investors in the privateplacements are not entitled to receive any additional benefit if the registration does not occur.Line of Credit:During the six months ended June 30, 2007, the Company received $130,000 in proceeds from arevolving line of credit established October 23, 2006 with David Vey, the Company’s Chairman of theBoard of Directors. The outstanding balance on the revolving line of credit is $355,000 as of June30, 2007. The remaining availability under the line of credit is $145,000 as of June 30, 2007.Stock Dividends:The Company ceased to declare preferred stock dividends as of January 1, 2001 on the outstandingseries of its Class A Convertible Preferred Stock. On March 31, 2006, the Company reduced itscumulative but undeclared dividends on its Class A, Series H Convertible Preferred Stock by$756,854 or $1.51 per share due to the settlement agreement which surrendered the Series HConvertible Preferred Stock without the payment of accrued dividends, as fully described in Note 6.Cumulative but undeclared dividends at June 30, 2007 equaled $780,000 or $1.56 per share. To theextent such dividends are declared and paid they will then be reflected appropriately in theCompany’s financial statements.Subsequent Events:Subsequent to June 30, 2007, the Company entered into agreements to sell 2,495,000 shares of commonstock to accredited investors in private placement transactions in exchange for $499,000 of workingcapital. The aggregate purchase price of the Shares averages $0.20 per share. One half of theShares shall be restricted from trading until the Shares are registered, and the first to occur ofthe following events: (1) the Company’s common stock trades at a market price of $0.40 per share orgreater; or (2) Six (6) months from the closing dates of the transactions have elapsed. Theremaining one half of the shares shall be restricted from trading until the Shares are registeredand whichever of the following events occurs first: (1) the Company’s common stock trades at amarket price of $0.50 per share or greater or (2) Twelve (12) months from the closing dates of thetransactions has elapsed.
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In addition, the Company will issue the investors three (3) year warrants to purchase 1,247,500shares of common stock at exercise prices ranging from $0.24 to $0.33 per share. The common sharesunderlying these warrants shall be restricted until registration of the Shares is completed and six(6) months from the closing dates of the transactions has elapsed. The Company shall have no callrights on these warrants.The Company paid a placement agent in connection with the above described transaction. The agentearned compensation in the amount of $29,940 related to the private placements.Note #4: Major Customer Transactions and Geographic InformationSince the Company’s primary sales strategy is focused on an indirect sales model, the Company’saccounts receivable and revenues are derived from a limited number of customers, consequently, theCompany’s trade accounts receivables and revenues are generally concentrated and any customer mayaccount for more than 10% of the total accounts receivable or revenue derived during any givenquarter.Revenues generated from one of the Company’s customers accounted for 36% of total revenues earnedin the quarter ended June 30, 2007 compared to the same period in 2006, in which four of theCompany’s customers accounted for 58% of total revenues. License and service revenues fluctuate asthey are dependent upon many variables including the delivery requirements, size and complexity ofthe transaction with our customers.Trade accounts receivable from two of the Company’s customers accounted for 89% of total accountsreceivable as of June 30, 2007.Substantially, all of the Company’s revenues are from customers in the United States and alllong-lived assets are located in the United States.Note #5: Supplemental Disclosures of Cash Flow Information           Six months ended  June 30,  2007 2006Cash paid during period for interest $856  $97,000 Conversion of accrued interest into common stock $—  $309,324 Settlement of Acxiom Obligations $—  $2,577,712 
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Note # 6: Earnings Per ShareThe Company accounts for earnings/loss per common share under the provisions of SFAS No. 128,*Earnings Per Share*, which requires a dual presentation of basic and diluted earnings/loss percommon share. Basic earnings/loss per common share excludes dilution and is computed by dividingincome available to common stockholders by the weighted average number of common shares outstandingfor the year. Diluted loss per common share is computed assuming the conversion of common stockequivalents, when dilutive. For the three and six months ended June 30, 2007, the Company’s commonstock equivalents, consisting of warrants to purchase 9,171,602 shares of common stock, preferredstock and debt convertible into 28,778,865 common shares, and options to purchase 4,210,543 sharesof common stock issued under the 2000 Incentive Stock Option Plan, were not included in computingdiluted loss per share because their effects were anti-dilutive. For the three and six monthsended June 30, 2006, the Company’s common stock equivalents, consisting of warrants to purchase10,139,295 shares of common stock, preferred stock and debt convertible into 20,363,323 commonshares, and options to purchase 4,146,854 shares of common stock issued under the 2000 IncentiveStock Option Plan, were not included in computing diluted loss per share because their effects wereanti-dilutive. Basic and diluted loss per share were the same for the three and six months endedJune 30, 2007 and 2006, respectively, as there were no potentially dilutive securities outstanding.Note # 7: LitigationOn May 5, 2003, SEDONA filed a civil action lawsuit against numerous defendants in the UnitedStates District Court for the Southern District of New York. The Company seeks damages from thedefendants named, and other defendants yet to be named, in the complaint for allegedlyparticipating in the manipulation of its common stock, fraud, misrepresentation, failure toexercise fiduciary responsibility, and/or failure to adhere to SEC trading rules and regulations,tortious interference, conspiracy and other actions set forth in the complaint. The parties arestill engaged in preliminary motions and discovery has not yet commenced. As of August 12, 2007,no ruling by the United States District Court for the Southern District of New York has been madewith regard to this matter. The outcomes of litigation proceedings are inherently uncertain andthere is no assurance that we will prevail in this matter.On June 28, 2006, SEDONA filed a civil action lawsuit against Open Solutions Inc (OSI), inMontgomery County Court in Pennsylvania for continuing violations of a software license agreemententered into between the parties in May 2002. The Company alleges that since September 2004, OSIceased remitting royalty payments required under its master software license and services agreementfor licensed products and services sold by OSI to its customers.OSI had requested a change in venue from the state of Pennsylvania to the state of Connecticut andsuch change was granted; oral arguments are in the process of being scheduled with the court. Theoutcomes of litigation proceedings are inherently uncertain and there is no assurance that we willprevail in this matter.No actions other than matters involved in the ordinary course of business are currently known byManagement and such other matters are believed by Management not to have material significance.Note # 8: Related Party TransactionsACEncrypt Solutions, LLCIn October 2005, the Company entered into a professional services agreement with ACEncryptSolutions, LLC. The President of ACEncrypt Solutions, LLC, Victoria Looney, is a member of theBoard of Directors of SEDONA Corporation. David R. Vey, Chairman of the Board of Directors ofSEDONA Corporation also has a financial interest in ACEncrypt Solutions. The total fee for theprofessional services project was $240,000, which included consultative, development and softwaretesting work in the development of an
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ACEncrypt product offering. The Company recognized $192,000 of revenue from this transaction inthe first quarter of 2006 after the completion and sign-off was received from ACEncrypt Solutionsfor milestone number one, the beta release. The second milestone was completed during the secondquarter of 2006 and the Company recognized the remaining $48,000 of revenue.David Vey and Oak Harbor*Revolving Line of Credit with David Vey*During the six months ended June 30, 2007, the Company received $130,000 in proceeds from arevolving line of credit with David Vey, the Company’s Chairman of the Board of Directors. Theoutstanding balance on the revolving line of credit was $355,000 as of June 30, 2007. Theremaining availability under the line of credit is $145,000 as of June 30, 2007. The note relatedto the revolving line of credit was originally due to mature on August 17, 2007 but was furtherextended until February 18, 2008.*Bridge Loan with David Vey*On October 23, 2006 an Independent Committee of the Board of Directors of the Company recommendedto the Board of Directors that certain other outstanding loans from Vey to the Company beconsolidated pursuant to a single promissory note. These other loans previously bore interest at arate of eight percent (8%) per year. On November 2, 2006 the Board of Directors approved theissuance of a $1,213,952 promissory note to Vey, effective October 23, 2006, evidencing andconsolidating certain loans made by Vey to the Company. A promissory note dated October 23, 2006in the principal amount of $1,213,952 has been issued and delivered by the Company to Vey (the“Bridge Note”). The principal amount of the Bridge Note reflects the prior loan from Vey to theCompany in the principal amount of $1,075,000 as well as interest and certain related expenses.The Bridge Note bears interest at a rate of eight percent (8%) per year on the unpaid principalbalance. One half of the principal sum and all accrued interest is due upon the earlier of: (a)ten (10) business days after the closing or purchase of debt and/or equity securities of theCompany arranged by a placement agent on behalf of the Company in connection with the placement ofcertain debt of equity securities; or (b) December 23, 2006. The principal balance remainingoutstanding thereafter together with accrued interest was due October 23, 2007.Vey subsequently waived the December 23, 2006 due date for payment of principal and interest andgranted the Company an extension until August 1, 2007. As of August 1, 2007, the Company and Veyfurther extended the payment due under the Bridge Note. The new payment dates for the Bridge Noteare as follows: (i) one half of the principal sum plus all accrued and unpaid interestshall be due and payable on February 1, 2008; and (ii) the unpaid principal balance of the Note,plus all accrued and unpaid interest shall be due and payable on August 1, 2008.*Oak Harbor Note*As part of a refinancing of certain obligations to Oak Harbor Investment Properties LLC (“OakHarbor”), the Company issued a promissory note to Oak Harbor dated as of August 17, 2006 in theprincipal amount of $1,040,402 (the “Oak Harbor Note”). Oak Harbor is a limited liabilitycorporation in which David Vey and Richard T. Hartley are managing members. The Oak Harbor Notehas a maturity date of May 1, 2009, and originally required the Company to reduce the principalamount of the note by $250,000 on May 1, 2007, and $250,000 on May 1, 2008, with the outstandingunpaid principal balance and all accrued but unpaid interest due on maturity. The Oak Harbor Notebears interest at a rate of eight percent (8%) per year. The Company and Vey extended the May 1,2007 payment date until August 1, 2007 and have further extended the initial payment date. The newpayment dates for the Oak Harbor Note are as follows. The Company will make a payment ofprincipal in the sum of Five Hundred Thousand and 00/100 Dollars ($500,000) on May 1, 2008 togetherwith all accrued and unpaid interest on the unpaid principal as of such payment date. The entireunpaid balance of principal and all accrued but unpaid interest will be due and payable on May 1,2009.
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*Interest Expense Related to David Vey and Oak Harbor*In addition, during the six months ended June 30, 2007, the Company recorded $209,403 in accruedinterest expense related to various outstanding debt instruments in favor of David Vey and OakHarbor.The table below details the total outstanding principal balance and accrued interest expense owedto David Vey and Oak Harbor as of June 30, 2007.                       Accrued interest atInstrument Payee Maturity Date Principal sum due 6-30-07Promissory Note