<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                   FORM 10-QSB


  [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 2005

  [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE 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 Employer
           incorporation 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) has filed all reports required to be filed
         by Section 13 and 15(d) of the Securities Exchange Act of 1934 during
         the preceding 12 months (or for such shorter period that the registrant
         was required to file such reports), and (2) has been subject to such
         filing requirements for the past 90 days. YES [X] NO [ ].

         At August 8, 2005, there were 86,992,831 shares outstanding of the
registrant's common stock, par value $0.001 per share.


         Transitional Small Business Disclosure Format: YES [ ] NO [X].







<PAGE>

<TABLE>
<CAPTION>
                                    SEDONA CORPORATION AND SUBSIDIARIES



                                                                                                     INDEX
PART I.  FINANCIAL INFORMATION                                                                       PAGE
------------------------------                                                                       -----
<S>                                                                                                  <C>
Item 1.  Consolidated Financial Statements

         Consolidated Balance Sheets -- June 30, 2005 (Unaudited)                                      4
              and December 31, 2004

         Consolidated Statements of Operations -- (Unaudited)                                          5
              three months ended June 30, 2005 and 2004

         Consolidated Statements of Operations - (Unaudited)                                           6
              six months ended June 30, 2005 and 2004

         Consolidated Statements of Cash Flow -- (Unaudited)                                           7
              six months ended June 30, 2005 and 2004

         Notes to Consolidated Financial Statements - June 30, 2005                                    8-12

Item 2.  Management's Discussion and Analysis of                                                       12-14
         Financial Condition and Results of Operations

Item 3.  Controls and Procedures                                                                       14

PART II.  OTHER INFORMATION
---------------------------

Item 1 through Item 6.                                                                                 15

SIGNATURE PAGE                                                                                         16

EXHIBIT INDEX                                                                                          17

CERTIFICATIONS                                                                                         18-21
</TABLE>






                                        2
<PAGE>



                       NOTE ON FORWARD-LOOKING STATEMENTS


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




                                        3
<PAGE>
<TABLE>
<CAPTION>
                                   SEDONA CORPORATION AND SUBSIDIARIES
                                       CONSOLIDATED BALANCE SHEETS
                             (In thousands, except share and per share data)




                                                                                  June 30,    December 31,
                                                                                    2005          2004
                                                                                 -------------------------
                                                                                 (unaudited)
<S>                                                                              <C>           <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                      $      1      $    138
   Accounts receivable                                                                  52           334
   Prepaid expenses and other current assets                                            51           145
                                                                                  ----------------------
Total current assets                                                                   104           617
   Property and equipment, net of accumulated depreciation and amortization             25            21
   Non-current assets - other                                                            3             3
                                                                                  ----------------------
Total non-current assets                                                                28            24
                                                                                  ----------------------
Total assets                                                                      $    132      $    641
                                                                                  ======================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                               $    327      $    166
   Accrued expenses and other current liabilities                                      752           662
   Deferred revenue                                                                    322           517
   Current maturities of long-term debt                                                961             8
   Interest payable on current maturities of long-term debt                            160             -
   Short-term debt- notes                                                            3,220         2,470
                                                                                  ----------------------
Total current liabilities                                                            5,742         3,823
                                                                                  ----------------------

Long-term debt, less current maturities                                                  -           953
Interest payable                                                                         -           123
                                                                                  ----------------------
Total long-term liabilities                                                              -         1,076
                                                                                  ----------------------
Total liabilities                                                                 $  5,742      $  4,899
                                                                                  ----------------------

Stockholders' equity/(deficit):
Class A convertible preferred stock
   Authorized shares - 1,000,000 (liquidation preference $2,500)
   Series A, par value $2.00, Issued and outstanding shares - 500,000                1,000         1,000
   Series H, par value $2.00, Issued and outstanding shares - 1,500                      3             3
Common stock, par value $0.001
   Authorized shares -175,000,000, Issued and outstanding shares - 86,992,831
    and 86,640,561 in 2005 and 2004, respectively                                       86            86
   Additional paid-in-capital                                                       62,083        61,975
   Accumulated deficit                                                             (68,782)      (67,322)
                                                                                  ----------------------
Total stockholders' deficit                                                         (5,610)       (4,258)
                                                                                  ----------------------
Total liabilities and stockholders' deficit                                       $    132      $    641
                                                                                  ======================
</TABLE>
See accompanying notes.




                                        4
<PAGE>
<TABLE>
<CAPTION>
                              SEDONA CORPORATION AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF OPERATIONS
                        (In thousands, except share and per share data)
                                          (Unaudited)


                                                                        Three Months Ended
                                                                             June 30,
                                                                  ---------------------------
                                                                     2005            2004
                                                                  ---------------------------
<S>                                                               <C>             <C>
REVENUES:
   Product licenses                                               $        87     $        80
   Services                                                               142             327
                                                                  ---------------------------
Total revenues                                                            229             407
                                                                  ---------------------------

COST OF REVENUES:
   Product licenses                                                         -             109
   Services                                                                49              14
                                                                  ---------------------------
Total cost of revenues                                                     49             123
                                                                  ---------------------------

Gross profit                                                              180             284

EXPENSES:
   General and administrative                                             357             440
   Sales and marketing                                                    135             106
   Research and development                                               245             297
                                                                  ---------------------------
Total operating expenses                                                  737             843
                                                                  ---------------------------
Loss from operations                                                     (557)           (559)
                                                                  ---------------------------

OTHER EXPENSE:
   Interest expense                                                       (84)            (49)
   Other                                                                    -              (3)
                                                                  ---------------------------
Total other expense                                                       (84)            (52)
                                                                  ---------------------------
Net loss                                                                 (641)           (611)
Preferred stock dividends                                                 (68)            (68)
                                                                  ---------------------------
Loss applicable to Common Stockholders                            $      (709)    $      (679)
                                                                  ===========================
Basic and diluted net loss per share applicable to common shares  $     (0.01)    $     (0.01)
                                                                  ===========================

 Basic and diluted weighted average common shares outstanding      86,853,638      83,138,725
                                                                  ===========================
</TABLE>
See accompanying notes.



                                        5
<PAGE>
<TABLE>
<CAPTION>
                                       SEDONA CORPORATION AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In Thousands, except share and per share data)
                                                   (Unaudited)


                                                                                        Six Months Ended
                                                                                            June 30,
                                                                                   2005                 2004
                                                                                --------------------------------
<S>                                                                             <C>                  <C>
REVENUES:
   Product licenses                                                             $        95          $       315
   Services (including related party fees of $20 in 2005 and $300 in 2004)              291                  379
                                                                                --------------------------------
Total revenues                                                                          386                  694
                                                                                --------------------------------

COST OF REVENUES:
   Product licenses                                                                       -                  249
   Services                                                                             132                   26
                                                                                --------------------------------
Total cost of revenues                                                                  132                  275
                                                                                --------------------------------
Gross profit                                                                            254                  419

EXPENSES:
   General and administrative                                                           762                  773
   Sales and marketing                                                                  303                  182
   Research and development                                                             493                  580
                                                                                --------------------------------
Total operating expenses                                                              1,558                1,535
                                                                                --------------------------------
Loss from operations                                                                 (1,304)              (1,116)
                                                                                --------------------------------

OTHER EXPENSE:
   Debenture expense                                                                      -                 (123)
   Interest expense                                                                    (154)                (104)
                                                                                --------------------------------
Total other expense                                                                    (154)                (227)
                                                                                --------------------------------
Net Loss                                                                             (1,458)              (1,343)

Preferred stock dividends                                                              (135)                (164)
                                                                                --------------------------------
Net loss applicable to Common Stockholders                                      $    (1,593)         $    (1,507)
                                                                                ================================

Basic and diluted net loss per share applicable to common shares                $     (0.02)         $     (0.02)
                                                                                ================================

 Basic and diluted weighted average common shares outstanding                    86,766,835           74,049,551
                                                                                ================================
</TABLE>

See accompanying notes.



                                        6
<PAGE>
<TABLE>
<CAPTION>
                             SEDONA CORPORATION AND SUBSIDIARIES
                            CONSOLIDATED STATEMENTS OF CASH FLOW
                       (In thousands, except share and per share data)
                                         (Unaudited)


                                                                       Six Months Ended
                                                                            June 30,
                                                                    -----------------------
OPERATING ACTIVITIES:                                                   2005         2004
                                                                    -----------------------
<S>                                                                 <C>             <C>
Net loss                                                            $(1,458)        $(1,343)

Adjustments to reconcile net loss to net cash used in operating
activities:

   Depreciation                                                          12              30
   Software amortization                                                  -             249
   Accretion of discount on convertible note                              -             123
   Charge for option and warrant based compensation                       7               8
   Charge for legal and consulting services                              47              37
   Charge for 401k stock contribution                                    39              55
Changes in operating assets and liabilities:
   Accounts receivable                                                  280            (198)
   Prepaid expenses and other current assets                             94              85
   Other non-current assets                                               -              15
   Accounts payable and accrued expenses                                288            (204)
   Deferred revenue and other liabilities                              (195)           (174)
                                                                    -----------------------
Net cash used in operating activities                                  (886)         (1,317)
                                                                    -----------------------

INVESTING ACTIVITIES:
Purchase of property and equipment                                      (16)              -
                                                                    -----------------------
Net cash used in investing activities                                   (16)              -
                                                                    -----------------------

FINANCING ACTIVITIES:
Issuance of convertible notes                                           750             500
Repayments of long-term obligations                                       -             (12)
Proceeds from the issuance of common stock, net                          15             809
Proceeds from exercise of common stock warrants, net                      -             100
                                                                    -----------------------
Net cash provided by financing activities                               765           1,397
                                                                    -----------------------
Net (decrease)/increase in cash and cash equivalents                   (137)             80
Cash and cash equivalents, beginning of period                          138              59
                                                                    -----------------------
Cash and cash equivalents, end of period                            $     1         $   139
                                                                    =======================
</TABLE>
See accompanying notes.





                                        7
<PAGE>



Note #1: General
         -------

The accompanying consolidated financial statements are unaudited and include the
accounts of SEDONA Corporation and subsidiaries ("SEDONA" or the "Company"). All
significant intercompany transactions and balances have been eliminated.

The consolidated financial statements included herein for the six months ended
June 30, 2005 and 2004 are unaudited. In the opinion of Management, all
adjustments (consisting of normal recurring accruals) have been made which are
necessary to present fairly the financial position of the Company in accordance
with accounting principles generally accepted in the United States. The results
of operations experienced for the six month period ended June 30, 2005 are not
necessarily indicative of the results to be experienced for the year ended
December 31, 2005.

The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustment that might
be necessary should the Company be unable to continue in existence. In addition
to the loss of ($1,458,000) realized during the six months ended June 30, 2005,
the Company incurred substantial losses from operations of approximately
($2,922,000) and ($4,212,000) during the years ended December 31, 2004 and 2003,
respectively. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The Company plan includes expanding the
penetration and acceptance of its CRM technology into the Company's existing
indirect sale distribution channel and pursuing direct sales opportunities for
marketing and selling its CRM application solution into community and regional
banks, credit unions, insurance companies and other vertical markets. The
Company also intends to continue its aggressive cost containment measures,
however it will likely require additional financing. In addition to the
$1,000,000 private placement transaction discussed in Note 3, the Company is
currently evaluating various financing options that it believes will be
sufficient to meet the Company's needs through the second quarter of 2006,
however, there can be no assurances that the Company will be able to obtain such
financing.

The statements and related notes have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally 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, 2004 annual financial statements on Form 10-K filed on March 31,
2005. Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations to account for its stock
option plans. The Company grants options for common stock at an option price
equal to the fair market value of the stock at the date of grant. Accordingly,
the Company does not record stock-based compensation expense for these options.
The Company's stock option plans are more fully described in the Company's
Annual Report on Form 10-K for fiscal year 2004.

The following table illustrates the effect on net earnings, net earnings per
basic common share and net earnings per diluted common share, as if compensation
cost for all options had been determined based on the fair market value
recognition provision of a Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure":




                                        8
<PAGE>


<TABLE>
<CAPTION>
                                                                   Six months ended June 30,
($ in thousands)                                                     2005              2004
                                                                    ------------------------
<S>                                                                 <C>              <C>
Net loss applicable to common stockholders                          $(1,593)         $(1,507)
Deduct:  Total stock-based employee expense
    determined under the fair value based method
    for all awards, net of related tax benefits                          (6)             (39)
                                                                    -------          -------
Pro-forma net loss applicable to common stockholders                $(1,599)         $(1,546)
                                                                    =======          =======
Basic and diluted earnings per common share                         $ (0.02)         $ (0.02)
Pro-forma, basic and diluted earnings per common share              $ (0.02)         $ (0.02)
</TABLE>

As the Company incurred losses in 2005 and 2004, the effect of stock options,
warrants and convertible securities were anti-dilutive and were therefore not
included in the calculation of diluted earnings per share.

Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This
statement revises SFAS No. 123, "Accounting for Stock-Based Compensation", and
requires companies to expense the value of employee stock options and similar
awards using the fair value method. The effective date of this standard is for
annual periods beginning after June 30, 2005. Although management has not fully
analyzed the effect this new statement will have on our consolidated financial
statements in the future, the pro forma net income effect of using the fair
value method for the past three fiscal years as well as further information on
this new statement is presented in Note 2 to our consolidated financial
statements on Form 10-K.

Note #2: Property and Equipment (In thousands)
         -------------------------------------

Property and equipment consists of:
<TABLE>
<CAPTION>
                                                 Six months ended        Year Ending
                                                     June 30,            December 31,
                                                       2005                 2004
                                                -------------------------------------
<S>                                             <C>                      <C>
Machinery and equipment                              $    61             $      1,005
Furniture and fixtures                                    10                       13
Leasehold improvements                                    15                       33
Purchased software for internal use                       31                      177
                                                -------------------------------------
                                                         117                    1,228
Less accumulated depreciation and amortization            92                    1,207
                                                -------------------------------------
                                                     $    25             $         21
                                                =====================================
</TABLE>

Note #3: Stockholders' Equity and Other Financing Activities
         ---------------------------------------------------

During the first six months of 2005, the Company issued 69,435 shares of its
Common Stock to consultants in lieu of $23,000 cash compensation for
professional services rendered. The Company also issued 75,775 shares of its
Common Stock to an attorney in lieu of $24,400 cash compensation for services
rendered in relation to the litigation filed by the Company on May 5, 2003. (See
Note 9 to the Consolidated Financial Statements to our consolidated financial
statements on Form 10-K).

In April 2005, the Company issued 84,329 shares of its Common Stock to employees
for shares purchased through the Employee Stock Purchase Plan. The purchase was
valued at $15,179.






                                        9
<PAGE>

In June 2005, the Company issued 122,731 shares of its Common Stock to employees
as a matching contribution under the Company's 401(k) plan. The contribution was
valued at $39,274.

From January 2005 through June 2005, the Company issued nine 8% convertible
notes to Mr. David R. Vey, the Company's Chairman of its Board of Directors and
received aggregate proceeds of $750,000. The convertible notes were issued at
fair market value on the transaction date. The issuance, maturity and issuable
shares are outlined below:

--------------------- -------------- ------------- ---------------------
Transaction
Date                  Amount           Maturity      Issuable Shares
--------------------- -------------- ------------- ---------------------
1-13-2005             $ 50,000        1-13-2006          166,667
--------------------- -------------- ------------- ---------------------
1-31-2005             $ 75,000        1-31-2006          258,621
--------------------- -------------- ------------- ---------------------
3-16-2005             $125,000        3-16-2006          403,226
--------------------- -------------- ------------- ---------------------
3-25-2005             $ 75,000        3-25-2006          258,620
--------------------- -------------- ------------- ---------------------
3-30-2005             $ 50,000        3-30-2006          172,413
--------------------- -------------- ------------- ---------------------
4-14-2005             $ 75,000        4-14-2006          326,087
--------------------- -------------- ------------- ---------------------
4-22-2005             $ 50,000        4-22-2006          217,391
--------------------- -------------- ------------- ---------------------
5-23-2005             $125,000        5-17-2006          568,181
--------------------- -------------- ------------- ---------------------
6-20-2005             $125,000        5-17-2006          568,181
--------------------- -------------- ------------- ---------------------

Subsequent to June 30, 2005, the Company entered into a private placement
transaction with an investor to provide the Company with $1,000,000 of working
capital financing. The agreement provides for the investor to lend the Company
$1,000,000 in two tranches of $250,000 each and one tranche of $500,000. On July
1, 2005, the investor lent the Company the initial $250,000. On August 2, 2005,
the investor lent the Company the second tranche of $250,000. The remaining
$500,000 is expected on, or before September 29, 2005, subject to certain
conditions. As evidence of such loans, the Company is obligated to issue to the
investor a convertible note dated as of the date of each loan, in the principal
amount of each loan. The convertible notes shall mature and are payable 24
months after the date of each loan, unless theretofore converted. The
convertible notes bear interest on the principal outstanding at a rate of 8% per
year annually in arrears from the date of the convertible notes until the
earlier of maturity or the date upon which the unpaid balance is paid in full or
is converted into shares of common stock. The investor may, at his option, at
any time after each loan, elect in writing to convert all or a designated part
of the unpaid principal balance, together with the accrued and unpaid interest,
of each convertible note into shares. The number of shares into which the
principal may be converted is equal to $0.18 per share. The number of shares
issuable upon conversion of the $1,000,000 principal balance of the convertible
notes is 5,555,555. Accrued and unpaid interest may also be paid in cash or, at
the election of the investor, in shares at a conversion price of $0.18 per
share. The conversion price for principal is protected by full-ratchet
anti-dilution, with the exemption of stock options issued to the Company's
employees and directors only. As additional consideration, the investor shall be
granted one (1) four-year warrant for every two (2) converted shares. The
exercise price of the warrant shall be $0.30 per share. In addition, the
Company granted the investor a twelve (12) month extension on the expiration
date of 525,266 stock purchase warrants issued from prior financings.

The Company ceased to declare preferred stock dividends as of January 1, 2001 on
the outstanding series of its Class A Convertible Preferred Stock. Cumulative
but undeclared dividends at June 30, 2005 equaled $1,184,354 or $2.36 per share.
To the extent such dividends are declared and paid they will then be reflected
appropriately in the Company's financial statements.






                                       10
<PAGE>

Note #4: Major Customers
         ---------------

Revenues generated from one major alliance partner (Fiserv CBS) and one direct
sale customer (Community National Bank) accounted for 42% of total revenues
earned in the quarter ended June 30, 2005. Revenues generated from two major
alliance partners (ACEncrypt and OSI) accounted for 95% of total revenues earned
in the quarter ended June 30, 2004.

As of December 2002, SEDONA sold its existing customer base and related services
to Fiserv Customer Contact Solutions (CCS), allowing SEDONA to focus on its
indirect business model and providing users of Intarsia with Fiserv's resources
to support and grow the Intarsia product line. However, as a result of the
Company's amendment of the Master Software License Agreement (MSLA) with Fiserv
Solutions Inc., in the 2nd quarter of 2004, beginning January 2005, SEDONA
re-signed maintenance agreements with several customers from the Fiserv CCS
business unit. The agreements were re-signed during December 2004, and SEDONA
began providing services under the maintenance agreements in January 2005.

Note #5: Supplemental Disclosures of Cash Flow Information
         --------------------------------------------------

($ in Thousands)                                    Six months ended
                                                         June 30
                                         ---------------------------------------
                                                   2005                   2004
                                         ---------------------------------------
Cash paid during period for interest          $       3         $            2
Conversion of note to common stock                    -                    200

Note #6: Contingencies
         -------------

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

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

Note #7: CIMS Transaction
         ----------------

In April 2000, the Company consummated a transaction to purchase the Customer
Information Management Systems (CIMS) business unit of Acxiom Corporation for
total potential consideration of $4,350,000. Five-year warrants amounting to an
aggregate of $550,000 were issued, $1,300,000 (with face value of $1,500,000)
was paid in preferred stock, a minimum of $1,000,000 due in October 2003 (the
"Required Payment"), or earlier, if certain performance hurdles were met, and
the remaining $1,500,000 will be paid contingent on the performance of the
business unit acquired ("the Contingent Payment"). Through March 2004, the
Company had paid $47,000 related to the Required Payment. There was no
contingent payment of $1,500,000 due based on performance of the business unit
acquired. The performance period for both the Required Payment and the
Contingent Payment expired in April 2003. In November 2003, the Company
restructured the agreement with Acxiom. The Company has issued a promissory note
for the $953,000 Required Payment, at an interest rate of 8% per annum. All
unpaid principal and interest are due no later than May 26, 2006. The
restructured terms include: extension of the conversion date of the Series H
Preferred Stock by thirty-six months, until April 1, 2006; payment of trade
payables due totaling $132,000, which are accrued net of a credit due back to
the Company of $78,000; and agreement to provide $262,000 worth of services to
Acxiom, if requested by Acxiom. The Company believes that there is a remote
possibility of having to provide future services related to this agreement.






                                       11
<PAGE>

Note # 8: Litigation
          ----------

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

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

See Consolidated Financial Statements beginning on page 4.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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

In an effort to capture rapidly and cost effectively a major share of the SMB
market, SEDONA adopted an indirect distribution channel strategy. The Company
licenses its CRM technology to Third Party Alliance Partners (TPAP), who market,
sell, distribute and support SEDONA's technology either as a component of its
TPAP total solution or as a standalone offering. Through its TPAP, the Company
receives a royalty payment based on a percentage of the license fee charged by
the strategic partner and on maintenance charged to customers by the TPAP. The
royalty fee is recognized by SEDONA when the Company receives written
acknowledgement from the TPAP that royalties have been earned and monies are
owed to SEDONA.

SEDONA has successfully signed OEM and reseller agreements with several leading
software and services providers for the financial services market and continues
to work on broadening its distribution channels, thus expanding its market
penetration both domestically and internationally.

During the second quarter of 2004, SEDONA announced that it would begin to
market and sell its CRM application solution directly to community and regional
banks, credit unions and insurance companies. In November 2004, the Company
successfully signed a license agreement with Community National Bank in
Minnesota. In April 2005, the Company announced that Venture Bank of Washington
entered into an agreement to purchase the Company's CRM solution. The Company
anticipates recognizing in aggregate, approximately $95,000 in license and
service fees from these banks in fiscal year 2005.






                                       12
<PAGE>

Results of Operations
---------------------

The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes related thereto for
the six months ended June 30, 2005 and 2004.

Revenues for the three months ended June 30, 2005 and 2004 were $229,000 and
$407,000, respectively. Revenue from license fees and royalties totaled $87,000
and $80,000 in the three months ended June 30, 2005 and 2004, respectively.
Revenues for 2005 were higher than the same period in 2004 due to an increase in
reported sales of the product from one of the Company's third party alliance
partners (TPAP) as well as the completion of one direct sale. During the second
quarter of 2005 the Company recognized $142,000 in services revenue compared to
$327,000 during the same quarter in 2004. The reduction in services revenue was
primarily due to a $300,000 decrease in related party revenue from ACEncrypt
Solutions recognized in 2004. For the six month period ended June 30, 2005 and
2004, total revenues were $386,000 and $694,000, respectively.

Total cost of revenues decreased to $49,000 for the three months ended June 30,
2005 from $123,000 reported for the three months ended June 30, 2004, primarily
due to a decrease in the amortization expense of capitalized software.
Capitalized software was fully amortized as of December 31, 2004. Service fees
related to the delivery of additional maintenance and professional services were
also higher in 2005 which offset the total decrease for the quarter. For the six
month period ended June 30, 2005 and 2004, total cost of revenues decreased to
$132,000 compared to $275,000 in 2004, respectively. The savings are a direct
result of the decrease in annual software amortization expense. While total cost
decreased during the fiscal year, gross profit increased. For the period ended
June 30, 2005, the gross margin percentage increased to 65% compared to a 60%
margin reported in 2004.

Total operating expenses decreased to $737,000 in the second quarter of 2005,
from $843,000 in the year earlier period, reflecting savings from the completion
and introduction of the Company's new multi-vertical version of its CRM solution
in 2004. At June 30, 2005, the Company had 18 full-time employees, compared to
the same period in 2004, in which the Company had 17 full-time employees and 1
part-time employee. For the six-month period ended June 30, 2005, total
operating expenses increased to $1,558,000 compared to $1,535,000 in 2004. The
increase was due to additional sales and marketing expenses.

Other expenses in the three months ended June 30, 2005 increased to $84,000 from
$52,000 in 2004, reflecting an increase in interest expense on convertible notes
and long- term debt. The results of operations for the six-month period ended
June 30, 2005 and 2004 resulted in other expenses of $ 154,000 and $227,000,
respectively. The decrease in 2005 is a result of lower interest expense
accretion related to convertible notes.

Liquidity and Capital Resources
-------------------------------

At June 30, 2005, cash and cash equivalents decreased to $1,000 compared to the
December 31, 2004 amount of $138,000. As discussed in Note 3, subsequent to June
30, 2005, the Company entered into a private placement transaction with an
investor to provide the Company with $1,000,000 working capital financing. For
the six months ended June 30, 2005, the cash flows from operating activities
resulted in a net use of cash of $886,000, compared to $1,317,000 for the same
months in 2004. The decrease in the use of cash was primarily due to the rise in
accounts payable and other accrued liabilities.

The cash flows from investing activities during the six-month period ended June
30, 2005, resulted in the use of cash of $16,000 to fund the purchase of
software. There were no investing activities in the six-month period ended June
30, 2004.

For the six months ended June 30, 2005, the cash flows from financing activities
resulted in net cash provided by financing activities of $765,000 compared to
$1,397,000 in the same six-month period in 2004. In 2005, the proceeds were
derived from the issuance of $750,000 in convertible notes compared to $500,000
in convertible notes in 2004. The Company also received proceeds from an
$800,000 private placement stock sale as well as recognizing $100,000 from the
exercise of 200,000 common stock warrants in 2004.








                                       13
<PAGE>

The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustment that might
be necessary should the Company be unable to continue in existence. In addition
to the loss of ($1,458,000) realized during the six months ended June 30, 2005,
the Company incurred substantial losses from operations of approximately
($2,922,000) and ($4,212,000) during the years ended December 31, 2004 and 2003,
respectively. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The Company plan includes expanding the
penetration and acceptance of its CRM technology into the Company's existing
indirect sale distribution channel and pursuing direct sales opportunities for
marketing and selling its CRM application solution into community and regional
banks, credit unions, insurance companies and other vertical markets. The
Company also intends to continue its aggressive cost containment measures,
however it will likely require additional financing. In addition to the
$1,000,000 private placement discussed in Note 3, the Company is currently
evaluating various financing options that it believes will be sufficient to meet
the Company's needs through the second quarter of 2006, however, there can be no
assurances that the Company will be able to obtain such financing.

ITEM 3.    CONTROLS AND PROCEDURES

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

There were no significant changes in the Company's internal controls or other
factors that could significantly affect these controls subsequent to the
Evaluation Date.











                                       14
<PAGE>



PART II - OTHER INFORMATION
---------------------------

      Item 1 -   Legal Proceedings - No material developments in this fiscal
                 quarter.

      Item 2 -   Unregistered Sale of Equity Securities and Use of Proceeds -
                 None not previously reported.

      Item 3 -   Default Upon Senior Securities - None

      Item 4 -   Submission of Matters to a Vote of Security Holders - None

      Item 5 -   Other Information - None

      Item 6 -   Exhibits and Reports on Form 8-K

                 Exhibit 31.1* - Certification of Principal Executive Officer
                                 pursuant to Section 302 of the Sarbanes-Oxley
                                 Act of 2002

                 Exhibit 31.2* - Certification of Principal Financial Officer
                                 pursuant to Section 302 of the Sarbanes-Oxley
                                 Act of 2002

                 Exhibit 32.1* - Certification of Principal Executive Officer
                                 pursuant to Section 906 of the Sarbanes-Oxley
                                 Act of 2002

                 Exhibit 32.2* - Certification of Principal Financial Officer
                                 pursuant to Section 906 of the Sarbanes-Oxley
                                 Act of 2002

--------------------------------------------------------------------------------
* Filed herewith
                    (b) Reports on Form 8-K: The Company furnished a Current
Report on Form 8-K on June 3, 2005, July 11, 2005, and August 8, 2005,
respectively, disclosing information required under Item 2.03, Creation of a
Direct Financial Obligation.









                                       15
<PAGE>

                                   SIGNATURES




Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned,


Thereunto duly authorized.


                                         SEDONA CORPORATION



DATE:  August 15, 2005                   /S/ Marco A. Emrich
                                         ---------------------------------------
                                         Marco A. Emrich
                                         President and Chief Executive Officer

DATE:  August 15, 2005                   /S/ Anita M. Primo
                                         ---------------------------------------
                                         Anita M. Primo
                                         Vice President and Chief Financial
                                         Officer













                                       16
<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                        Description
-----------                        -----------

Exhibit 31.1*             Certification of Principal Executive Officer pursuant
                          to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2*             Certification of Principal Financial Officer pursuant
                          to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1*             Certification of Principal Executive Officer pursuant
                          to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2*             Certification of Principal Financial Officer pursuant
                          to Section 906 of the Sarbanes-Oxley Act of 2002

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

* Filed herewith






                                       17