<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 March 31, 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 registrants is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) YES[ ] NO [X].

At May 8, 2006, there were 89,547,583 shares outstanding of the registrant's
common stock, par value $0.001 per share.

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


<PAGE>

                       SEDONA CORPORATION AND SUBSIDIARIES



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

Item 1.  Consolidated Financial Statements

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

         Consolidated Statements of Operations -- (Unaudited)             5
              three months ended March 31, 2006 and 2005

         Consolidated Statements of Cash Flow -- (Unaudited)              6
              three months ended March 31, 2006 and 2005

         Notes to Consolidated Financial Statements - March 31, 2006      7-13

Item 2.  Management's Discussion and Analysis of                          13-15
         Financial Condition and Results of Operations

Item 3.  Controls and Procedures                                          15

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

Item 1 through Item 6.                                                    16

SIGNATURE PAGE                                                            17

EXHIBIT INDEX                                                             18

CERTIFICATIONS                                                            19-22

                                       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>
                                                                                      March 31,     December 31,
                                                                                        2006            2005
                                                                                  -------------------------------
                                                                                     (Unaudited)
<S>                                                                                    <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                            $   205        $    51
  Accounts receivable, net of allowance for doubtful accounts of $0 and $0,
    respectively                                                                           174            254
  Prepaid expenses and other current assets                                                106            124
                                                                                  -------------------------------
Total current assets                                                                       485            429
                                                                                  -------------------------------
    Accounts receivable, non-current                                                       130             63
    Property and equipment, net of accumulated depreciation and amortization                24             25
    Non-current assets - other                                                               3              3
                                                                                  -------------------------------
Total non-current assets                                                                   157             91
                                                                                  -------------------------------
Total assets                                                                           $   642        $   520
                                                                                  ===============================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable                                                                        $272           $263
  Accrued expenses and other current liabilities                                           701            668
  Deferred revenue                                                                         619            554
  Current maturities of long-term debt                                                     458            961
  Interest payable on current maturities of long-term debt                                 135            267
  Interest payable with common stock                                                         -            292
  Short-term debt - notes                                                                3,435          3,435
                                                                                  -------------------------------
Total current liabilities                                                                5,620          6,440
                                                                                  -------------------------------

Long-term debt, less current maturities and net of debt discount                         1,288          1,000
Deferred revenue                                                                           130             63
                                                                                  -------------------------------
Total long-term liabilities                                                              1,418          1,063
                                                                                  -------------------------------
Total liabilities                                                                      $ 7,038        $ 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 -89,547,583
   and 87,324,334 in 2006 and 2005, respectively                                            89             87
  Additional paid-in-capital                                                            63,151         60,646
  Accumulated deficit                                                                  (70,636)       (70,216)
                                                                                  -------------------------------
Total stockholders' deficit                                                             (6,396)        (6,983)
                                                                                  -------------------------------
Total liabilities and stockholders' deficit                                            $   642        $   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
                                                                                    March 31,
                                                                  ------------------------------------------
                                                                          2006                   2005
                                                                  ------------------------------------------
<S>                                                                <C>                     <C>
REVENUES:
  Product licenses-unrelated parties                               $       162             $         8
  Services-unrelated parties                                               114                     149
  Services-related parties                                                 192                       -
                                                                  ------------------------------------------
Total revenues                                                             468                     157
                                                                  ------------------------------------------

COST OF REVENUES:
  Product licenses                                                           5                       -
  Services                                                                  59                      84
                                                                  ------------------------------------------
Total cost of revenues                                                      64                      84
                                                                  ------------------------------------------
Gross profit                                                               404                      73

EXPENSES:
  General and administrative                                               439                     405
  Sales and marketing                                                       66                     167
  Research and development                                                 214                     248
                                                                  ------------------------------------------
Total operating expenses                                                   719                     820
                                                                  ------------------------------------------
Loss from operations                                                      (315)                   (747)
                                                                  ------------------------------------------

OTHER (EXPENSE):
  Interest expense                                                        (105)                    (70)
                                                                  ------------------------------------------
Total other expense                                                       (105)                    (70)
                                                                  ------------------------------------------
Net loss                                                                  (420)                   (817)
Deemed dividends applicable to preferred stockholders                      (30)                    (68)
                                                                  ------------------------------------------
Loss applicable to Common Stockholders                             $      (450)            $      (885)
                                                                  ==========================================
Basic and diluted net loss per share applicable to
    common shares                                                  $     (0.01)            $     (0.01)
                                                                  ==========================================

 Basic and diluted weighted average common shares outstanding       88,934,673              86,680,816
                                                                  ==========================================
</TABLE>
See accompanying notes.

                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                                         March 31,
                                                             --------------------------------
OPERATING ACTIVITIES:                                               2006            2005
                                                             --------------------------------
<S>                                                               <C>              <C>
Net loss                                                          $ (420)          $(817)
Adjustments to reconcile net loss to net cash used in
operating activities:

  Depreciation                                                         1               6
     Charge for option and warrant based compensation                 42               4
     Charge for legal and consulting services                         23              19
Changes in operating assets and liabilities:
  Accounts receivable                                                 13             245
  Prepaid expenses and other current assets                           18              51
  Accounts payable and accrued expenses                              145             157
  Deferred revenue                                                   132            (96)
                                                             --------------------------------
Net cash used in operating activities                                (46)           (431)
                                                             --------------------------------

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

FINANCING ACTIVITIES:
Issuance of convertible notes                                        600             375
Repayments of long-term obligations                                 (400)              -
                                                             --------------------------------
Net cash provided by financing activities                            200             375
                                                             --------------------------------
Net increase in cash and cash equivalents                            154             (56)
Cash and cash equivalents, beginning of period                        51             138
                                                             --------------------------------
Cash and cash equivalents, end of period                          $  205           $  82
                                                             ================================
</TABLE>
See accompanying notes.

                                       6
<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 three months ended
March 31, 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 three month period ended March 31, 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 ($420,000) realized during the three months ended March 31, 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. Subsequent to December
31, 2005, the Company received $750,000 in proceeds from the issuance of
long-term convertible debentures 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.

                                       7
<PAGE>

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

Property and equipment consists of:
<TABLE>
<CAPTION>
                                                                  Three months ended       Year Ending
                                                                       March 31,           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                             98                     97
                                                                ------------------------------------------
                                                                         $ 24                   $ 25
                                                                ==========================================
</TABLE>

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

During the first three months of 2006, the Company issued 33,595 shares of its
Common Stock to consultants in lieu of $5,000 cash compensation for professional
services rendered. The Company also issued 127,493 shares of its Common Stock to
an attorney in lieu of $18,300 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. The number of shares into which the principal may be converted is equal
to $0.25 per share. The number of shares issuable upon conversion of the
$600,000 principal balance of the convertible notes is 2,400,000. Accrued and
unpaid interest may also be paid in cash or, at the election of the investor, in
shares at a conversion price of $0.25 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.

Subsequent to March 31, 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.

                                       8
<PAGE>

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 March 31, 2006 equaled $630,000 or $1.26 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 8.

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

Revenues generated from three of the Company's clients, ACEncrypt Solutions, a
related party, Advancial Federal Credit Union and Fiserv Corporation, accounted
for 75% of total revenues earned in the quarter ended March 31, 2006. Revenues
generated from one major alliance partner (OSI) accounted for 15% of total
revenues earned in the quarter ended March 31, 2005.

Note #5:  Supplemental Disclosures of Cash Flow Information
          -------------------------------------------------
<TABLE>
<CAPTION>
                                                                 Three months ended
                                                                     March 31,
                                                           ------------------------------
                                                               2006               2005
                                                           ------------------------------
<S>                                                         <C>                 <C>
Cash paid during period for interest                        $    589            $  1,472
Conversion of accrued interest into common stock            $309,324            $      -
</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.

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

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

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

                                       9
<PAGE>

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 is payable 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 $1,828,858 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,
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.

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 $242,000, 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 is
expected to be completed during the second quarter of 2006. The balance of the
professional services agreement revenue will be deferred until delivery of the
remaining milestone. At March 31, 2006, accounts receivable reflect $42,000 in
services related to the completion of milestone one the invoice is due and
payable thirty days from the invoice date.

                                       10
<PAGE>

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. Beginning January 1, 2006, the
Company adopted Statement No. 123(R). The Company recorded total compensation
expense of $42,000 for share-based payments for the period ended March 31, 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 $3,889 of compensation expense
for the first quarter of 2005, increasing the net loss from $817,000 to
$821,000 or ($0.01) per share. As of March 31, 2006, the total expense impact
of the non-vested awards is $160,310 and will be recognized over a
weighted-average period of 4.67 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
April 2006 and December 2013. All options were granted at or above the fair
market value on the grant date. Transactions under this Plan were as follows:

                                       11
<PAGE>

<TABLE>
<CAPTION>
------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
                                                                                          Weighted
                                                                                        Average Value
                                                                  Weighted               of remaining        Aggregate intrinsic
                                                                   Average               contractual          value of in-the-
                                             Shares            Exercise Price           terms (years)           money options
                                      --------------------- ---------------------- ------------------------ ----------------------

------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
<S>                                    <C>                  <C>                    <C>                      <C>
Outstanding at December 31, 2005                 4,767,710                  $0.80                     3.66                      -
------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
Canceled or expired                              (331,918)                  $1.61
------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
Granted                                                  -                      -
------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
Exercised                                                -                      -
------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
Outstanding at March 31, 2006                    4,435,792                  $0.77                     3.88               $440,650
------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
Exercisable at March 31, 2006                    3,102,314                  $1.01                     3.52               $165,341
------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
</TABLE>

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 January 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
                                                                  Weighted               of remaining        Aggregate intrinsic
                                                                   Average               contractual          value of in-the-
                                             Shares            Exercise Price           terms (years)           money warrants
                                      --------------------- ---------------------- ------------------------ ----------------------

------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
<S>                                    <C>                  <C>                    <C>                      <C>
Outstanding at December 31, 2005                12,134,525                  $1.08                     1.80                      -

Canceled or expired                             (1,817,348)                  0.95
Granted                                          1,200,000                   0.35
Exercised                                                -                      -
Outstanding at March 31, 2006                   11,517,177                  $1.03                     1.93               $118,500
Exercisable at March 31, 2006                   11,293,126                  $1.02                     1.89               $118,500
------------------------------------- --------------------- ---------------------- ------------------------ ----------------------
</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:

------------------------------ --------------------------------------------
                                         For the period ended
------------------------------ --------------------------------------------
                               March 31, 2006           December 31, 2005
------------------------------ ------------------------ -------------------
Stock options and warrants     $0.28                    $0.18
------------------------------ ------------------------ -------------------

                                       12
<PAGE>

During the first quarter of 2006, there were no common stock options or warrants
granted to Officers of the Company. Additionally, a total of 1,200,000 warrants
were issued related to investors.

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 March 31, 2006, the Company has
recorded a total of $201,003 in current and non-current accounts receivable and
associated deferred revenue for monthly subscription fees that will be
recognized ratably over the contract terms.

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 first quarter of 2006, the Company successfully completed the
installation services under a license agreement with Advancial Federal Credit
Union. In January 2006, the Company entered into a license agreement with Plumas
Bank of Northern California. Also 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. In March 2006, IntegraSys,
a business unit of Fiserv, Inc. announced it had selected SEDONA's MRM
technology, Intarsia(R), as the foundation for its MRM solution.

                                       13
<PAGE>

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

The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes related thereto for
the three months ended March 31, 2006 and 2005.

Revenues for the three months ended March 31, 2006 and 2005 were $468,000 and
$157,000, respectively, an increase of 198% over the same period a year ago.
Revenue from license fees and royalties totaled $162,000 and $8,000 in the three
months ended March 31, 2006 and 2005, respectively. Revenues from license fees
and royalties were higher in 2006 than the same period in 2005 due to a $70,000
increase in direct sales contracts as well as a $92,000 increase in royalties
from the company's alliance partners. During the first quarter of 2006 the
Company recognized $306,000 in services revenue from related and unrelated
parties compared to $149,000 during the same quarter in 2005, an increase of
105%. The increase in services revenue was primarily due to a $192,000 increase
in related party revenue from ACEncrypt Solutions recognized in the first
quarter of 2006 offset by a $35,000 or 23% decrease in project related fees from
the Company's customer base.

Total cost of revenues decreased 24% to $64,000 for the three months ended March
31, 2006 from $84,000 reported for the three months ended March 31, 2005, mainly
due to lower support costs relating to a policy change in which the Company
limits customer support and maintenance services to its clients for the
then-current version and the immediately prior version of its software. Since
the Company reacquired its customer base in January 2005, it has successfully
upgraded its entire client base to the then-current version or the immediately
prior version of its software. While total cost of revenues decreased during the
first quarter of 2006, gross profit increased. For the period ended March 31,
2006, a gross profit of $404,000 or 86% of revenue was reported compared to a
$73,000 gross profit or 46% of revenue reported in the same period of 2005.

Total operating expenses decreased 12% to $719,000 in the first quarter of 2006,
from $820,000 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 2006, in which the Company had 19 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 March 31, 2006, the
Company recorded share based expense of $42,000 compared to $4,000 in the prior
quarter ended March 31, 2005.

Other expenses in the three months ended March 31, 2006 increased 50% to
$105,000 from $70,000 in 2005, reflecting an increase in interest expense on
additional convertible notes and long-term debt.

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

At March 31, 2006, cash and cash equivalents increased 302% to $205,000 compared
to the December 31, 2005 amount of $51,000. For the three months ended March 31,
2006 the cash flows from operating activities resulted in a net use of cash of
$46,000, compared to $431,000 for the same months in 2005. The 89% decrease in
the use of cash was primarily due to the decrease in accounts receivable and
deferred revenue and an increase in other accrued liabilities.

There were no investing activities for the three-month periods ended March 31,
2006 and 2005 respectively.

For the three months ended March 31, 2006, the cash flows from financing
activities resulted in net cash provided by financing activities of $200,000
compared to $375,000 in the same three-month period in 2005, a 47% decrease year
over year. In 2006, the proceeds were derived from the issuance of $600,000 in
convertible notes compared to $375,000 in convertible notes in 2005. The Company
also used $400,000 of its proceeds to repay a long-term obligation to Acxiom
Corporation, as fully described in Note 7.

                                       14
<PAGE>

The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustment that might
be necessary should the Company be unable to continue in existence. In addition
to the loss of ($420,000) realized during the three months ended March 31, 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.

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. Subsequent to year-end
the Company received $750,000 in proceeds from the issuance of long-term
convertible debentures 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.

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 March 31, 2006, or other factors that could significantly
affect these controls subsequent to the Evaluation Date.




                                       15
<PAGE>

<TABLE>
<CAPTION>
PART II - OTHER INFORMATION
---------------------------

<S>               <C>
         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 on Form 8-K

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

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

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

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

-------------------------------------------------------------------------------------------------------------------
* Filed herewith
</TABLE>




                                       16
<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:  May 17, 2006                   /S/Marco A. Emrich
                                      ------------------------------------------
                                      Marco A. Emrich
                                      President and Chief Executive Officer

DATE:  May 17, 2006                   /S/Anita M. Primo
                                      ------------------------------------------
                                      Anita M. Primo
                                      Vice President and Chief Financial Officer





                                       17
<PAGE>

<TABLE>
<CAPTION>
                                            EXHIBIT INDEX


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

<S>                   <C>
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
</TABLE>












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