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**SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, DC 20549**

**FORM 10-Q**

 

|                                                      | QUARTERLY REPORT PURSUANT TO SECTION 13 OR        15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|------------------------------------------------------|-------------------------------------------------------------------------------------------------|
|                                                 |                                                                                            |
| For the quarterly period ended        March 31, 2004 |
|                                                 |                                                                                            |
|                                                      | 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 registrant as specified in its charter) 

|   | PENNSYLVANIA                                                          | 95-4091769                                 |   |
|--------|-----------------------------------------------------------------------|--------------------------------------------|--------|
|   |                                                                       |                                            |   |
|   | (State or other jurisdiction of incorporation        or organization) | (IRS Employer Identification          No.) |   |
|   |                                                                  |                                       |   |
|   | 1003 W. 9th Avenue,        Second Floor, King of Prussia, PA          | 19406                                      |   |
|   |                                                                       |                                            |   |
|   | (Address of principal executive offices)                              | (Zip Code)                                 |   |

     Registrant's telephone    number, including area code (610) 337-8400.

      Indicate by the    check mark whether the registrant (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  NO .

      Indicate by check    mark whether the registrant is an accelerated file (as defined in Rule 12b-2    of the Exchange Act). YES  NO . 

At March 31, 2004,    there were 83,088,195 shares outstanding of the registrant’s common    stock, par value $0.001 per share. 

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**SEDONA      CORPORATION AND SUBSIDIARIES**

|                          |                                                                                                                 |     | **INDEX** |
|-------------------------------|----------------------------------------------------------------------------------------------------------------------|----------|-----------|
| PART I. FINANCIAL INFORMATION |                                                                                                                 | **PAGE** |
|                          |                                                                                                                 |     |      |
| Item 1.                  | Consolidated Financial Statements                                                                                    |     |      |
|                          |                                                                                                                 |     |      |
|                          | Consolidated          Balance Sheets – March 31, 2004 (Unaudited)and          December 31, 2003                 |     | 4         |
|                          |                                                                                                                 |     |      |
|                          | Consolidated          Statements of Operations – (Unaudited)three          months ended March 31, 2004 and 2003 |     | 5         |
|                          |                                                                                                                 |     |      |
|                          | Consolidated          Statements of Cash Flow – (Unaudited)three          months ended March 31, 2004 and 2003  |     | 6         |
|                          |                                                                                                                 |     |      |
|                          | Notes          to Consolidated Financial Statements –March          31, 2004                                    |     | 7-11      |
|                          |                                                                                                                 |     |      |
| Item 2.                  | Management's Discussion and Analysis ofFinancial        Condition and Results of Operations                          |     | 11-12     |
|                          |                                                                                                                 |     |      |
| Item 3.                  | Quantitative and Qualitative Disclosure about        Market Risk                                                     |          | 12        |
|                          |                                                                                                                 |     |      |
| Item 4.                  | Controls and Procedures                                                                                              |     | 13        |
|                          |                                                                                                                 |     |      |
| PART II. OTHER INFORMATION    |                                                                                                                 |     |
|                          |                                                                                                                 |     |      |
| Item 1 through Item 6.        |                                                                                                                      | 14       |
|                          |                                                                                                                 |     |      |
| SIGNATURE PAGE                |                                                                                                                 | 15       |
|                          |                                                                                                                 |     |      |
| EXHIBIT INDEX                 |                                                                                                                 | 16       |
|                          |                                                                                                                 |     |      |
| CERTIFICATIONS                |                                                                                                                 | 17-20    |

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**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 "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.

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| **SEDONA CORPORATION AND SUBSIDIARIES**                                                                                                      |
|----------------------------------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED BALANCE SHEETS**                                                                                                              |
| *(In thousands, except share and per share data)*                                                                                            |
|                                                                                                                                         |   |   |   |   |   |   |
|                                                                                                                                         | **March    31,** |   | **December    31,** |   |
|                                                                                                                                         |  |  |   |  |  |   |
|                                                                                                                                         | ** ****2004** |   | ** ****2003** |   |
|                                                                                                                                         |  |  |   |  |  |   |
|                                                                                                                                         | **(unaudited)** |   |   |   |   |
| **Assets**                                                                                                                                   |   |   |   |   |   |   |
| Current assets:                                                                                                                              |   |   |   |   |   |   |
|      Cash and cash equivalents                                                                                      | $ | 228 |   | $ | 59 |   |
|      Accounts receivable,      net of allowance for doubtful accounts of $13 and $13 at March 31, 2004    and       |   |   |   |   |   |   |
|      December 31, 2003,    respectively                                                                             |   | 126 |   |   | 179 |   |
|      Prepaid expenses and other current assets                                                                      |   | 96 |   |   | 138 |   |
|                                                                                                                                         |  |  |   |  |  |   |
| Total current assets                                                                                                                         |   | 450 |   |   | 376 |   |
|                                                                                                                                         |   |   |   |   |   |   |
|      Property and equipment, net of accumulated depreciation and amortization                                       |   | 50 |   |   | 66 |   |
|      Software development      costs, net of accumulated amortization of $1,465 and $3,531 at March 31,    2004     |   |   |   |   |   |   |
|      and December 31, 2003 respectively                                                                             |   | 211 |   |   | 351 |   |
|      Non-current assets – other                                                                                |   | 27 |   |   | 39 |   |
|                                                                                                                                         |  |  |   |  |  |   |
| Total non-current assets                                                                                                                     |   | 288 |   |   | 456 |   |
|                                                                                                                                         |  |  |   |  |  |   |
| Total assets                                                                                                                                 | $ | 738 |   | $ | 832 |   |
|                                                                                                                                         |  |  |   |  |  |   |
| **Liabilities and stockholders’ equity**                                                                                                |   |   |   |   |   |   |
| Current liabilities:                                                                                                                         |   |   |   |   |   |   |
|      Accounts payable                                                                                               | $ | 228 |   | $ | 425 |   |
|      Accrued expenses and other current liabilities                                                                 |   | 612 |   |   | 665 |   |
|      Deferred revenue                                                                                               |   | 136 |   |   | 314 |   |
|      Current maturities of long-term debt                                                                           |   | 11 |   |   | 20 |   |
|      Short-term debt- debentures                                                                                    |   | 1,620 |   |   | 1,697 |   |
|                                                                                                                                         |  |  |   |  |  |   |
| Total current liabilities                                                                                                                    |   | 2,607 |   |   | 3,121 |   |
|                                                                                                                                         |   |   |   |   |   |   |
| Long-term debt, less current maturities                                                                                                      |   | 953 |   |   | 953 |   |
| Interest payable                                                                                                                             |   | 65 |   |   | 46 |   |
|                                                                                                                                         |  |  |   |  |  |   |
| Total long-term liabilities                                                                                                                  |   | 1,018 |   |   | 999 |   |
|                                                                                                                                         |  |  |   |  |  |   |
| Total liabilities                                                                                                                            |   | 3,625 |   |   | 4,120 |   |
|                                                                                                                                         |   |   |   |   |   |   |
| 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      -125,000,000, Issued and outstanding shares – 83,088,195 and 61,131,513    in 2004 |   |   |   |   |   |   |
|      and 2003, respectively                                                                                         |   | 83 |   |   | 61 |   |
|      Additional paid-in-capital                                                                                     |   | 61,159 |   |   | 60,048 |   |
|      Accumulated deficit                                                                                            |   | (65,132 | ) |   | (64,400 | ) |
|                                                                                                                                         |  |  |   |  |  |   |
| Total stockholders’ equity/(deficit)                                                                                                    |   | (2,887 | ) |   | (3,288 | ) |
|                                                                                                                                         |  |  |   |  |  |   |
| Total liabilities and stockholders’ equity/(deficit)                                                                                    | $ | 738 |   | $ | 832 |   |
|                                                                                                                                         |  |  |   |  |  |   |
| *See accompanying notes.*                                                                                                                    |   |   |   |   |   |   |

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| **SEDONA CORPORATION AND SUBSIDIARIES**                          |
|------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF OPERATIONS**                        |
| *(In thousands, except share and per share data)*                |
| (Unaudited)                                                      |
|                                                             |   |   |   |   |   |   |   |
|                                                             |   | **Three Months Ended** |   |
|                                                             |   | **March 31,** |   |
|                                                             |   |  |   |
|                                                             |   |   | **2004** |   |   | **2003** |   |
|                                                             |   |  |  |   |  |  |   |
| **Revenues:**                                                    |   |   |   |   |   |   |   |
|      Product licenses                   |   | $ | 235 |   | $ | 301 |   |
|      Services                           |   |   | 52 |   |   | 267 |   |
|                                                             |   |  |  |   |  |  |   |
| *Total revenues*                                                 |   |   | 287 |   |   | 568 |   |
|                                                             |   |   |   |   |   |   |   |
| **Cost of revenues:**                                            |   |   |   |   |   |   |   |
|      Product licenses                   |   |   | 140 |   |   | 191 |   |
|      Services                           |   |   | 12 |   |   | 25 |   |
|                                                             |   |  |  |   |  |  |   |
| *Total cost of revenues*                                         |   |   | 152 |   |   | 216 |   |
|                                                             |   |  |  |   |  |  |   |
| *Gross profit*                                                   |   |   | 135 |   |   | 352 |   |
|                                                             |   |   |   |   |   |   |   |
| **Expenses:**                                                    |   |   |   |   |   |   |   |
|      General and administrative         |   | 333 |   |   | 501 |   |
|      Sales and marketing                |   |   | 76 |   |   | 77 |   |
|      Research and development           |   | 283 |   |   | 198 |   |
|                                                             |  |  |   |  |  |   |
| *Total operating expenses*                                       |   |   | 692 |   |   | 776 |   |
|                                                             |   |  |  |   |  |  |   |
| *Loss from operations*                                           |   |   | (557 | ) |   | (424 | ) |
|                                                             |   |   |   |   |   |   |   |
| **Other income (expense):**                                      |   |   |   |   |   |   |   |
|      Interest income                    |   |   | — |   |   | 2 |   |
|      Interest expense                   |   |   | (175 | ) |   | (224 | ) |
|      Other                              |   |   | — |   |   | (2 | ) |
|                                                             |   |  |  |   |  |  |   |
| *Total other (expense)*                                          |   |   | (175 | ) |   | (224 | ) |
|                                                             |   |  |  |   |  |  |   |
| Net loss                                                         |   |   | (732 | ) |   | (648 | ) |
| Preferred stock dividends                                        |   |   | (97 | ) |   | (75 | ) |
|                                                             |   |  |  |   |  |  |   |
| Loss applicable to Common Stockholders                           | $ | (829 | ) | $ | (723 | ) |
|                                                             |  |  |   |  |  |   |
|                                                             |   |   |   |   |   |   |   |
| Basic and diluted net loss per share applicable to common shares | $ | (0.01 | ) | $ | (0.01 | ) |
|                                                             |  |  |   |  |  |   |
|                                                             |   |   |   |   |   |   |   |
| Basic and diluted weighted average common shares outstanding     |   | 58,636,414 |   |   | 49,825,357 |   |
|                                                             |  |  |   |  |  |   |
| *See accompanying notes.*                                        |   |   |   |   |   |   |   |

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| **SEDONA CORPORATION AND SUBSIDIARIES**                                        |
|--------------------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF CASH FLOW**                                       |
| *(In thousands, except share and per share data)*                              |
| (Unaudited)                                                                    |
|                                                                           |   |   |   |   |
|                                                                           |  **Three Months Ended** |   |
|                                                                           |  **March 31,** |   |
|                                                                           |  |  |   |
| **Operating activities:**                                                      |   | **2004** |   |   | **2003** |   |
|                                                                           |  |  |   |  |  |   |
| Net loss                                                                       | $ | (732 | ) | $ | (648 | ) |
| Adjustments to reconcile net loss to net cash    used in operating activities: |   |   |   |   |   |   |
|      Depreciation                                     |   | 16 |   |   | 51 |   |
|      Software amortization                            |   | 140 |   |   | 189 |   |
|      Accretion of discount on convertible note        |   | 123 |   |   | 198 |   |
|      Charge for option and warrant based compensation |   | 4 |   |   | — |   |
|      Charge for legal and consulting services         |   | 28 |   |   | — |   |
| Changes in operating assets and liabilities:                                   |   |   |   |   |   |   |
|      Accounts receivable                              |   | 53 |   |   | (317 | ) |
|      Change in restricted cash                        |   | — |   |   | 238 |   |
|      Prepaid expenses and other current assets        |   | 43 |   |   | 54 |   |
|      Other non-current assets                         |   | 12 |   |   | — |   |
|      Accounts payable and accrued expenses            |   | (231 | ) |   | (1,028 | ) |
|      Deferred revenue and other liabilities           |   | (178 | ) |   | (22 | ) |
|                                                                           |  |  |   |  |  |   |
| Net cash used in operating activities                                          |   | (722 | ) |   | (1,285 | ) |
|                                                                           |   |   |   |   |   |   |
| **Investing activities:**                                                      |   |   |   |   |   |   |
| Purchase of property and equipment                                             |   | — |   |   | (3 | ) |
|                                                                           |  |  |   |  |  |   |
| Net cash used in investing activities                                          |   | — |   |   | (3 | ) |
|                                                                           |   |   |   |   |   |   |
| **Financing activities:**                                                      |   |   |   |   |   |   |
| Issuance of convertible note                                                   |   | — |   |   | 1,320 |   |
| Repayments of long-term obligations                                            |   | (9 | ) |   | (17 | ) |
| Payments on redemption of debenture                                            |   | — |   |   | — |   |
| Proceeds from the issuance of common stock, net                                |   | 800 |   |   | 242 |   |
| Proceeds from exercise of common stock warrants, net                           |   | 100 |   |   | 9 |   |
| Repayment of note payable-related party                                        |   | — |   |   | (12 | ) |
|                                                                           |  |  |   |  |  |   |
| Net cash provided by financing activities                                      |   | 891 |   |   | 1,542 |   |
|                                                                           |  |  |   |  |  |   |
| Net increase in cash and cash equivalents                                      |   | 169 |   |   | 254 |   |
| Cash and cash equivalents, beginning of period                                 |   | 59 |   |   | — |   |
|                                                                           |  |  |   |  |  |   |
| Cash and cash equivalents, end of period                                       | $ | 228 |   | $ | 254 |   |
|                                                                           |  |  |   |  |  |   |
| *See accompanying notes.*                                                      |   |   |   |   |   |   |

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Note #1: General

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

The consolidated financial statements included herein for the three months ended March 31, 2004 and 2003 are unaudited. In the opinion of Management, all adjustments (consisting of normal recurring accruals) have been madewhich 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 three month period ended March 31, 2004 arenot necessarily indicative of the results to be experienced for the year ended December 31, 2004.

The Company believes that, if it can generate funds from operations and additional sales of securities, such funds will be sufficient to meet the Company’s working capital requirements over the period through the firstquarter of 2005. In addition to the loss of ($732,000) realized during the three months ended March 31, 2004, the Company incurred substantial losses from operations of approximately ($4,212,000) and ($6,001,000) during the years ended December 31,2003 and 2002, respectively. If additional financing is required in the period through the first quarter of 2005, such funding may not be readily available. These factors raise substantial doubt about the Company’s ability to continue as agoing concern. The Company’s plans include expanding the sale and acceptance of its current and future strategic alliance partnerships; targeting new application solutions; and seeking additional debt or equity financing in addition toaggressive cost containment measures.

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 financialstatements 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 December31, 2003 annual financial statements on Form 10-K and Form 10K/A filed on March 30, 2004 and April 29, 2004, respectively. 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 anoption 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 2003.

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 marketvalue 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”:

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|                                                                                                                                         | ** ** | **Three months ended March 31,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
|                                                                                                                                         | ** ** | **2004**                         | ** ** | ** ** | **2003** |   |
|                                                                                                                                         |            |                                  |       |  |  |   |
|                                                                                                                                         |       |                             |       |   |   |   |
| Net loss applicable to common stockholders                                                                                                   | $          | (732,000                         | )          | $ | (648,000 | ) |
| Deduct: Total stock-based       employee expense determined under the fair value based method for all    awards, net of related tax benefits |       | (27,000                          | )          |   | (314,000 | ) |
|                                                                                                                                         |            |                                  |       |  |  |   |
| Pro-forma net loss applicable    to common stockholders                                                                                      | $          | (759,000                         | )          | $ | (962,000 | ) |
|                                                                                                                                         |            |                                  |       |  |  |   |
| Basic and diluted earnings per common share                                                                                                  | $          | (0.01                            | )          | $ | (0.01 | ) |
| Pro-forma, basic and diluted earnings per common share                                                                                       | $          | (0.01                            | )          | $ | (0.02 | ) |

As the Company incurred losses in 2004 and 2003,  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.

Note #2: Property and Equipment (In thousands)

Property and equipment consists of:

|                                           | **Three months** |   |             |   |   |
|------------------------------------------------|------------------|--------|------------------|--------|--------|
|                                           | **ended**        |   | **Year ending**  |   |
|                                           | **March 31,**    |   | **December 31,** |   |
|                                           | **2004**         |   | **2003**         |   |
|                                           |                  |   |                  |   |
| Machinery and equipment                        | $                | 1,005  |             | $      | 1,005  |   |
| Equipment under capital lease                  |             | 209    |             |   | 209    |   |
| Furniture and fixtures                         |             | 3      |             |   | 46     |   |
| Leasehold improvements                         |             | 33     |             |   | 40     |   |
| Purchased software for internal use            |             | 193    |             |   | 193    |   |
|                                           |                  |        |             |        |        |   |
|                                           |             | 1,443  |             |   | 1,493  |   |
| Less accumulated depreciation and amortization |             | 1,393  |             |   | 1,427  |   |
|                                           |                  |        |             |        |        |   |
|                                           | $                | 50     |             | $      | 66     |   |
|                                           |                  |        |             |        |        |   |

Note #3: Stockholders’ Equity

During the first quarter of 2004, the Company issued19,424 shares of its Common Stock to a consultant in lieu of $10,000 cash compensationfor investor relation services rendered. The Company also issued 35,130 sharesof  its Common Stock to an attorney in lieu of $18,300 cash compensation forservices rendered in relation to the litigation filed by the Company on May 5,2003. (See Note 9 to the Consolidated Financial Statements).

In January 2004, the Company issued 1,702,128 shares of its Common Stock to investors in exchange for cash proceeds from a private placement of $800,000. The Company also issued the same investors 851,064 two-year warrantsto purchase shares of its Common Stock at $0.70 per share.

During the first quarter, the Company received $100,000 and issued 200,000 shares of its Common Stock from the exercise of 200,000 Common Stock warrants.

In March 2004, the Company issued 20,000,000 shares of its Common Stock to Mr. David Vey who elected to convert $200,000 of convertible debentures issued in January and March 2003 into Company Common Stock.

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Subsequent to March 2004, the Company issued 7,225 shares of its Common Stock to a consultant in lieu of $2,500 cash compensation for investor relation services rendered. The Company also issued 14,455 shares of its CommonStock to an attorney in lieu of $6,100 cash compensation for services rendered in relation to the litigation filed by the Company on May 5, 2003. The Company issued 59,916 shares of its Common Stock to employees for shares purchased through theEmployee Stock Purchase Plan.

All of the securities issued in the preceding transactions were sold in reliance upon Rule 506 of regulation D involving only accredited investors.

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 on at March 31, 2004 equaled $846,854or $1.69 per share. To the extent such dividends are declared and paid they will then be reflected appropriately in the Company's financial statements.

Note #4: Major Customers

Revenues generated from two major alliance partners  (Fiserv and OSI) accounted for 97% of total revenues earned in the quarter ended  March 31, 2004.

In March 2004, SEDONA signed an addendum to its Master Software License Agreement signed April 18, 2002 with Fiserv Solutions Inc. The agreement grants Fiserv the rights to Intarsia Version 4.1 for a renewal fee of$280,400. In June 2003 Fiserv notified the Company of its right to cancel maintenance services for its customer base. By cancellation Fiserv also forfeited its rights to any future product releases, updates, upgrades, patches and corrections. TheMarch 2004 addendum grants Fiserv the right to Intarsia Version 4.1 for a fee of $280,400 to be credited against the balance of prepaid royalties, which are included in deferred revenue. The Company also agreed to provide Fiserv with up to 750personnel hours of professional services and customer support at a rate of one hundred and thirty-four dollars per hour or $100,500 until December 31, 2004. In the event that Fiserv does not use all of the service hours by December 31, 2004, SEDONAagreed to reimburse Fiserv for the value of unused services. The Company has deferred revenue recognition of $100,500 of the license renewal fee to account for the value of professional services. The fees will be recognized in subsequent periodsthrough December 31, 2004 as services are performed. The Company has also agreed to provide third-level support to Fiserv for a period of three years. The Company valued the maintenance at $8,995, has deferred recognition of the maintenance and willrecognize the revenue on a monthly basis over a three-year period.

Note # 5: Alliance Agreements

In January 2004, SEDONA announced that EastPoint Technologies had signed an agreement to resell SEDONA’s CRM solution. EastPoint Technologies delivers integrated, end-to-end core processing solutions for communitybanks, finance companies and other financial institutions located across the United States.

Note #6: Supplemental Disclosures of Cash Flow Information

|                                       |   |   | **Three months ended** |   |
|--------------------------------------------|--------|--------|------------------------|--------|
|                                       |   |   | **March 31**           |   |
|                                       |   |        |                        |        |  |  |   |
|                                       |   |   | **2004**               |   |   | **2003** |   |
|                                       |   |        |                        |   |  |  |   |
| Cash paid during period for interest       |   | $      | 697                    |   | $ | 8,000 |   |
| Conversion of Director liability to equity |   |   | —                |   |   | 211,000 |   |
| Conversion of debenture to common stock    |   |   | 200,000                |   |   | — |   |

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Note #7: Contingencies

In June 2000, the Company entered into a contract    with a software vendor to incorporate a component of that vendor’s software    into SEDONA’s Intarsia TM. 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. 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.

In January 2004, the Company notified one of its    consultants, Hunter A. Carr, that per his May 6, 2003 litigation support    agreement and database participation agreement, the consultant had not performed    his duties noted therein, and is in default of the contracts. The Company    is in the process of trying to resolve the dispute and has suspended payments    to the consultant starting in December 2003, pending satisfactory resolution    of the matter. Per the agreements, the Company was obligated to pay $14,910    per month under the litigation support agreement and $6,900 per month under    the database participation agreement.

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 #8: 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.

Note # 9: 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.

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

SEDONA has successfully signed OEM and reseller    agreements with several leading software and services providers for the financial    services market, such as EastPoint Technologies signed in January 2004, and    continues to work on broadening its distribution channels, thus expanding    its market penetration both domestically and internationally.

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 three months ended March 31, 2004 and    2003.

Revenues for the three months ended March 31, 2004    and 2003 were $287,000 and $568,000, respectively. Revenues for 2003 were    higher than the same period in 2004 due to a change in the Company’s    business model to an indirect sales approach where the Company distributes    its product through third party alliance partners (TPAP). 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. Revenue from license fees and royalties totaled    $235,000 and $301,000 in the first quarter of 2004 and 2003, respectively.    The increase in fees during the first quarter of 2003 compared to 2004 was    due to the signing of a new license agreement to a TPAP. During the first    quarter of 2004 the Company recognized $52,000 in services revenue compared    to $267,000 during the same quarter in 2003. The decrease in services revenue    was primarily due to the sale of SEDONA’s customer base and related    services fees to Fiserv Solutions in January 2003.

Total cost of revenues decreased to $152,000 for    the three months ended March 31, 2004 from $216,000 for the three months    ended March 31, 2003, due to a decrease in the amortization expense of capitalized    software.

Total operating expenses decreased to $692,000    in the first quarter of 2004, from $776,000 in the year earlier period, reflecting    principally a decrease in rent and moving expenses related to the relocation    of the Company’s corporate headquarters in January 2003. The Company    also recognized a significant decrease in its telecommunications expense due    to the relocation of its headquarters. Fees for audit and legal services    also decreased during the first quarter of 2004 compared to the 2003.

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Other expenses in the three months ended March    31, 2004 decreased to $175,000 from $224,000 in the three months ended March    31, 2003, reflecting a decrease in the non-cash convertible note discount    accretion associated with convertible notes.

Liquidity and Capital Resources

At March 31, 2004, cash and cash equivalents increased      to $228,000 compared to the December 31, 2003 amount of $59,000. For the      three months ended March 31, 2004, the cash flows from operating activities      resulted in a net use of cash of $722,000. This use of cash was primarily  due to payments of payroll, accounts payable and accrued expenses.

The cash flows from investing activities during    the three-month period ended March 31, 2004 and March 31, 2003, respectively,    resulted in a use of cash of $0 and $3,000 to fund the purchase of equipment.

For the three months ended March 31, 2004, the    cash flows from financing activities resulted in net cash provided by financing    activities of $891,000. The principal increase in cash was due to proceeds    from an $800,000 private placement stock sale. The Company also recognized    $100,000 from the exercise of 200,000 common stock warrants. For the three    months ended March 31, 2003, the cash flow from financing activities increased    principally due to proceeds from the issuance of common stock of $242,000    and the exercise of 90,000 common stock warrants that resulted in proceeds    of $9,000.

**Item 3. Quantitative and Qualitative Disclosure      About Market Risk**

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

From time to time the Company also has issued fixed-rate    debt and preferred stock, which is convertible into its Common Stock at a    predetermined conversion price. Convertible debt has characteristics that    give rise to both interest-rate risk and market risk because the fair value    of the convertible security is affected by both the current interest-rate    environment and the price of the underlying Common Stock. For the three month    period ended March 31, 2004 and the year ended December 31, 2003, the Company's    convertible debt, on an if-converted basis, was not dilutive and, as a result,    had no impact on the Company's net income per share – (assuming dilution).    In future periods, the debt may be converted, or the if-converted method    may be dilutive and net income per share – (assuming dilution) would    be reduced.

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**Item 4. 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.

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| PART II - OTHER INFORMATION  |
|-----------------------------------|
|                              |   |   |   |
|                              | Item 1 –  | Legal Proceedings |
|                              |   |   |   |
|                              |   | No actions other than matters involved in        the ordinary course of business are currently known by management and        none of these are believed by management to be material to the Company’s    financial condition or results of operations. |
|                              |   |   |   |
|                              | Item 2 –  | Changes in Securities and Use of    Proceeds – None |
|                              |   |   |   |
|                              | 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 |
|                              |   |   |   |
|                              |   | Exhibit 10.48* –  | Addendum dated March 31,        2004 to Master Software License Agreement by and between the Company    and Fiserv Solutions Inc. dated March 28, 2002 |
|                              |   |   |   |
|                              |   | 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                  |

      Reports on      Form 8-K – The Company furnished    a Current Report on Form 8-K on March 18, 2004 in connection with a press    release announcing its preliminary results for the full year and three monthsended December 31, 2003.

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**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: May 14, 2004      | /S/Marco A. Emrich                                                |
|                                             |      Marco A. Emrich                                                                                                                                                                                                         |
|                                             |      President and Chief Executive Officer                                                                                                                                                                                   |
|                                             |                                                                                                                                                                                                                                                  |
| DATE: May 14, 2004      | /S/Anita M. Primo                                       |
|                                             |      Anita M. Primo                                                                                                                                                                                                          |
|                                             |      Vice President and Chief Financial Officer                                                                                                                                                                              |

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| **EXHIBIT INDEX** |
|-------------------|
|              |   |
|              |   |
| Exhibit No.       | Description |
|                   |  |
|              |   |
| Exhibit 10.48*    | Addendum dated March 31, 2004 to Master Software      License Agreement by and between the Company and Fiserv Solutions Inc. dated      March 28, 2002 |
|              |   |
| 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  |   |

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