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

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**FORM 10-Q**

|    **QUARTERLY        REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT        OF 1934** |
|------------------------------------------------------------------------------------------------------------------------------|

**For the quarterly period ended    June 30, 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 specifiedin 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)          |

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

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     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 August 12, 2004, there were 83,242,022    shares outstanding of the registrant’s common stock, par value $0.001    per share.

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**SEDONA CORPORATION AND SUBSIDIARIES**

| PART I. FINANCIAL INFORMATION   |                                                                                                           | INDEXPAGE |
|---------------------------------|----------------------------------------------------------------------------------------------------------------|-----------|
|                            |                                                                                                           |      |   |
| Item 1.          | Consolidated Financial Statements                                                                              |      |   |
|                            |                                                                                                           |      |   |
|                            | Consolidated Balance Sheets – June    30, 2004 (Unaudited) and December 31, 2003                          |      | 4 |
|                            |                                                                                                           |      |   |
|                            | Consolidated Statements of          Operations – (Unaudited) three months ended June 30, 2004 and    2003 |      | 5 |
|                            |                                                                                                           |      |   |
|                            | Consolidated Statements of    Operations – (Unaudited) six months ended June 30, 2004 and 2003            |      | 6 |
|                            |                                                                                                           |      |   |
|                            | Consolidated Statements of    Cash Flow – (Unaudited) six months ended June 30, 2004 and 2003             |      | 7 |
|                            |                                                                                                           |      |   |
|                            | Notes to Consolidated Financial    Statements – June 30, 2004                                             |      | 8-12 |
|                            |                                                                                                           |      |   |
| Item 2.                         | Management's Discussion and    Analysis of Financial Condition and Results of Operations                       |      | 12-13 |
|                            |                                                                                                           |      |   |
| Item 3.                         | Quantitative and Qualitative    Disclosure about Market Risk                                                   |      | 13 |
|                            |                                                                                                           |      |   |
| Item 4.                         | Controls and Procedures                                                                                        |      | 14 |
|                            |                                                                                                           |      |   |
| PART II. OTHER INFORMATION      |                                                                                                           |      |
|                            |                                                                                                           |      |   |
| Item 1 through          Item 6. |                                                                                                           | 15        |
|                            |                                                                                                           |      |   |
| SIGNATURE PAGE                  |                                                                                                           | 16        |
|                            |                                                                                                           |      |   |
| EXHIBIT INDEX                   |                                                                                                           | 17        |
|                            |                                                                                                           |      |   |
| CERTIFICATIONS                  |                                                                                                           | 18-25     |

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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 pershare data)*

|                                                                                                                                                                             |   |   | **June 30,**    |   |   | **December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------|--------|--------|------------------|--------|
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
|                                                                                                                                                                             |   |   | **2004**        |   |   | **2003**         |   |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
|                                                                                                                                                                             |   |   | **(unaudited)** |   |   | ** **       |   |
| **Assets**                                                                                                                                                                       |   |   |            |   |   |             |   |
| Current assets:                                                                                                                                                                  |   |   |            |   |   |             |   |
|      Cash        and cash equivalents                                                                                                                   |   | $      | 139             |   | $      | 59               |   |
|      Accounts        receivable, net of allowance for doubtful accounts of $13 and $13 at        June 30, 2004 and December 31, 2003, respectively      |   |   | 77              |   |   | 179              |   |
|      Accounts        receivable, related party                                                                                                          |   |   | 300             |   |   | —           |   |
|      Prepaid        expenses and other current assets                                                                                                   |   |   | 53              |   |   | 138              |   |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| Total current assets                                                                                                                                                             |   |   | 569             |   |   | 376              |   |
|                                                                                                                                                                             |   |   |            |   |   |             |   |
| Property        and equipment, net of accumulated depreciation and amortization                                                                                                  |   |   | 36              |   |   | 66               |   |
| Software        development costs, net of accumulated amortization of $1,023 and $3,531        at June 30, 2004     and December 31, 2003, respectively |   |   | 102             |   |   | 351              |   |
| Non-current        assets – other                                                                                                                                           |   |   | 24              |   |   | 39               |   |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| Total non-current assets                                                                                                                                                         |   |   | 162             |   |   | 456              |   |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| Total assets                                                                                                                                                                     |   | $      | 731             |   | $      | 832              |   |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| **Liabilities and stockholders’ equity**                                                                                                                                   |   |   |            |   |   |             |   |
| Current liabilities:                                                                                                                                                             |   |   |            |   |   |             |   |
|      Accounts        payable                                                                                                                            |   | $      | 232             |   | $      | 425              |   |
|      Accrued        expenses and other current liabilities                                                                                              |   |   | 671             |   |   | 665              |   |
|      Deferred        revenue                                                                                                                            |   |   | 140             |   |   | 314              |   |
|      Current        maturities of long-term debt                                                                                                        |   |   | 8               |   |   | 20               |   |
|      Short-term        debt- debentures                                                                                                                 |   |   | 2,120           |   |   | 1,697            |   |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| Total current liabilities                                                                                                                                                        |   |   | 3,171           |   |   | 3,121            |   |
|                                                                                                                                                                             |   |   |            |   |   |             |   |
| Long-term debt, less current        maturities                                                                                                                                   |   |   | 953             |   |   | 953              |   |
| Interest payable                                                                                                                                                                 |   |   | 84              |   |   | 46               |   |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| Total long-term liabilities                                                                                                                                                      |   |   | 1,037           |   |   | 999              |   |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| Total liabilities                                                                                                                                                                |   |   | 4,208           |   |   | 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 – 83,169,791        and 61,131,513 in 2004 and 2003, respectively  |   |   | 82              |   |   | 61               |   |
|      Additional        paid-in-capital                                                                                                                  |   |   | 61,181          |   |   | 60,048           |   |
|      Accumulated        deficit                                                                                                                         |   |   | (65,743         | )      |   | (64,400          | )      |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| Total stockholders’ equity/(deficit)                                                                                                                                       |   |   | (3,477          | )      |   | (3,288           | )      |
|                                                                                                                                                                             |   |        |                 |   |        |                  |   |
| Total liabilities and stockholders’ equity/(deficit)                                                                                                                       |   | $      | 731             |   | $      | 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** |   |
|----------------------------------------------------------------------------------------------|--------|--------|---------------------------------|--------|
|                                                                                         |   |   | **June 30,**                    |   |
|                                                                                         |   |        |                            |
|                                                                                         |   |   | **2004**                        |   |   | **2003** |   |
|                                                                                         |   |        |                                 |   |  |  |   |
| **Revenues:**                                                                                |   |   |                            |   |   |   |   |
|      Product        licenses                                        |   | $      | 80                              |   | $ | 92 |   |
|      Services        (including related party fees of $300 in 2004) |   |   | 327                             |   |   | 105 |   |
|                                                                                         |   |        |                                 |   |  |  |   |
| *Total revenues*                                                                             |   |   | 407                             |   |   | 197 |   |
|                                                                                         |   |   |                            |   |   |   |   |
| **Cost of revenues:**                                                                        |   |   |                            |   |   |   |   |
|      Product        licenses                                        |   |   | 109                             |   |   | 180 |   |
|      Services                                                       |   |   | 14                              |   |   | 43 |   |
|                                                                                         |   |        |                                 |   |  |  |   |
| *Total cost of revenues*                                                                     |   |   | 123                             |   |   | 223 |   |
|                                                                                         |   |        |                                 |   |  |  |   |
| *Gross profit*                                                                               |   |   | 284                             |   |   | (26 | ) |
|                                                                                         |   |   |                            |   |   |   |   |
| **Expenses:**                                                                                |   |   |                            |   |   |   |   |
|      General        and administrative                              |   |   | 440                             |   |   | 468 |   |
|      Sales        and marketing                                     |   |   | 106                             |   |   | 71 |   |
|      Research        and development                                |   |   | 297                             |   |   | 205 |   |
|                                                                                         |   |        |                                 |   |  |  |   |
| *Total operating expenses*                                                                   |   |   | 843                             |   |   | 744 |   |
|                                                                                         |   |        |                                 |   |  |  |   |
| *Loss from operations*                                                                       |   |   | (559                            | )      |   | (770 | ) |
|                                                                                         |   |   |                            |   |   |   |   |
| **Other income (expense):**                                                                  |   |   |                            |   |   |   |   |
|      Debenture        expense                                       |   |   | —                          |   |   | (382 | ) |
|      Interest        expense                                        |   |   | (49                             | )      |   | (54 | ) |
|      Other                                                          |   |   | (3                              | )      |   | — |   |
|                                                                                         |   |        |                                 |   |  |  |   |
| *Total other (expense)*                                                                      |   |   | (52                             | )      |   | (436 | ) |
|                                                                                         |   |        |                                 |   |  |  |   |
| Net loss                                                                                     |   |   | (611                            | )      |   | (1,206 | ) |
| Preferred stock dividends                                                                    |   |   | (68                             | )      |   | (76 | ) |
|                                                                                         |   |        |                                 |   |  |  |   |
| Net loss applicable to Common        Stockholders                                            |   | $      | (679                            | )      | $ | (1,282 | ) |
|                                                                                         |   |        |                                 |   |  |  |   |
| Basic and diluted net loss per        share applicable to common shares                      |   | $      |   (0.01                    | )      | $ |   (0.02 | ) |
|                                                                                         |   |        |                                 |   |  |  |   |
| Basic and diluted weighted average        common shares outstanding                          |   |   | 83,138,725                      |   |   | 53,455,372 |   |
|                                                                                         |   |        |                                 |   |  |  |   |
| *See accompanying notes.*                                                                    |   |   |                                 |   |   |  |   |

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

|                                                                                         |   |   | **Six Months          Ended** |   |
|----------------------------------------------------------------------------------------------|--------|--------|-------------------------------|--------|
|                                                                                         |   |   | **June 30,**                  |   |
|                                                                                         |   |        |                          |
|                                                                                         |   |   | **2004**                      |   |   | **2003** |   |
|                                                                                         |   |        |                               |   |  |  |   |
| **Revenues:**                                                                                |   |   |                          |   |   |   |   |
|      Product        licenses                                        |   | $      | 315                           |   | $ | 393 |   |
|      Services        (including related party fees of $300 in 2004) |   |   | 379                           |   |   | 372 |   |
|                                                                                         |   |        |                               |   |  |  |   |
| *Total revenues*                                                                             |   |   | 694                           |   |   | 765 |   |
|                                                                                         |   |   |                          |   |   |   |   |
| **Cost of revenues**                                                                         |   |   |                          |   |   |   |   |
|      Product        licenses                                        |   |   | 249                           |   |   | 371 |   |
|      Services                                                       |   |   | 26                            |   |   | 68 |   |
|                                                                                         |   |        |                               |   |  |  |   |
| *Total cost of revenues*                                                                     |   |   | 275                           |   |   | 439 |   |
|                                                                                         |   |        |                               |   |  |  |   |
| *Gross profit*                                                                               |   |   | 419                           |   |   | 326 |   |
|                                                                                         |   |   |                          |   |   |   |   |
| **Expenses:**                                                                                |   |   |                          |   |   |   |   |
|      General        and administrative                              |   |   | 773                           |   |   | 969 |   |
|      Sales        and marketing                                     |   |   | 182                           |   |   | 148 |   |
|      Research        and development                                |   |   | 580                           |   |   | 403 |   |
|                                                                                         |   |        |                               |   |  |  |   |
| *Total operating expenses*                                                                   |   |   | 1,535                         |   |   | 1,520 |   |
|                                                                                         |   |        |                               |   |  |  |   |
| *Loss from operations*                                                                       |   |   | (1,116                        | )      |   | (1,194 | ) |
|                                                                                         |   |   |                          |   |   |   |   |
| **Other income (expense):**                                                                  |   |   |                          |   |   |   |   |
|      Debenture        expense                                       |   |   | (123                          | )      |   | (580 | ) |
|      Interest        expense                                        |   |   | (104                          | )      |   | (80 | ) |
|                                                                                         |   |        |                               |   |  |  |   |
| *Total other (expense)*                                                                      |   |   | (227                          | )      |   | (660 | ) |
|                                                                                         |   |        |                               |   |  |  |   |
| Loss from operations before        provision for income taxes                                |   |   | (1,343                        | )      |   | (1,854 | ) |
| Preferred stock dividends                                                                    |   |   | (164                          | )      |   | (151 | ) |
|                                                                                         |   |        |                               |   |  |  |   |
| Net loss applicable to Common        Stockholders                                            |   | $      | (1,507                        | )      | $ | (2,005 | ) |
|                                                                                         |   |        |                               |   |  |  |   |
| Basic and diluted net loss per        share applicable to common shares                      |   | $      | (.02                          | )      | $ | (0.04 | ) |
|                                                                                         |   |        |                               |   |  |  |   |
| Basic and diluted weighted average        common shares outstanding                          |   |   | 74,049,551                    |   |   | 53,111,296 |   |
|                                                                                         |   |        |                               |   |  |  |   |
| *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)

|                                                                                  |   |   | **Six Months          Ended** |   |
|---------------------------------------------------------------------------------------|--------|--------|-------------------------------|--------|
|                                                                                  |   |   | **June 30,**                  |   |
|                                                                                  |   |        |                          |
|                                                                                  |   |   | **2004**                      |   |   | **2003** |   |
|                                                                                  |   |        |                               |   |  |  |   |
| **Operating activities:**                                                             |   |   |                          |   |   |   |   |
| Net loss                                                                              |   | $      | (1,343                        | )      | $ | (1,854 | ) |
| Adjustments to reconcile        net loss to net cash used in operating activities:    |   |   |                          |   |   |   |   |
||
|      Depreciation                                            |   |   | 30                            |   |   | 101 |   |
|      Software        amortization                            |   |   | 249                           |   |   | 376 |   |
|      Accretion        of discount on convertible note        |   |   | 123                           |   |   | 580 |   |
|      Charge        for option and warrant based compensation |   |   | 8                             |   |   | 19 |   |
|      Charge        for legal and consulting                  |   |   | 37                            |   |   | — |   |
|      Charge        for 401k stock contribution               |   |   | 55                            |   |   | 82 |   |
| Changes in operating assets        and liabilities:                                   |   |   |                          |   |   |   |   |
|      Accounts        receivable                              |   |   | (198                          | )      |   | (138 | ) |
|      Change        in restricted cash                        |   |   | —                        |   |   | 238 |   |
|      Prepaid        expenses and other current assets        |   |   | 85                            |   |   | 102 |   |
|      Other        non-current assets                         |   |   | 15                            |   |   | — |   |
|      Accounts        payable and accrued expenses            |   |   | (204                          | )      |   | (1,127 | ) |
|      Deferred        revenue and other liabilities           |   |   | (174                          | )      |   | (74 | ) |
|                                                                                  |   |        |                               |   |  |  |   |
| Net cash used in operating activities                                                 |   |   | (1,317                        | )      |   | (1,695 | ) |
|                                                                                  |   |   |                          |   |   |   |   |
| **Investing activities: -**                                                           |   |   |                          |   |   |   |   |
| Purchase of property and equipment                                                    |   |   | —                        |   |   | (6 | ) |
|                                                                                  |   |        |                               |   |  |  |   |
| Net cash used in investing activities                                                 |   |   | —                        |   |   | (6 | ) |
|                                                                                  |   |   |                          |   |   |   |   |
| **Financing activities:**                                                             |   |   |                          |   |   |   |   |
| Issuance of convertible note                                                          |   |   | 500                           |   |   | 1,445 |   |
| Repayments of long-term obligations                                                   |   |   | (12                           | )      |   | (32 | ) |
| Proceeds from the issuance of        common stock, net                                |   |   | 809                           |   |   | 293 |   |
| Proceeds from exercise of common        stock warrants, net                           |   |   | 100                           |   |   | 190 |   |
| Repayment of note payable-related        party                                        |   |   | —                        |   |   | (49 | ) |
|                                                                                  |   |        |                               |   |  |  |   |
| Net cash provided by financing        activities                                      |   |   | 1,397                         |   |   | 1,847 |   |
|                                                                                  |   |        |                               |   |  |  |   |
| Net increase in cash and cash        equivalents                                      |   |   | 80                            |   |   | 146 |   |
| Cash and cash equivalents, beginning        of period                                 |   |   | 59                            |   |   | — |   |
|                                                                                  |   |        |                               |   |  |  |   |
| Cash and cash equivalents, end        of period                                       |   | $      | 139                           |   | $ | 146 |   |
|                                                                                  |   |        |                               |   |  |  |   |
| *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 been eliminated. 

The consolidated financial statements    included herein for the six months ended June 30, 2004 and 2003 are unaudited.    In the opinion of Management, all adjustments (consisting of normal recurring    accruals) have been made which are necessary to present fairly the financial    position of the Company in accordance with accounting principles generally    accepted in the United States. The results of operations experienced for    the six month period ended June 30, 2004 are not 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 second quarter of 2005. In addition to the net    loss of approximately ($1,343,000) realized during the six months ended June    30, 2004, the Company incurred substantial net losses 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 second quarter    of 2005, such funding may not be readily available. These factors raise substantial    doubt about the Company’s ability to continue as a going 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 to aggressive    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 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, 2003 annual financial    statements on Form 10-K and Form 10-K/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 to its employees and directors at an option    price equal to the fair market value of the stock at the date of grant. Accordingly,    the Company does not record stock-based compensation expense for these options.    The Company's stock option plans are more fully described in the Company's    Annual Report on Form 10-K for fiscal year 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 market value recognition provision of a Statement    of Financial Accounting Standards ("SFAS") No.    123, "Accounting for Stock-Based    Compensation" as amended by SFAS No. 148, “Accounting for Stock –Based    Compensation-Transition and Disclosure”:

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|                                                                                                                                                       |   |   | **Six months          ended June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------|--------|
|                                                                                                                                                       |   |        |                                   |
| (In thousands)                                                                                                                                             |   |   | **2004**                               |   |   | **2003** |   |
|                                                                                                                                                       |   |        |                                        |   |  |  |   |
| Net loss applicable to common        stockholders                                                                                                          |   | $      | (1,507                                 | )      | $ | (2,005 | ) |
| Deduct: Total stock-based employee        expense  determined under the fair        value based method  for all awards,        net of related tax benefits |   |   | (39                                    | )      |   | (577 | ) |
|                                                                                                                                                       |   |        |                                        |   |  |  |   |
| Pro-forma net loss applicable        to common stockholders                                                                                                |   | $      | (1,546                                 | )      | $ | (2,582 | ) |
|                                                                                                                                                       |   |        |                                        |   |  |  |   |
| Basic and diluted loss per common        share                                                                                                             |   | $      | (0.02                                  | )      | $ | (0.04 | ) |
| Pro-forma, basic and diluted        loss per common share                                                                                                  |   | $      | (0.02                                  | )      | $ | (0.05 | ) |

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:

|                                                  |   |   | **Six months ended** |   |   | **Year ending**  |   |
|-------------------------------------------------------|--------|--------|----------------------|--------|--------|------------------|--------|
|                                                  |   |   | **June 30,**         |   |   | **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 |   |   | (1,407               | )      |   | (1,427           | )      |
|                                                  |   |        |                      |   |        |                  |   |
|                                                  |   | $      | 36                   |   | $      | 66               |   |
|                                                  |   |        |                      |   |        |                  |   |

Note #3: Stockholders’ Equity      and Other Financing Activities

During the first quarter of 2004,    the Company issued 19,424 shares of its Common Stock to a consultant in lieu    of $10,000 cash compensation for investor relation services rendered. The    Company also issued 35,130 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. (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 warrants to 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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During the second quarter of 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 Common Stock 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. 

A total of 59,916 shares of the Company’s    Common Stock were issued to employees for shares purchased through the Employee    Stock Purchase Plan.

On June 4, 2004, the Company issued    an 8% convertible debenture to Mr. David R. Vey and received proceeds of    $500,000. The debenture matures on June 3, 2005 and is convertible at any    time at the option of the holder into 1,423,533 shares of Common Stock until    that date.

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    June 30, 2004 equaled $914,354 or $1.82 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 (ACEncrypt and OSI) accounted for 95% of total revenues    earned in the quarter ended June 30, 2004.

Note #5: Related Party Transactions

In September 2003, the Company signed    a technology licensing 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 license agreement is $1,000,000, which includes delivery    of the current version of Intarsia plus the cost of other contract defined    milestones related to the development of derivative products for the health    insurance market. The Company recognized $475,000 of revenue from this transaction    in the third quarter of 2003. Contract milestones two and three were completed    during the second quarter of 2004 and the Company recognized an additional    $300,000 from their completion. The balance of the contract revenue has been    deferred until delivery of the remaining milestones. At June 30, 2004, accounts    receivable reflects $300,000 in services related to the completion of milestone    two and three, the invoice is due and payable thirty days from invoice date.

Note #6: Supplemental Disclosures      of Cash Flow Information

| ** **                                        |   |   | **Six months          ended     June 30,** |   |
|---------------------------------------------------|--------|--------|--------------------------------------------|--------|
|                                              |   |        |                                            |        |  |  |   |
| ** **                                        |   |   | **2004**                                   |   |   | **2003** |   |
|                                              |   |        |                                            |   |  |  |   |
| Cash paid during period for        interest       |   | $      | 2,230                                      |   | $ | 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, all of which has been paid; 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, 

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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.

**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

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

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.

During the second quarter of 2004,    SEDONA began to expand its direct sales efforts through a network of    experienced independent sales representatives. Each sales representative    will have a pre-established sales territory and will be paid on a commission    only basis.

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 June    30, 2004 and 2003.

Total revenues for the three months    ended June 30, 2004 and 2003 were $407,000 and $197,000, respectively. Revenue    from license fees and royalties totaled $80,000 and $92,000 in the second    quarter of 2004 and 2003, respectively. During the second quarter of 2004    the Company recognized $327,000 in services revenue compared to $105,000    during the same quarter in 2003. The net increase in services revenue was    primarily due to the additional related party revenue recorded from ACEncrypt    Solutions contract offset by a decrease due to the sale of SEDONA’s    customer base and related services fees to Fiserv Solutions in January 2003.    For the six month period ended June 30, 2004 and 2003, total revenues were    $694,000 and $765,000, respectively. 

Total cost of revenues decreased    to $123,000 for the three months ended June 30, 2004 from $223,000 for the    three months ended June 30, 2003, due mainly to a decrease in the amortization    expense of capitalized software. For the six month period ended June 30,    2004 and 2003, total cost of revenues decreased to $275,000 and $439,000,    respectively. The decrease is a direct result of decreased amortization costs.    While total costs decreased during the fiscal year, gross profit increased.    For the quarter ended June 30, 2004, gross margin percentage increased to    70% compared to (13%) for the same period in 2003. For the six months ended    June 30, 2004, gross margin percentage increased to 60% from 43% as compared    to 2003.

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Total operating expenses increased    to $843,000 in the second quarter of 2004, from $744,000 in the year earlier    period, principally reflecting an increase in expenses related to the completion    of the new multi-vertical version of our CRM solution, IntarsiaTM.    For the six-month period ended June 30, 2004, total operating expenses increased    to $1,535,000 compared to $1,520,000 for the same period in 2003 principally    due to an increase in cost related to the completion of the new CRM solution    offset by savings 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 and general insurance    expenses offset slightly by an increase in personnel costs and benefits. 

Other expenses in the three months    ended June 30, 2004 decreased to $52,000 from $436,000 in the three months    ended June 30, 2003, reflecting a decrease in the non-cash convertible note    discount accretion associated with convertible notes. The results of operations    for the six-month period ended June 30, 2004 and 2003 resulted in other expenses    of $227,000 and $660,000, respectively. The decrease is a direct result of    decreased accretion expense related to convertible notes.

Liquidity and Capital Resources 

At June 30, 2004, cash and cash equivalents    increased to $139,000 compared to the December 31, 2003 amount of $59,000.    For the six months ended June 30, 2004, the cash flows from operating activities    resulted in a net use of cash of $1,317,000 compared to $1,695,000 for the    same months in 2003. This use of cash was primarily due to payments of payroll,    accounts payable and accrued expenses. 

The cash flows from investing activities    during the six-month period ended June 30, 2003 resulted in the use of cash    of $6,000 to fund the purchase of equipment. There were no investing activities    in the six-month period ended June 30, 2004.

For the six months ended June 30,    2004, the cash flows from financing activities resulted in net cash provided    by financing activities of $1,397,000. The principal increase in cash was    due to proceeds from the issuance of convertible notes totaling $500,000    as well as an $800,000 private placement stock sale. The Company also recognized    $100,000 from the exercise of 200,000 common stock warrants. For the six    months ended June 30, 2003, the cash flow from financing activities totaled    $1,847,000. The increase was principally due to $1,445,000 in proceeds from    the issuance of convertible notes, $293,000 in proceeds from the issuance    of common stock and $190,000 from the exercise of common stock warrants. 

**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 six month period ended June 30, 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 have been no changes    in the Company’s internal controls over financial reporting identified in connection with management’s evaluation that occurred during the Company’s last  fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

|   | Item 1 –    | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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|   |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                             | 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 tradingrules and regulations, tortuous interference, conspiracy and other actionsset forth in the complaint, but not limited to enforcement of settlementdate and affirmative determination.    Item 6 –Exhibits     Exhibit 10.48* – Convertible note dated June 4, 2004      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    May 25, 2004 in connection with a press release announcing it had sent a    letter to the Berlin Exchange requesting that it’s common stock no    longer be quoted on that exchange.

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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:   August 10, 2004  /s/Marco A. Emrich                                                     Marco A. Emrich  President and Chief Executive Officer   DATE:   August 10, 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* Convertible note dated June 4, 2004   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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