<PAGE>

                UNITED STATES 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, 2006

  [ ]   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) 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 shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ] .

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) YES[ ] NO [X].


At August 8, 2006, there were 89,843,102 shares outstanding of the registrant's
common stock, par value $0.001 per share.


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





                                       1
<PAGE>

                       SEDONA CORPORATION AND SUBSIDIARIES

                                                                        INDEX
PART I.  FINANCIAL INFORMATION                                          PAGE
------------------------------                                          ----


Item 1.  Consolidated Financial Statements

         Consolidated Balance Sheets -- June 30, 2006 (Unaudited)         4
              and December 31, 2005

         Consolidated Statements of Operations -- (Unaudited)             5
              three months ended June 30, 2006 and 2005

         Consolidated Statements of Operations -- (Unaudited)
              six months ended June 30, 2006 and 2005                     6

         Consolidated Statements of Cash Flow -- (Unaudited)              7
              six months ended June 30, 2006 and 2005

         Notes to Consolidated Financial Statements - June 30, 2006       8-14

Item 2.  Management's Discussion and Analysis of                          15-17
         Financial Condition and Results of Operations

Item 3.  Controls and Procedures                                          17

PART II.  OTHER INFORMATION

Item 1 through Item 6.                                                    18

SIGNATURE PAGE                                                            19

EXHIBIT INDEX                                                             20


CERTIFICATIONS                                                            21-24



                                       2
<PAGE>

                       NOTE ON FORWARD-LOOKING STATEMENTS


This Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by use of terms such as "may",
"will", "should", "could", "would", "plan", "estimates", "projects", "predicts",
"potential", "believes", "anticipates", "intends", or "expects". These
forward-looking statements relate to the plans, objectives, and expectations of
SEDONA(R) Corporation (the "Company", SEDONA Corp." or "SEDONA") for future
operations. In light of the risks and uncertainties inherent in all
forward-looking statements, the inclusion of such statements in this Form 10-QSB
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>

                       SEDONA CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                 (In thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                    June 30,      December 31,
                                                                                      2006            2005
                                                                                  ----------------------------
                                                                                   (Unaudited)
<S>                                                                                <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                       $     59       $     51
   Accounts receivable                                                                  250            254
   Prepaid expenses and other current assets                                             48            124
                                                                                   --------       --------
Total current assets                                                                    357            429
                                                                                   --------       --------
     Accounts receivable, non-current                                                   145             63
     Property and equipment, net of accumulated depreciation and amortization            22             25
     Non-current assets - other                                                           3              3
                                                                                   --------       --------
Total non-current assets                                                                170             91
                                                                                   --------       --------
Total assets                                                                       $    527       $    520
                                                                                   ========       ========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                                $    306       $    263
   Accrued expenses and other current liabilities                                       555            668
   Deferred revenue                                                                     321            554
   Current maturities of long-term debt                                                 983            961
   Interest payable on short and long-term debt                                         146            267
   Interest payable with common stock                                                     -            292
   Short-term debt - notes                                                            3,590          3,435
                                                                                   --------       --------
Total current liabilities                                                             5,901          6,440
                                                                                   --------       --------

Long-term debt, less current maturities                                               1,600          1,000
Deferred revenue                                                                        145             63
                                                                                   --------       --------
Total long-term liabilities                                                           1,745          1,063
                                                                                   --------       --------
Total liabilities                                                                  $  7,646       $  7,503
                                                                                   --------       --------

Stockholders' (deficit):
Class A convertible preferred stock
   Authorized shares - 1,000,000
   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                       -          1,500
Common stock, par value $0.001
   Authorized shares -175,000,000, Issued and outstanding shares -89,843,102
    and 87,324,334 in 2006 and 2005, respectively                                        90             87
   Additional paid-in-capital                                                        62,965         60,646
   Accumulated deficit                                                              (71,174)       (70,216)
                                                                                   --------       --------
Total stockholders' deficit                                                          (7,119)        (6,983)
                                                                                   --------       --------
Total liabilities and stockholders' deficit                                        $    527       $    520
                                                                                   ========       ========
</TABLE>

See accompanying notes.


                                       4
<PAGE>

                       SEDONA CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                             Three Months Ended
                                                                                  June 30,
                                                                     ---------------------------------
                                                                          2006                2005
                                                                     ---------------------------------
<S>                                                                   <C>                <C>
REVENUES:
   Product licenses-unrelated parties                                 $         72       $         87
   Services-unrelated parties                                                  190                142
   Services-related parties                                                     48                  -
                                                                      ------------       ------------
Total revenues                                                                 310                229
                                                                      ------------       ------------

COST OF REVENUES:
   Product licenses                                                              -                  -
   Services                                                                     84                 49
                                                                      ------------       ------------
Total cost of revenues                                                          84                 49
                                                                      ------------       ------------
Gross profit                                                                   226                180

EXPENSES:
   General and administrative                                                  355                357
   Sales and marketing                                                         123                135
   Research and development                                                    160                245
                                                                      ------------       ------------
Total operating expenses                                                       638                737
                                                                      ------------       ------------
Loss from operations                                                          (412)              (557)
                                                                      ------------       ------------

OTHER (EXPENSE):
   Interest expense                                                           (126)               (84)
                                                                      ------------       ------------
Total other expense                                                           (126)               (84)
                                                                      ------------       ------------
Net loss                                                                      (538)              (641)
Deemed dividends applicable to preferred stockholders                          (30)               (68)
                                                                      ------------       ------------
Loss applicable to Common Stockholders                                $       (568)      $       (709)
                                                                      ============       ============
Basic and diluted net loss per share applicable to common shares      $      (0.01)      $      (0.01)
                                                                      ============       ============
Basic and diluted weighted average common shares outstanding            89,689,362         86,853,638
                                                                      ============       ============
</TABLE>
See accompanying notes.



                                       5
<PAGE>

                       SEDONA CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In Thousands, except share and per share data)
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                                 June 30,
                                                                           2006              2005
                                                                     --------------------------------
<S>                                                                   <C>                <C>
REVENUES:
   Product licenses                                                   $        234       $         95
   Services- unrelated parties                                                 304                291
   Services- related parties                                                   240                  -
                                                                      ------------       ------------
Total revenues                                                                 778                386
                                                                      ------------       ------------

COST OF REVENUES:
   Product licenses                                                              5                  -
   Services                                                                    143                132
                                                                      ------------       ------------
Total cost of revenues                                                         148                132
                                                                      ------------       ------------
Gross profit                                                                   630                254

EXPENSES:
   General and administrative                                                  794                762
   Sales and marketing                                                         189                303
   Research and development                                                    374                493
                                                                      ------------       ------------
Total operating expenses                                                     1,357              1,558
                                                                      ------------       ------------
Loss from operations                                                          (727)            (1,304)
                                                                      ------------       ------------

OTHER EXPENSE:
   Debenture expense                                                           (26)                 -
   Interest expense                                                           (205)              (154)
                                                                      ------------       ------------
Total other expense                                                           (231)              (154)
                                                                      ------------       ------------
Net Loss                                                                      (958)            (1,458)
Preferred stock dividends                                                      (60)              (135)
                                                                      ------------       ------------
Net loss applicable to Common Stockholders                            $     (1,018)      $     (1,593)
                                                                      ============       ============

Basic and diluted net loss per share applicable to common shares      $      (0.01)      $      (0.02)
                                                                      ============       ============

Basic and diluted weighted average common shares outstanding            89,314,102         86,766,835
                                                                      ============       ============
</TABLE>

See accompanying notes.


                                       6
<PAGE>

                       SEDONA CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                 (In thousands, except share and per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                     Six Months Ended
                                                                         June 30,
                                                               ---------------------------
OPERATING ACTIVITIES:                                          2006                2005
                                                               ---------------------------

<S>                                                            <C>               <C>
Net loss                                                       $  (958)          $(1,458)
Adjustments to reconcile net loss to net cash used in
operating activities:

     Depreciation                                                    3                12
     Charge for stock based compensation                            87                 7
     Charge for legal and consulting services                       63                47
     Charge for 401k stock contribution                              -                39
     Charge for discount amortization                               26                 -
Changes in operating assets and liabilities:
   Accounts receivable                                             (78)              280
   Prepaid expenses and other current assets                        76                94
   Accounts payable and other liabilities                           44               288
   Deferred revenue                                               (151)             (195)
                                                               -------           -------
Net cash used in operating activities                             (888)             (886)
                                                               -------           -------

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

FINANCING ACTIVITIES:
Issuance of convertible notes                                      755               750
Issuance of short term promissory note                             975                 -
Repayments of long-term obligations                               (850)                -
Proceeds from the issuance of common stock, net                     16                15
                                                               -------           -------
Net cash provided by financing activities                          896               765
                                                               -------           -------
Net increase in cash and cash equivalents                            8              (137)
Cash and cash equivalents, beginning of period                      51               138
                                                               -------           -------
Cash and cash equivalents, end of period                       $    59           $     1
                                                               =======           =======
</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, 2006 and 2005 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, 2006 are not
necessarily indicative of the results to be experienced for the year ended
December 31, 2006.

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 ($958,000) realized during the six months ended June 30, 2006,
the Company incurred substantial losses from operations of approximately
($2,894,000) during the year ended December 31, 2005. These factors raise
substantial doubt about the Company's ability to continue as a going concern.

The Company will require additional working capital over the next twelve months.
The capital requirements will depend on many factors, including, the Company's
rate of revenue growth, the expansions of its marketing and sales activities,
the timing and extent of spending to support product development efforts and
expansion into new vertical markets and the continuing market acceptance of its
services. The Company's plan includes expanding the penetration and acceptance
of its CRM technology into the Company's existing indirect sales distribution
channel and pursuing targeted direct sales opportunities for marketing and
selling its CRM application solution into community and regional banks, credit
unions, insurance companies and other vertical markets. During the second
quarter of 2006, the Company received $975,000 in proceeds from the issuance of
short-term debt and plans to raise additional funds as needed through public
and/or private equity or debt financing to support the implementation of its
operating plan through the first quarter of 2007; however, there can be no
assurances that the Company will be able to succeed in its plan 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, 2005 annual financial statements on Form 10-KSB filed on April 21,
2006.


                                       8
<PAGE>

Note #2:  Property and Equipment (In thousands)

Property and equipment consists of:

<TABLE>
<CAPTION>
                                                      Six months ended            Year Ending
                                                          June 30,                December 31,
                                                            2006                      2005
                                                     -----------------------------------------
<S>                                                       <C>                       <C>
Machinery and equipment                                   $ 76                      $ 76
Furniture and fixtures                                       -                         -
Leasehold improvements                                      15                        15
Purchased software for internal use                         31                        31
                                                          ----                      ----
                                                           122                       122
Less accumulated depreciation and amortization             100                        97
                                                          ----                      ----
                                                          $ 22                      $ 25
                                                          ====                      ====
</TABLE>

Note #3:  Stockholders' Equity and Other Financing Activities

During the first six months of 2006, the Company issued 113,423 shares of its
Common Stock to consultants in lieu of $20,000 cash compensation for
professional services rendered. The Company also issued 242,262 shares of its
Common Stock to an attorney in lieu of $43,100 cash compensation for services
rendered in relation to the litigation filed by the Company on May 5, 2003.

During January 2006, the Company issued 1,356,800 shares of its Common Stock to
David R. Vey for $203,520 of accrued interest due on convertible notes through
December 2005. In addition, the Company issued 705,361 shares of its Common
Stock to Oak Harbor Investments for $105,804 of interest and late fees due on
promissory notes dated January 2003 and March 2003, respectively.

The Company also entered into a private placement transaction with two investors
to provide the Company with $600,000 of working capital financing on March 31,
2006. As evidence of such loans, the Company issued to the investors,
convertible notes 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 investors may, at their 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. These notes were amended on May 31, 2006. The
conversion price into which the principal may be converted was changed to $0.20
per share. The number of shares into which the principal may be converted is
equal to 3,000,000. The maturity date of the transaction was also extended to
May 31, 2008. Accrued and unpaid interest may also be paid in cash or, at the
election of the investor, in shares at a conversion price of $0.20 per share.
The conversion price for principal is protected by full-ratchet anti-dilution,
with the exemption of stock and stock options issued to the Company's employees
and directors only. As additional consideration, the investors shall be granted
one (1) four-year warrant for every two (2) converted shares. The exercise price
of the warrant shall be $0.35 per share.

In May 2006, the Company issued an 8% convertible note to Mr. David R. Vey, the
Company's Chairman of its Board of Directors and received aggregate proceeds of
$155,000. The convertible note was issued at fair market value on the
transaction dates. The convertible note matures on May 1, 2008. The number of
shares into which the principal may be converted is equal to $0.14726 per share.
The number of shares issuable upon conversion of the $155,000 principal balance
of the convertible note is 1,052,560. Accrued and unpaid interest may also be
paid in cash or, at the election of the investor, in shares at a conversion
price of $0.14726 per share. SEDONA may, after thirty days written notice to the
investor, prepay any part or the entire balance of the note without penalty,
provided the investor does not elect in writing to convert all or a designated
part of the principal and interest amount of the convertible note to equity
during the thirty day notice period.

                                       9
<PAGE>

A series of approximately twenty convertible notes issued by the Company in
favor of David Vey for the approximate principal sum of $2,590,000 issued by the
Company in favor of David Vey expired on July 1, 2006. The Company and Mr. Vey
are currently negotiating the terms of a refinancing of such notes. In addition,
Mr. Vey loaned the Company $975,000 in short-term funding during the second
quarter of 2006. As part of the restructuring above, the Company and Mr. Vey are
currently negotiating the terms of the short-term funding.

Additionally, two notes issued by the Company in favor of Oak Harbor Investments
for the principal sum of $1,000,000 expired on July 1, 2006. The Company and Oak
Harbor Investments are currently negotiating the terms of a refinancing of such
notes. Mr. Vey is a principal of Oak Harbor Investments.

In May 2006, the Company issued a total of 100,922 shares of its common stock to
employees for common shares purchased through its Employee Stock Purchase Plan.
The purchase was valued at $15,875. The plan provides employees the option to
purchase common stock at a 15% discount to its fair market value. The Company
recorded $2,800 of compensation expense related to common stock purchase of
$15,875.

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, 2006 equaled $660,000 or $1.32 per share.
To the extent such dividends are declared and paid they will then be reflected
appropriately in the Company's financial statements. On March 31, 2006, the
Company reduced its cumulative 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 H Convertible Preferred Stock without the
payment of accrued dividends, as fully described in Note 7.

Note #4:  Major Customers

Revenues generated from four of the Company's clients, ACEncrypt Solutions, a
related party, Bremer Bank, Plumas Bank and Fiserv Corporation, accounted for
58% of total revenues earned in the quarter ended June 30, 2006. Revenues
generated from one major alliance partner (Fiserv CBS) and one direct sales
customer (Community National Bank) accounted for 42% of total revenues earned in
the quarter ended June 30, 2005.

Subsequent to June 30, 2006, the Company entered into a license agreement for
the sale of Intarsia with a financial services institution in the amount of
$218,670.

Note #5:  Supplemental Disclosures of Cash Flow Information

<TABLE>
<CAPTION>
                                                                            Six months ended
                                                                                June 30,
                                                                -----------------------------------------
                                                                          2006                   2005
                                                                -----------------------------------------
<S>                                                                <C>                          <C>
Cash paid during period for interest                               $     97,000                 $    3
Conversion of accrued interest into common stock                   $    309,324                 $    -
Settlement of Acxiom Obligations                                   $   2,577,712                     -
</TABLE>

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.


                                       10
<PAGE>


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 was to 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 were 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.

On March 31, 2006, the Company entered into a final settlement agreement with
Acxiom Corporation, holder of its Class A, Series H, convertible preferred
stock. In consideration of an $850,000 cash payment that was paid in the amounts
of $400,000 on March 31, 2006 and $450,000 on June 30, 2006 respectively, and
the agreement to issue 500,000 stock purchase warrants with an exercise price of
$0.30 per share, exercisable for a three year period, Acxiom agreed to surrender
1,500 shares of Series H Preferred Stock, valued at $1,500,000, waive its right
to accrued but unpaid dividends of approximately $756,854 related to the Series
H Stock. In addition, Acxiom agreed to waive its rights to payment related to an
outstanding $953,000 promissory note issued by SEDONA plus approximately
$217,858 in accrued interest. Since this is considered to be a capital
transaction with a related party, the Company accounted for the debt
extinguishment of $1,820,858 as additional paid in capital and reduced the
current maturities of long term debt by $103,000; reduced interest payable on
current maturities of long term debt by $217,858; and reduced its Class A,
Series H Preferred Stock by $1,500,000. In addition, the Company reduced its
accrued but unpaid dividends by $756,854 or $1.51 per share.

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,
tortious interference, conspiracy and other actions set forth in the complaint.
As this is an on-going action, no adjustments have been made to the financial
statements related to this matter.

On June 28, 2006, SEDONA filed a civil action lawsuit against Open Solutions Inc
(OSI), in Montgomery County Court in Pennsylvania for continuing violations of a
software license agreement entered into between the parties in May 2002. The
Company alleges that since September 2004, OSI ceased remitting royalty payments
required under its master software license and services agreement for licensed
products and services sold by OSI to its customers. As this is an on-going
action, no adjustments have been made to the financial statements related to
this matter.

                                       11
<PAGE>

Note # 9:  Related Party Transaction

In October 2005, the Company entered into a professional services agreement with
ACEncrypt Solutions, LLC. The President of ACEncrypt Solutions, LLC, Victoria
Looney, is a member of the Board of Directors of SEDONA Corporation. David R.
Vey, Chairman of the Board of Directors of SEDONA Corporation also has a
financial interest in ACEncrypt Solutions. The total fee for the professional
services project is $240,000, which includes consultative, development and
software testing work in the development of an ACEncrypt product offering. The
Company recognized $192,000 of revenue from this transaction in the first
quarter of 2006 after the completion and sign-off was received from ACEncrypt
Solutions for milestone number one, the beta release. The second milestone was
completed during the second quarter of 2006 and the Company recognized the
remaining $48,000 of revenue. At June 30, 2006, accounts receivable reflect
$40,000 in services related to the completion of milestone two. The invoice is
due and payable thirty days from the invoice date.

In addition, the Company completed the following transactions with David R. Vey,
the Company's Chairman of its Board of Directors. In January 2006, the Company
issued 1,356,800 shares of its Common Stock to David R. Vey for $203,520 of
accrued interest due on convertible notes through December 2005. In addition,
the Company issued 705,361 shares of its Common Stock to Oak Harbor Investments
for $105,804 of interest and late fees due on promissory notes dated January
2003 and March 2003, respectively.

In May 2006, the Company issued an 8% convertible note to Mr. David R. Vey, and
received aggregate proceeds of $155,000. The convertible note was issued at fair
market value on the transaction dates. The convertible note matures on May 1,
2008. The number of shares into which the principal may be converted is equal to
$0.14726 per share. The number of shares issuable upon conversion of the
$155,000 principal balance of the convertible note is 1,052,560. Accrued and
unpaid interest may also be paid in cash or, at the election of the investor, in
shares at a conversion price of $0.14726 per share. SEDONA may, after thirty
days written notice to the investor, prepay any part or the entire balance of
the note without penalty, provided the investor does not elect in writing to
convert all or a designated part of the principal and interest amount of the
convertible note to equity during the thirty day notice period.

A series of approximately twenty convertible notes issued by the Company in
favor of David Vey for the approximate principal sum of $2,590,000 issued by the
Company in favor of David Vey expired on July 1, 2006. The Company and Mr. Vey
are currently negotiating the terms of a refinancing of such notes. In addition,
Mr. Vey loaned the Company $975,000 in short-term funding during the second
quarter of 2006. As part of the restructuring above, the Company and Mr. Vey are
currently negotiating the terms of the short-term funding.

Additionally, two notes issued by the Company in favor of Oak Harbor Investments
for the principal sum of $1,000,000 expired on July 1, 2006. The Company and Oak
Harbor Investments are currently negotiating the terms of a refinancing of such
notes. Mr. Vey is a principal of Oak Harbor Investments.


Note # 10:  Stock Options & Warrants

On January 1, 2006, the Company adopted the Financial Accounting Standards Board
(FASB) Statement No. 123 (R), Share Based Payment, as required. The objective of
Statement No. 123(R) is to improve financial reporting by requiring all share
based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair value. Prior to January
1, 2006, the Company accounted for share-based payments to employees using APB
No. 25's intrinsic value method and, as such, generally recognized no
compensation expense for employee stock options.


                                       12
<PAGE>

Beginning January 1, 2006, the Company adopted Statement No. 123(R). The Company
recorded total compensation expense of $87,000 for share-based payments for the
period ended June 30, 2006. SFAS No. 123 requires the disclosure of pro forma
net income (loss) and earning (loss) per share had the Company adopted the fair
value method since the Company's inception. If the computed values of the
Company's stock-based awards to employees had been amortized to expense over the
vesting period of the awards, it would have resulted in an additional $3,015 of
compensation expense for the second quarter of 2005, increasing the net loss
from $641,000 to $644,000 or ($0.01) per share. As of June 30, 2006, the total
expense impact of the non-vested awards is $118,448 and will be recognized over
a weighted-average period of 4.42 years.

Long-Term Incentive Plans

During 2000, the Stockholders of the Company approved the 2000 Incentive Stock
Option Plan (the "2000 Plan"). This plan has replaced the 1992 Long-Term
Incentive Plan (the "1992 Plan") under which no further options will be issued.
Significant provisions of the 2000 Plan include: reserving 15% of the
outstanding shares for awards that may be outstanding at any one time, rather
authorizing restricted stock, deferred stock, stock appreciation rights,
performance awards settleable in cash or stock, and other types of awards based
on stock or factors influencing the value of stock; adding provisions so that
options and other performance-based awards will qualify for tax deductions; and,
specifying obligations relating to non-competition and proprietary information
that may be imposed on optionees. The term of each Award under the Plan shall be
for such period as may be determined by the Committee which administers such
plan but generally in no event shall the term exceed a period of ten years from
the date of grant. Options issued under the Plan are considered outstanding
until they are exercised and any other Award is outstanding in the calendar year
in which it is granted and for so long thereafter as it remains such to any
vesting condition required continuing employment. The Committee shall determine
the term of each Option, the circumstances under which an award may be exercised
in whole or in part (including based on achievement of performance goals and/or
future service requirements), the methods by which such exercise price may be
paid or deemed to be paid, the form of such payment, including without
limitation, cash, stock, other awards or awards granted under other plans of the
Company and any subsidiary, or other property and the methods by or forms in
which Stock will be delivered or deemed to be delivered to participants.

Options outstanding under the Long-Term Incentive Plan and the 2000 Plan have
been granted to Officers, Directors, Employees, and others and expire between
July 2006 and December 2015. All options were granted at or above the fair
market value on the grant date. Transactions under this Plan were as follows:

<TABLE>
<CAPTION>
   ------------------------------------------------------------------------------------------------------------
                                                          Weighted Average Weighted Average      Aggregate
                                                           Exercise Price      Value of       intrinsic value
                                                                               remaining      of in-the-money
                                                                              contractual         options
                                                 Shares                       terms (years)
   ------------------------------------------------------------------------------------------------------------
<S>                                            <C>                  <C>                <C>         <C>
   Outstanding at December 31, 2005             4,767,710            $0.80              3.66        $        -
   ------------------------------------------------------------------------------------------------------------
   Canceled or expired                          (620,856)            $1.46
   ------------------------------------------------------------------------------------------------------------
   Granted                                              -                -
   ------------------------------------------------------------------------------------------------------------
   Exercised                                            -                -
   ------------------------------------------------------------------------------------------------------------
   Outstanding at June 30, 2006                 4,146,854              0.73              4.29       $    69,000
   ------------------------------------------------------------------------------------------------------------
   Exercisable at June 30, 2006                 2,819,749            $ 0.98              3.81       $    41,400
   ------------------------------------------------------------------------------------------------------------
</TABLE>


                                       13
<PAGE>

Warrants

Warrants outstanding have been granted to Officers, Directors, Stockholders and
others to purchase common stock at prices ranging from $0.30 to $3.75 per share
and expiring between July 2006 and March 2012. All warrants were granted at or
above the fair market value on the grant date. Transactions under the plan were
as follows:

<TABLE>
<CAPTION>
   -----------------------------------------------------------------------------------------------------------------
                                                                          Weighted Average
                                                                              Value of
                                                                             remaining         Aggregate intrinsic
                                          Shares         Weighted Average  ontractual terms   value of in-the-money
                                                          Exercise Price      (years)              warrants
                                   ---------------------------------------------------------------------------------
<S>                                     <C>                  <C>                <C>                     <C>
   Outstanding at December 31,           12,134,525            $1.08              1.80                    $   -
   2005
   Canceled or expired                  (3,195,230)             1.00
   Granted                                1,200,000             0.35
   Exercised                                      -                -
   Outstanding at June 30, 2006          10,139,295             1.02              1.94                    $    -
   Exercisable at June 30, 2006           9,915,244            $1.01              1.90                    $    -
   -----------------------------------------------------------------------------------------------------------------
</TABLE>


The Company estimates the fair value of each common stock option and warrant to
purchase common stock at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 2006 and 2005: no dividends paid for all years; average expected
volatility of 107% for 2006 and 102% for 2005; risk-free interest rates of 4.83%
for 2006 and 1% to 5% for 2005, expected terms range from 2.00 to 10.00 years.

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                              For the period ended
------------------------------------------------------------------------------------------------------------
                                               June 30, 2006                     December 31, 2005
------------------------------------------------------------------------------------------------------------
<S>                                                <C>                                 <C>
Stock options and warrants                         $0.28                               $0.18
------------------------------------------------------------------------------------------------------------
</TABLE>

During the second quarter of 2006, there were no common stock options or
warrants granted to Officers of the Company.


                                       14
<PAGE>


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's), who
market, sell, distribute and support SEDONA's technology either as a component
of its total solution or as a standalone offering. The Company receives royalty
fees based on a percentage of:

         1.    The license fee and annual maintenance fee charged by the TPAP to
               each customer in-house deployment of SEDONA's CRM technology, and

         2.    The monthly subscription fee charged by the TPAP to each customer
               deploying SEDONA's CRM technology in an Application Service
               Provider (ASP) environment.

The royalty fee for each sale is recognized by SEDONA when the Company receives
written acknowledgement from the TPAP that a sale has been completed with their
enduser and monies are owed to SEDONA. As of June 30, 2006, the Company has
recorded a total of $294,576 in current and non-current accounts receivable and
associated deferred revenue for monthly subscription fees that will be
recognized ratably over the contract terms. This represents a 47% increase over
the $201,003 reported as of March 31, 2006.

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 2006, the Company successfully completed the
installation services under a license agreement with Plumas Bank. In January
2006, the Company announced that the National Association of Federal Credit
Unions Services Corporation (NAFCU) had selected SEDONA as its preferred partner
for member relationship management technologies. As such, NAFCU Services will be
promoting Intarsia(R), SEDONA's MRM solution, to all of NAFCU's member credit
unions.

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, 2006 and 2005.

Revenues for the three months ended June 30, 2006 and 2005 were $310,000 and
$229,000, respectively, an increase of 35% over the same period a year ago.
Revenue from license fees and royalties totaled $72,000 and $87,000 in the three
months ended June 30, 2006 and 2005, respectively. Revenues from license fees
and royalties were slightly lower in 2006 than the same period in 2005 due to a
decline in comparative license product sales from an alliance partner. During
the second quarter of 2006 the Company recognized $238,000 in services revenue
from related and unrelated parties compared to $142,000 during the same quarter
in 2005, an increase of 68%. The increase in services revenue was primarily due
to a $48,000 increase in related party revenue from ACEncrypt Solutions
recognized in the second quarter of 2006 as well as a $48,000 or 33% increase in
project related professional service fees from the Company's customer base.
License and service revenues are dependent upon the delivery requirements, size
and complexity of the transaction with our clients and third party alliance
partners.

                                       15
<PAGE>

Cost of revenues includes the direct expenses and third party cost associated
with providing professional services, training, customer support and
installation services. Total cost of revenues increased to $84,000 for the three
months ended June 30, 2006 from $49,000 reported for the three months ended June
30, 2005. The increase in cost is directly related to the 68% increase in
quarterly services revenues. While total cost of revenues increased during the
second quarter of 2006, gross profit decreased. For the period ended June 30,
2006, a gross profit of $226,000 or 73% of revenue was reported compared to a
$180,000 gross profit or 79% of revenue reported in the same period of 2005.

Total operating expenses decreased 14% to $638,000 in the second quarter of
2006, from $737,000 reported in the year earlier period. The savings are a
result of staff reductions. At March 31, 2006, the Company had 15 full-time
employees, compared to the same period in 2005, in which the Company had 18
full-time employees. In addition, beginning January 1, 2006, the Company adopted
the requirements of Financial Accounting Standards Board (FASB) Statement No.
123 (R) that required all share-based payments to be recognized in the income
statement based on their fair value. For the quarter ended June 30, 2006, the
Company recorded share based expense of $45,000 compared to $3,015 in the prior
quarter ended June 30, 2005.

Other expenses in the three months ended June 30, 2006 increased 50% to $126,000
from $84,000 in 2005, reflecting an increase in interest expense on additional
convertible notes and long-term debt as well as a $26,000 increase from the
accretion of the discount on a convertible note issued on March 31, 2006.

Liquidity and Capital Resources

At June 30, 2006, cash and cash equivalents increased to $59,000 compared to the
December 31, 2005 amount of $51,000. For the six months ended June 30, 2006 the
cash flows from operating activities resulted in a net use of cash of $888,000,
compared to $886,000 for the same months in 2005. The increase was primarily due
to recognition of $87,000 of stock compensation expense for the adoption of SFAS
123R.

There were no investing activities for the six-month period ended June 30, 2006.
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.

For the six months ended June 30, 2006, the cash flows from financing activities
resulted in net cash provided by financing activities of $896,000 compared to
$765,000 in the same six-month period in 2005, a 17% increase year over year. In
2006, the proceeds were derived from the issuance of $755,000 in convertible
notes compared to $750,000 in convertible notes in 2005. The Company also issued
a short-term note and received proceeds of $975,000 in 2006. The Company used
$850,000 of its proceeds to repay a long-term obligation to Acxiom Corporation,
as fully described in Note 7.

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 ($958,000) realized during the six months ended June 30, 2006,
the Company incurred a substantial loss from operations of approximately
($2,894,000) during the year ended December 31, 2005. These factors raise
substantial doubt about the Company's ability to continue as a going concern.

                                       16
<PAGE>

The Company will require additional working capital over the next twelve months.
The capital requirements will depend on many factors, including, the Company's
rate of revenue growth, the expansions of its marketing and sales activities,
the timing and extent of spending to support product development efforts and
expansion into new vertical markets and the continuing market acceptance of its
services. The Company's plan includes expanding the penetration and acceptance
of its CRM technology into the Company's existing indirect sales distribution
channel and pursuing targeted direct sales opportunities for marketing and
selling its CRM application solution into community and regional banks, credit
unions, insurance companies and other vertical markets. The Company received
$755,000 in proceeds from the issuance of long-term convertible debentures and
$975,000 from the issuance of short-term notes. The Company plans to raise
additional funds as needed through public and/or private equity or debt
financing to support the implementation of its operating plan through the second
quarter of 2007; however, there can be no assurances that the Company will be
able to succeed in its plan 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 made in the Company's internal controls during
the quarter ended June 30, 2006, or other factors that could significantly
affect these controls subsequent to the Evaluation Date.



                                       17
<PAGE>


PART II - OTHER INFORMATION

         Item 1 -   Legal Proceedings - None.

         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

                    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







                                       18
<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 14, 2006              /S/Marco A. Emrich
                                    --------------------------------------------
                                    Marco A. Emrich
                                    President and Chief Executive Officer

DATE:  August 14, 2006              /S/Anita M. Primo
                                    --------------------------------------------
                                    Anita M. Primo
                                    Vice President and Chief Financial Officer





                                       19
<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







                                       20