UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

For the fiscal year ended December 31, 2009

OR

For the transition period from      to      

Commission file number 000-15864

SEDONA CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:  610-337-8400

Securities registered pursuant to Section 12 (b) of the Act:  None

Securities registered pursuant to Section 12 (g) of the Act:

Common Stock, par value $.001 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o.

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  Large accelerated filer o, Accelerated filer o, Non-accelerated filer o, Smaller reporting company x.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing price as reported on OTCBB system as of June 30, 2009 was $9,705,486.

The number of shares of the Registrant’s common stock, $.001 par value per share (“common stock”) issued and outstanding as of March 26, 2010 was 127,364,064 shares.

DOCUMENTS INCORPORATED BY REFERENCE

None.

NOTE ON FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning 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”, “expects” or similar expressions. These forward-looking statements relate to the plans, objectives, and expectations of SEDONA® Corporation (the “Company”, “SEDONA Corp.”, “SEDONA”, “we”, “us” or “our”) for future operations. In light of the risks and uncertainties inherent in all forward-looking statements, the inclusion of such statements in this Annual Report on Form 10-K 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 attract and retain qualified personnel, 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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ITEM 1.  DESCRIPTION OF BUSINESS

Overview

SEDONA® Corporation (OTC: SDNA) (“SEDONA” or the “Company”) delivers Customer and Member Relationship Management (CRM and MRM) solutions that help to improve the financial performance of banks and credit unions.  The Company develops and distributes the SEDONA CRM™ and SEDONA MRM™ software applications (formerly known as SEDONA Intarsia®).  SEDONA also delivers services which, combined with its software, help to improve bank and credit union growth, stability, and service.

The Company has strategically targeted financial services organizations such as community and regional banks, credit unions, and savings and loans to market our leading CRM/MRM solutions.  Our customers are financial institutions with whom we sell solutions to directly or strategic channel partners who are providers of software applications and service solutions to banks and credit unions.

With its state-of-the-art technology and flexible licensing options, SEDONA solutions are designed to be installed directly on client premises or offered through a hosting center as a SaaS (Software as a Service) solution.  Our channel partners offer a SaaS solution through secure, world-class facilities which provide core processing and other applications to the banking and credit union industry.  The SaaS solution is especially attractive for small to mid-sized financial services organizations that lack the financial resources and IT infrastructure to deploy an in-house enterprise business application such as CRM/MRM.

SEDONA CRM/MRM is designed to enable financial institutions to increase the profitability of their customer and member portfolios.  SEDONA CRM can help increase overall sales and client retention while reducing expenses often incurred with having to purchase multiple solutions in order to gain a complete CRM solution set.  SEDONA solutions can be implemented within weeks, not months, to assist in delivering a rapid return on investment which helps enhance overall shareholder value to both the financial services institution and channel partner solution providers.

SEDONA believes that the key to selling CRM/MRM successfully is presenting a solution that not only meets the organization’s unique industry, business, and budget requirements, but also provides the organization with proven technology and services that can be cost effectively integrated into its business.

The current economic climate brings a growing opportunity for CRM solutions as banks and credit unions place increasing emphasis on effectively managing the relationship of, and interaction with, their clients.  Financial services organizations have identified CRM as a strategic initiative to improve customer retention and profitability rates.  These organizations see CRM as a competitive weapon in an industry dominated by large national and international companies with greater resources, services and advertising power.

Unlike most traditional, general-purpose CRM applications, SEDONA CRM/MRM is a customer relationship management application solution specifically designed and priced to meet the needs of financial institutions with multiple lines-of-business across several vertical industries.  SEDONA CRM/MRM provides financial services organizations with a complete view of their customers’ relationships and interactions.  This information enables them to gain knowledge about their customers’ preferences, needs and characteristics, and build the appropriate strategies to more effectively target the right products, to the right people, at the right time.  SEDONA CRM/MRM assists those organizations to effectively identify, acquire, foster and maintain loyal, profitable customers.

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In addition to the financial services market, the Company’s products have also been tailored to support Property, Casualty, Life Insurance and Continuing Education vertical markets.  Although available for sale, the Company is not actively marketing these product lines at this time in order to focus on delivering CRM/MRM to the financial services industry.

In 2008, the company expanded its product offerings to include SEDONA Profit Pro.  This additional offering enables the financial institution to determine the most accurate customer and member account profitability.  Profit Pro provides general ledger reconciliation, along with a continually updated historical funds transfer pricing database, organization and customer portfolio “What If” capabilities, along with an expanded folder of profitability reporting that enables drilling down into every component of a branch, household, customer and account profit contribution.

In addition, the Company’s services have been expanded to provide a complete Incentive and Call Tracking offering.  This functionality includes specialized workflows to ensure lead follow-up, custom goal and incentive table generation, complex, yet flexible, goal calculation algorithms, and comprehensive reporting enabled at any level from the individual, or rolled up to the organization dashboard.

The Company’s principal office is located at 1003 West Ninth Avenue, Second Floor, King of Prussia, Pennsylvania, 19406.  The Company has a software delivery facility in Plymouth, MN.  The Company’s principal website address is www.sedonacorp.com.

The Company was incorporated in 1992 as Scan Graphics, Inc., a manufacturer of peripheral scanning equipment and geographical information systems software.  In late 1999, the Company changed its name to SEDONA Corporation and ceased engaging in its original business.  Instead, the Company focused its efforts on the development of SEDONA CRM/MRM and the related services business.

In February 2009, the Company elected to change the name of its CRM/MRM product from Intarsia to SEDONA CRM/MRM.  The Company believes that SEDONA CRM/MRM provides greater brand recognition.

Additional Information

Copies of the Company’s Form 10-K, 10-Q, 8-K reports, proxy and information statements, and other information with the SEC, and all amendments to these filings, may be obtained free of charge from the Company’s website at www.sedonacorp.com, as soon as reasonably practicable following the filing of any of these reports with the SEC.  Copies may also be obtained free of charge by contacting the Company at investorinfo@sedonacorp.com.  In addition, copies may be obtained via the SEC’s internet website, www.sec.gov.  The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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Description of Business Strategy

SEDONA is a software application and services provider that develops and markets web-based, vertical CRM/MRM.  The Company has strategically targeted financial services organizations as the primary vertical market to deliver its leading CRM/MRM application solution including, but not limited to, community and regional banks, credit unions, savings and loans. The Company’s CRM/MRM application solution enables financial services organizations to improve key performance metrics to strengthen their position in the market and obtain a greater share of the customer’s wallet.

SEDONA has signed Original Equipment Manufacturer (OEM) and reseller agreements with several leading software and services providers for the financial services market, including, but not limited to: Fiserv; Connecticut Online Computer Center, Inc.; Profit Technologies; Bradford-Scott; CU ink; Share One and EPL.  In addition, the Company also sells its software application solutions directly to banks, credit unions, and savings and loans.

For 2010, SEDONA has decided to capitalize on its strength as a highly specialized, nimble company to focus on increasing direct sales, channel sales, services and new capabilities.  The Company plans to undertake a number of initiatives to accomplish this including enhancing its product suite to enable rapid deployment and development of new capabilities.  Included are solutions for contact management, demographic and psychographic information services, performance assessment, profitability management and sales referral tracking.  These new product platforms will fully exploit the Company’s unique capabilities in data warehousing, data mining, business intelligence and predictive analytics.

In 2009, SEDONA engaged the services of Archemedae Management, a consulting firm specializing in technology startups, turnarounds, strategic planning, and venture financing. The firm conducted a thorough review of the Company’s business model, its product and services, and technology trends in the CRM market. The firm supplied a managing director, David H. Tobey, to implement a number of new strategies intended to advance the success of the Company and its products.

As a result of the recommendations from this engagement, the Company’s new vision is to provide advanced technology solutions throughout the entire life cycle of the financial institution.  The new architecture facilitates financial institution performance by supporting the transition from processing agent to trusted advisor.  The Company plans on releasing a series of new products and services that will expand the Company’s market presence from the small community bank and credit union to the largest global financial institution-improving risk management, customer retention, growth and profitability from teller to bank president to banking conglomerate CEO.

The Company’s product strategy includes offering two licensing versions for SEDONA CRM and MRM:  SEDONA Enterprise and SEDONA Lite.  Customers who select the Lite option are opting for personalized portals with back office analysis, reports, and front-line capability, at a lower cost of entry. Customers selecting the Enterprise option add robust campaign management, sales and service process management and predictive analytics to the Lite option.  Customers of a Lite application can upgrade to an Enterprise license whenever their financial institution is ready to expand its use of CRM or MRM.

SEDONA has also engaged in an effort of systematic lead generation and qualification within its target market, using a variety of sources to compile vital information to qualify prospects.  This enhances the effectiveness of SEDONA’s sales efforts for both direct and channel sales.  Some statistics on the bank and credit union market are provided below.  From this total prospect population, SEDONA carefully chooses the most applicable prospects to pursue with sales resources. The Company targets financial institutions with assets below $10 billion, however, our products are easily implemented by financial institutions of any size.

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Source: FDIC & National Credit Union Association — February 2009

SEDONA has also enhanced its customer care system to ensure that all employees have ready access to information on the Company’s direct clients and can provide superior service for incoming calls. With these enhancements, the Company sees a strong potential for more responsive delivery of client services to its customer base, increased cross-selling and up-selling, and improved customer retention.

The new initiatives for prospecting, selling, service delivery, and customer care have been implemented using SEDONA’s own CRM technology, providing an outstanding example of how a smaller organization such as a community bank or credit union can quickly configure and design improvements in its CRM system — making ongoing incremental changes — and reap the rewards within weeks, not months or years.  At SEDONA, the SEDONA CRM system supports customer-facing processes that include all critical functions from marketing through delivery and payment.

The Advantages of SEDONA Solutions

SEDONA solutions offer a number of advantages that are particularly important to the Company’s target market.

·                  Flexible Installation and Pricing — customers can choose to host the system themselves with a perpetual license or to have the system hosted by one of SEDONA’s partners along with SaaS pricing. The hosting and SaaS pricing options appeal to community banks and credit unions, which have relatively small technology budgets and limited IT support.

·                  Speed — community banks and credit unions can deploy SEDONA CRM or MRM within weeks, not months, and begin to see results — increased retention rates, more effective cross-selling, improved profitability — not in the next year but in the next quarter.

·                  Simplicity — community banks and credit unions aspire to the same CRM and MRM capabilities as the big financial institutions, but do not have the resources for specialized staff or significant system training and support. Therefore they need a solution such as SEDONA’s which is intuitive for the non-technical employees who need to use it with minimal training.

·                  Flexibility and Configurability — national banks use painstaking custom programming to build systems that fit their existing or desired processes and culture.  SEDONA solutions have built-in flexibility and configurability so that a community bank or credit union can design reports, departmental portals, and sales and service processes to suit how they work.

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·                  Engineering — SEDONA technology is web-based and database agnostic, with a meticulously engineered data integration engine capable of handling significant quantities and types of data coming from the core processor, third party applications, spreadsheets and text files.  This means that SEDONA solutions can fit into the widely varying technology environments encountered at today’s varied financial institutions.

·                  Data Integration Services — SEDONA’s client services professionals together have vast experience integrating data for banks and credit unions to create a complete and high quality picture of customers, members, and households.

SEDONA’s Target Market

Banks and credit unions need to foster and retain loyal, profitable customers and members by understanding individuals and households as well as the profitability of different products and product mixes.  SEDONA and its channel partners need to offer CRM and MRM capabilities that differentiate them from their competitors.

·                  Banks deal with a highly unusual business situation compared to companies in other industries.  In most industries, when a customer purchases a product or service, the seller realizes a profit, however small, with the possible exception of promotions and limited time discounts.  However, for banks, some of the products they offer are profitable while others are not.  In addition, a given financial product may see its profitability vary from customer to customer depending upon the interest rate, term, and fees.  Therefore it is possible for a bank customer to use one or more financial products, such as a checking account and savings account, while costing the bank money every month.  Unprofitable customers or households can continue driving down the overall returns for banks.

·                  Bank customers generally use a mix of accounts and services, from checking and savings accounts, to certificates of deposit, loans, debit cards and internet banking.  This product mix includes both profitable and unprofitable accounts.  It is imperative for a bank to create a unified picture of all of a customer’s accounts to determine how profitable that customer is overall in order to use the bank’s limited resources to retain highly profitable customers and more effectively promote products which are appropriate and appealing to a customer or household.

·                  Building a unified picture of a customer and a household becomes even more challenging when you consider that banks often have additional lines of business such as trust accounts, wealth management, and insurance, operating not on the core processing system but on third party applications.  This information must also be unified with bank account data in order to fully understand the customer and household relationship with the bank. The ability to thoroughly and efficiently unify data from the core processor and third party applications is a principal strength of SEDONA solutions.

·                  Credit unions are similar to banks, except that as member-owned financial institutions where profits are shared by members, considerations of profitability are secondary to the mission of the organization. Credit unions are generally smaller than banks, with over 85% having less than $100 million in assets compared to 38% of banks, and so have fewer resources in terms of money and people to devote to retaining their members and promoting to them.  Consequently credit unions must be highly judicious in their promotion and retention efforts.

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·                  These challenges, true for banks and credit unions even in the best economic times, are all the more daunting during turbulent times.  During 2009, financial institutions saw their customer base and membership changing unpredictably.  To begin with, high unemployment and underemployment have changed which customers are profitable as deposit balances drop dramatically and loans go into delinquency and default.  Furthermore, households are changing their financial product mix as they seek to build secure savings with insured deposits and shy away from credit and investments.  All of this requires banks and credit unions to understand changing trends and demands in order to offer suitable products and services.

·                  The challenges described here lead banks and credit unions to seek out vendors who specialize in their industry because products designed for other industries are not readily applicable to the banking environment.  Banks and credit unions look for solutions designed not only for financial services, but for banks or credit unions specifically. This vertical specialization is another of SEDONA’s key strengths.

·                  SEDONA’s channel partners are solution providers to banks and credit unions. The majority of them provide core processing systems, which financial institutions use for day-to-day account deposits and withdrawals.  Once a bank or credit union adopts a core processor, it becomes very difficult to move to a competitor due to the effort involved in changing such a critical system.  Each year, the core processing providers compete fiercely to convince a small percentage of financial institutions to switch systems.  When the Company’s channel partners license SEDONA technology, they offer value-added services which provide added incentives for institutions to switch core processors.  They also provide leading edge capabilities to their current base of customers, for whom new features are even more important due to their resistance to changing core processors.  SEDONA’s tight integration with core processors, while developing as an independent and standalone product, is yet another of the Company’s critical competitive advantages.

How SEDONA Solutions Help Financial Institutions

The Company’s customers utilize SEDONA solutions in a variety of ways in order to better manage the relationship with their customers and members. A bank or credit union may embark on any combination of the initiatives described below.

·                  Retention — by retaining valuable customers and members, banks and credit unions can enjoy more stable deposits and long term loyalty, both of which indirectly boost financial stability and profitability.  Typically, 10% of households contribute 90% of profits; banks and credit unions can use SEDONA to identify those households and track efforts to retain them.  SEDONA’s Retention Risk Predictor provides ready-made advanced analytics capabilities not normally accessible to smaller financial institutions, calculating a score that helps banks and credit unions identify those individuals most at risk of leaving, before they leave.

·                  Cross-selling — SEDONA provides the ability to identify the best prospects in a customer base or membership for additional products. Marketers and front line staff can utilize the information to develop more effective and targeted direct marketing campaigns. The next best product recommendations apply advanced analytics to deliver suggestions which are designed not just to appeal to the specific individual, but also to improve individual or household profitability.  Additionally, banks and credit unions use SEDONA to track referrals and incentives, increasing the number of qualified prospects for their cross-selling efforts.

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·                  Profit Pro — SEDONA Profit Pro provides the ability for a financial institution to determine the most accurate account and customer profit contribution.  Through the use of a continually updated historical funds transfer pricing database, along with automatic download of financial reporting, Profit Pro provides the most accurate picture of individual and household contribution to organizational profit.

·                  Acquisition — SEDONA helps profile the characteristics of loyal and profitable households, usually a combination of location, age range, household size, lifestyle, and product mix which is specific to each financial institution.  Banks and credit unions use this profile to select prospect lists to solicit new customers and members.  In addition, by using SEDONA for on-boarding, a custom designed service where new customers or members are automatically moved through a standard process to welcome them and to offer suitable additional financial products, banks and credit unions can improve their retention rates for new customers.

·                  Marketing ROI — the community banks, regional banks, and credit unions in SEDONA’s target market generally have limited resources for marketing.  It has long been difficult to justify marketing expenses because of the difficulty in measuring the return.  SEDONA solutions lets financial institutions track individuals or households in a promotion and measure the return on mailing, calling, or other promotion efforts in terms of new accounts opened, total new balances or loan amounts, and additional monthly profit.  Armed with this information, SEDONA’s customers can shift their resources to those initiatives which yield the best return.

·                  Front Line Effectiveness — financial institutions use SEDONA to provide customer-facing and member-facing employees with a snapshot of information on an individual’s and household’s accounts and history.  SEDONA is also a single online platform to deliver prospect lists for direct mail and calling campaigns along with marketing brochures, talking points, and sales scripts. Banks and credit unions can use SEDONA to track their sales pipelines and create consistent processes for prompt and effective sales and service, with reminders and escalation of delays.

·                  Loyal, Profitable Relationships — banks and credit unions use SEDONA’s unified data and analytical capabilities to identify and track the growth of loyal, profitable relationships, and to understand their impact on retention, market penetration, and profitability.

·                  SEDONA Services — can range anywhere from solution recommendations, to follow on or advanced training, through complete functionality design and custom implementation using SEDONA CRM.

The flexibility of SEDONA’s software means that financial institutions can select those initiatives that are most in line with their culture, their priorities, and their limited resources.  Over time, institutions can grow into their use of the product for increasing return on their CRM and MRM investment.  Some banks and credit unions begin their adoption of CRM with centralized, back-office marketing initiatives, expanding later to front line cross-selling and other interactions as resources permitted. Other financial institutions deploy SEDONA in the back office and across the front line simultaneously.

The Role of SEDONA’s Channel Partners

SEDONA’s channel sales strategy is an important complement to its direct sales activities.  SEDONA has signed Original Equipment Manufacturer (OEM) and reseller agreements with several leading software and services providers for the financial services market, including, but not limited to: Fiserv; Connecticut Online Computer Center, Inc.; Profit Technologies; Bradford-Scott; CU ink; Share One; and EPL Inc.

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When the channel partner is a core processing system provider, the SEDONA offering has the added advantage of data integration which is tightly coordinated between the core system and the SEDONA solution.  In many cases, the CRM or MRM system delivered as a SaaS based offering is hosted in the same secure facilities as the core system.

Many core processing providers have made attempts to provide CRM or MRM to their customers by developing capabilities as part of their core system.  These capabilities run up against limitations because the provider must favor development of core system capabilities over CRM.  In contrast, SEDONA’s sole focus is developing CRM and MRM capabilities and services, and therefore its solutions maintain their competitive position at the forefront of the market.  As a consequence, our channel partners’ bank and credit union customers enjoy the best of both worlds — a solution that is both tightly integrated with the core processor and also leading-edge. This is another key advantage for SEDONA.

The Value of SEDONA’s SaaS Offering

The SaaS model is especially attractive for small to mid-sized financial services organizations that lack the financial resources and IT infrastructure to deploy an in-house enterprise business application such as CRM and MRM. The SaaS model is another principal advantage of SEDONA solutions.

Just as attractive as the hosting of the system, is the pricing, calculated as a cost-effective monthly price charged as long as the customer uses the system. SaaS pricing does not involve the significant up-front charges of a perpetual license and does not come out of the capital expenditures budget. SEDONA also offers a SaaS pricing option for those customers who choose to host the software on their own premises but wish to benefit from subscription pricing.

Staying in the Forefront of CRM/MRM Technology

SEDONA CRM provides banks and credit unions with a comprehensive customer relationship management solution that is tightly integrated with their business processes and back-end systems.  It enables them to optimize their return on customer relationships by personalizing the management and interaction with their customers and ensuring that the sales and marketing efforts are strategically aligned toward increasing company profitability.

Exploiting the ubiquity of the internet, SEDONA CRM’s comprehensive set of components provide financial institutions with a robust set of marketing analytics and operational CRM capabilities necessary to:

·                  Have a 360° view of the customer by integrating the front, back and mobile offices into one comprehensive database of information about customers and prospects.

·                  Analyze customer and prospect data, enabling financial services organizations to manage critical business performance such as profitability of customers, (accounts, members and policy holders), personnel, households and products.

·                  Measure the effectiveness of the organization’s lead generation and marketing campaigns and ensure timely follow-up of referrals, customer requests and sales leads.

·                  Improve coordination and communication between financial services organizations and their customers, enhancing the ability to deliver effective service and improve organizational productivity.

·                  Automate business processes that may be critical for the effective management and monitoring of the relationships and interactions with customers at the financial services organizations.

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SEDONA CRM seamlessly enhances the bank or credit union customer and prospect data with user demographics, behaviors, interests and preference information provided by third-party content management suppliers or personal interactions.  This enhanced data is then analyzed to create timely and precise information on demand.  This information is used by all of SEDONA CRM’s components in order to enable the organization to:

·                  Create “look-a-like” models to effectively identify prospects that share the same characteristics as their organization’s best customers, increasing the institution’s ability to acquire new customers.

·                  Help predict customer retention and make profitable cross-sell (next best product) recommendations.

·                  Generate alerts and automated processes to deal with critical changes in customer status or other business indicators.

·                  Develop personalized sales, marketing and services programs aimed at retaining the financial services organization’s most profitable customers and turning unprofitable customers into profitable ones.

SEDONA believes that the key to selling CRM/MRM successfully is finding a solution that not only meets the organization’s unique industry, business, and budget requirements, but also provides the organization with proven technology and services that can be cost effectively integrated into its business.  When these needs are met, our Customer’s should achieve a positive return on their CRM/MRM investment (ROI).

Research & Development

The main strategy of SEDONA’s research and development activities is to provide high-quality, high-value products and support services in a consistent and predictable manner, as follows:

·                  Promote and cultivate a culture of team-based development:

The Company’s research and development organization is structured into small teams of developers, responsible for the design, development and unit testing of each component of the SEDONA CRM/MRM application solution.  Each project team also provides technical assistance to the systems integration group.

·                  Create efficient and predictable software development life cycle:

SEDONA utilizes an industry-proven software development process that encourages component reusability and enhances the predictability, timeliness and quality of the overall software process.

SEDONA has adopted the Base Level Integration Plan software development methodology, which has been designed to promote an interactive and predictable process for the development, unit and system integration testing and delivery of products.  This methodology divides the development of sophisticated products into specified, pre-defined cycles.  It also allows the Company to react quickly to business and technical changes generated by the marketplace and/or new customer requirements.

Base levels serve as the fundamental planning and execution process that drives the engineering activities for that time period, including the maintenance of existing products and releases, training and education requirements, as well as new product development. This process operates

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in the context of a development organization where there is a set of small project teams cooperating to build a large, complex software product under the guidance of the Chief Technology Officer.

In addition, SEDONA’s research and development efforts are focused on enhancing the features and functionality of our products.  We only provide support to our customers on the then-current version of our software and one prior release.  As a result, we do not have to maintain multiple versions of our software which helps to keep our costs for maintenance and support low.

Research and development expenses were $338,000 and $526,000 for the years ended December 31, 2009 and 2008, respectively.  The decrease in expenses of $188,000 was the result of a reduction in outside staffing costs used to supplement product development.  In addition, in 2009, the research and development team dedicated more time to completing custom development projects for clients and upgrading and supporting the release of a new version of our software application; these expenses are included in cost of sales.

Trademarks and Copyrights

SEDONA has obtained copyright and trademark protection for certain of its products and services.  The Company has a service mark for a logo design, which was registered with the United States Patent and Trademark Office (USPTO) on July 23, 2002 (Registration No. 2,598,107), a service mark for the word mark, “SEDONA”, which was registered with the USPTO on March 24, 2003 (Registration No. 2,700,294), and a trademark and service mark for the word mark “INTARSIA” which was registered with the USPTO on July 12, 2005 (Registration No. 2,967,355).  The Company shares the word mark “INTARSIA” with Intarsia Corporation, who since 2002, has accepted a co-existence agreement with the Company.  SEDONA has the exclusive right to use the “Intarsia®” trademark in connection with its CRM/MRM services.

The Company claims and possesses rights in various other trademarks and services marks, and intends to file various additional trademark and service mark applications to register such trademarks and service marks with the USPTO as management deems advisable.

Major Customers

Since one of the Company’s primary sales strategies is to utilize an indirect sales model, i.e., the Company distributes its products through its channel partners, the Company’s revenues are derived from a limited number of partners.  Consequently, any partner may account for more than 10% of the total revenue derived during any given year.

License and service revenues fluctuate as they are dependent upon many variables including the delivery requirements, size and complexity of the transaction with our customers.

As of December 31, 2009 and 2008, the Company had obtained net revenues from significant customers/and distribution partners as follows:

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As of December 31, 2009 and 2008, the Company had accounts receivable from significant customers/partner accounts as follows:

Substantially, all of the Company’s revenues are earned from customers in the United States.

Backlog

Revenue backlog consists of unfulfilled purchase contracts, service contracts entered into with partners for SaaS services and deferred revenues, primarily for advance royalties and maintenance contracts where revenues are recognized ratably over the life of the contract which typically ranges from 36 to 60 months.  As of December 31, 2009, the Company had a deferred revenue backlog of approximately $677,000, substantially all of which is expected to be recognized as revenue in 2010.  In addition, as of December 31, 2009, the Company had recorded a total of approximately $918,000 in current and non-current accounts receivable and associated deferred revenue for monthly subscription fees that will be recognized ratably over the contract terms.

Competition

SEDONA believes that the most important competitive factor, which enables the Company to differentiate itself from the competition, is its focus on delivering a specifically tailored CRM/MRM solution to the financial services market through a sales force with extensive financial services industry knowledge and by partnering with a number of leading core processor providers.

Since core processor providers are responsible for mission-critical business applications and solutions, they have the information required to make the implementation of a CRM/MRM solution viable.  Using the core processor providers as a sales, marketing and distribution channel, improves SEDONA’s opportunity to establish itself as a leading provider of CRM/MRM application software and services, as those organizations create a formidable barrier for other CRM/MRM providers to enter the market.

There are additional core processing providers with whom SEDONA is seeking to establish partnerships; the Company anticipates expanding its market presence in this way.  (See Item 6.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.)

The Company further believes its competitive advantage in the market is based on the following factors:

·                  Marketing and Sales - The Company has an entrenched marketing and sales distribution channel through worldwide OEM partnerships with leading core services providers for the financial services market.

·                  Technology — The Company’s proven CRM/MRM solution is specifically designed and priced for the financial services market. It is fully integrated with the financial services organization’s core processing systems and designed to support the business processes and data requirements of the multiple lines of business of those organizations

SEDONA CRM uniquely supports multiple lines of business on a single platform.  It allows organizations to accurately manage, report, analyze and interact with customers who have portfolios that cross lines of business such as insurance and banking, without a need for multiple servers, separate databases or additional application training.  SEDONA CRM includes highly tailorable components such as process management, campaign management, point of service,

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web-based reporting and a personalized portal for each user.  Once installed, SEDONA CRM can be fully configured for each user reflecting his/her own system preferences, portal and dashboard contents, and security access.

The CRM/MRM market has offerings from a variety of providers that focus on sales force automation, call center management, contact management, marketing customer information file systems (MCIF) and other marketing solutions that address certain aspects of the management of customer relationships.  The Company’s software solution is unique in that it combines a CRM/MRM application solution tailored for the financial services market with a knowledgeable and experienced sales and marketing distribution channel provided by the Company.  SEDONA’s OEM and reseller agreements with leading software and services providers enable the Company to leverage their marketing strengths, broad distribution channels and strong reputations.  SEDONA’s direct sales channels coupled with these strategic partnerships provide SEDONA with revenue opportunities and strengthen its competitive position.

SEDONA’s primary competitors are Harland Clarke Holdings Corp. (Harland), Harte-Hanks Inc. (Harte-Hanks), and Marquis Software Solutions (Marquis).

·                  Harland provides software solutions for financial institutions, including, but not limited to, bank core systems, deposit and loan origination, teller, mortgage, call center, document solution and customer relationship management.

·                  Harte-Hanks provides direct and target marketing services, including, but not limited to, sales lead management, inbound/outbound telemarketing and web-based database marketing, to consumers and business-to-business marketers across multiple vertical markets.

·                  Marquis is a privately-held company primarily focused on low cost Marketing Customer Information File (MCIF), sales and services and referral tracking solutions for the financial services market.

The Company anticipates additional competition from other established and new companies as the markets for CRM/MRM applications continue to develop.  In addition, current and potential competitors have established, or may in the future establish, cooperative relationships among themselves or with third parties.  Large software companies may acquire or establish alliances with SEDONA’s competitors.  The Company expects that the software industry will continue to consolidate.  It is possible that new competitors or alliances among competitors may emerge and rapidly acquire a significant market share.  The results of increased competition and possible reduction of the Company’s potential market share could materially and adversely affect its business, operating results and financial condition.

Employees

As of March 31, 2010, the Company had 13 employees.  In addition, the Company hires consultants where applicable to augment its staffing requirements.  None of the company’s employees are covered by a collective bargaining agreement.  The Company believes that its employee relationships are good.

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Appointment of Interim President and CEO

Effective September 18, 2008, the Company appointed Scott C. Edelman as the interim Chief Executive Officer and President of the Company.  Mr. Edelman had served as the Co-Chairman of the Board since May 2007 and as a Director of the Company since August 2004.  Mr. Edelman served as Interim Chief Executive Officer until May 2009 when David R. Vey was appointed Chief Executive Officer.

Dependence Upon Key Personnel

The Company is dependent upon certain key members of its management team for the successful operation and development of its business.  The loss of the services of one or more of the Company’s management personnel could materially and adversely affect the operation of the Company.

The Company does not carry key man insurance on its executives.

In addition, in order to continue its operations, the Company must attract and retain additional technically qualified personnel with backgrounds in business development, consulting, engineering and finance.  There is keen competition for such highly-qualified personnel and consequently there can be no assurance that the Company will be successful in recruiting or retaining personnel of the requisite caliber or in the numbers necessary to enable the Company to continue to conduct its business.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company’s principal offices are located in King of Prussia, PA.  In December 2005, the Company entered into a lease for a 4,270 square foot facility to serve as its principal offices.  The five (5) year lease commenced on January 1, 2006 and expires December 31, 2010.  The initial annual base rent was $68,320 or $16.00 per sq. ft. and has increased $0.50 per sq. ft. in each of the remaining years of the lease.  Annual base rent expense for the PA office is projected to be approximately $77,000 in 2010.

The Company has the option to terminate the lease after January 1, 2009, by giving one hundred eighty (180) days prior written notice to the Landlord and paying a sum equal to the unamortized transaction costs incurred in connection with the lease amendment, plus three (3) months rent on the term expiration date.

The Company also has a software delivery and customer care office located in Minnesota.  Effective May 2009, the Company entered into a lease for an 894 square foot facility in Plymouth, Minnesota.  The lease commenced May 1, 2009 and expires April 30, 2011.  The initial base annual rent is $7,020 per year or $7.85 per sq. ft. plus an escalation charge of 3.4% annually.  The Company has the option to renew its lease for two (2) years by providing nine (9) months written notice to the Landlord, prior to the lease expiration.  Annual base rent for the Minnesota office is projected to be approximately $7,000 in 2010.

The Company believes its leased properties are adequately insured for any losses.

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ITEM 3.  LEGAL PROCEEDINGS

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 sought 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.

On March 27, 2009, the Honorable Judge Laura Swain, a federal judge in the United States District Court for the Southern District of New York, issued an opinion dismissing several of the defendants from the civil action lawsuit filed by SEDONA on May 5, 2003.  SEDONA was granted the right and has filed a third amended petition against the remaining defendants and is aggressively pursuing these claims.  On May 1, 2009, Amro International, S.A., Rhino Advisors, Inc., Roseworth Group., LTD., and Cambois Finance, Inc., all defendants in the May 5, 2003 action, filed suit against SEDONA and several of its former directors in Federal Court in the Southern District of New York alleging breach of a settlement agreement seeking unspecified damages and attorney’s fees and expenses.  The suit is being vigorously defended by SEDONA and its former directors.  The outcome of litigation proceedings is inherently uncertain and there is no assurance that the Company will prevail in either of these matters.

On September 28, 2006, SEDONA filed a civil action lawsuit against Open Solutions Inc. (OSI), in Montgomery County Court in Pennsylvania for breach of a software license agreement entered into between the parties in May, 2002.  In the lawsuit, the Company alleges that since September 2004, OSI has failed to pay royalty payments required under the parties’ master software license and services agreement for licensed products and services sold by OSI to its customers.  OSI removed the case to federal court and successfully moved for a change in venue from the United States District Court for the District of Pennsylvania to the United States District Court for the District of Connecticut.  SEDONA filed an amended complaint after the case was transferred to the District of Connecticut, case no. 3:07-cv-171.  In its amended complaint, SEDONA seeks a declaration and damages relating to OSI’s failure to pay royalties under the agreement for its sales of the cView product operating on the .NET platform and for breach of the agreement’s confidentiality provision.  OSI served an amended answer with counterclaims asserted against SEDONA for declaratory relief and breach of contract.  Discovery was completed and each party has moved for summary judgment. The parties participated in oral argument before the Court concerning the summary judgment motions on September 19, 2008.

In a ruling filed August 19, 2009, the court denied SEDONA’s motion for summary judgment on claims that OSI was required to pay royalties on the sale of the cView product and that failure to pay such royalties and disclosure of confidential information to the offshore development company constituted a breach of contract. Further, the court denied OSI’s motion for summary judgment on claims that SEDONA was in breach of contract for demanding royalty payments, while accepting OSI’s claim that cView was a license enhancement not subject to royalties.

No actions other than the matters set forth above or 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.

ITEM 4.  RESERVED

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PART II

Market Price of and Dividends of the Company’s Common Stock

The following table sets forth, for the periods indicated, the high and low closing prices of SEDONA’s common stock.  The common stock has been available for trading on the OTC Bulletin Board under SDNA.OB.  The last reported sale price of SEDONA common stock on March 26, 2010 was $0.06 per share.  At that time, there were approximately 3,375 holders of record of SEDONA common stock.

The following table reflects high and low bid information for SEDONA’s common stock for the periods specified, as reported by the OTC Bulletin Board.  These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Dividends

The Company has never declared or paid any cash dividends on its common stock and does not anticipate declaration or payment of cash dividends on its common stock in the foreseeable future.  It is the current intent of the Company to continue to retain future earnings, if any, to finance the expansion, development and growth of its business.  Payment of future dividends, if any, will be at the discretion of the Board of Directors after taking into account various factors, including the Company’s financial condition, operating results, current and anticipated cash needs and plans for expansion.

In addition, SEDONA’s outstanding Series A Preferred Stock has a preference on the payment of any dividends.  SEDONA must pay all accrued and unpaid dividends, if any, on its outstanding preferred stock before it can pay dividends on its common stock.

The Company ceased to declare preferred stock dividends as of January 1, 2001 on the issued and outstanding series of the Class A Convertible Preferred Stock.  Cumulative but undeclared dividends on the Series A Preferred Stock at December 31, 2009, equaled $1,080,000 or $2.16 per share compared to at December 31, 2008 which equaled $960,000 or $1.92 per share.

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Equity Compensation Plans as of December 31, 2009:

Equity Compensation Plan Information

Recent Sales of Unregistered Securities

The Company has effected sales of unregistered securities from time to time during the past three years.  Each of these sales has previously been reported in the Company’s periodic filings on Form 10-K, Form 10-KSB, Form 10Q, Form 10-QSB or on Form 8-K.

ITEM 6.  SELECTED FINANCIAL DATA

This item is not required to be furnished by smaller reporting companies.

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SEDONA is a software application and services provider that develops and markets web-based, vertical Customer and Member Relationship Management solutions.  The Company has strategically targeted financial services organizations such as community and regional banks, credit unions, and savings and loans to market our leading CRM/MRM solutions.  The Company targets financial institutions with assets below $10 million, however, our products are easily implemented by financial institutions of any size.  The Company’s CRM/MRM application solution enables financial services organizations to improve key performance metrics to strengthen their position in the market and obtain greater share of the customer’s wallet.

The Company licenses its CRM/MRM applications to software and services providers, who market, sell, distribute and support SEDONA’s technology either as a component of their total solution or as a stand-alone offering.  The Company is not an application service provider (SaaS), however, SEDONA CRM/MRM can be deployed in a SaaS environment through the Company’s channel distribution partners.

SEDONA has signed Original Equipment Manufacturer (OEM) and reseller agreements with several leading software and services providers for the financial services market, including, but not limited to: Fiserv; Connecticut Online Computer Center, Inc.; Profit Technologies; Bradford-Scott, CU ink, Share One and EPL.

Revenues

The Company’s revenues currently consist of product license revenue and service license revenue.

Product license revenue includes:

·       license fees from direct sales by either the Company or its distribution partners

·       monthly subscription fees from SaaS sales by our channel distribution partners

Service license revenue includes:

·       professional services fees including set-up and installation fees, training and mapping fees

·       annual maintenance fees

The following is a discussion and analysis of the Company’s results of operations and financial condition for the years ended December 31, 2009 and December 31, 2008 and should be read in conjunction with the Company’s audited financial statements as of December 31, 2009 and 2008 along with the notes to those financial statements.

The discussion and analysis of financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingencies.  We evaluate, on an on-going basis, our estimates and judgments, including those related to bad debts, income taxes, contingencies and litigation.  Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

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Critical Accounting Policies

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of its wholly owned subsidiary, SEDONAâGeoServices, Inc.  All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosures in the consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all unencumbered highly liquid investments with original maturities of three (3) months or less when purchased to be cash equivalents.  Cash and cash equivalents, which primarily consist of cash on deposit and money market funds, are stated at cost, and approximate fair value.

Accounts Receivable

Trade receivables are generated primarily from the Company’s customers and channel distribution partners.  Receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  A valuation allowance is provided for known and anticipated credit losses, as determined by Management in the course of regularly evaluating individual customer receivables.  Receivables are written off when deemed uncollectible.  Recoveries of receivables previously written off are recorded when received.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the respective assets, which range from three (3) to seven (7) years.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with ASC Topic 360, Property, Plant and Equipment.  Assets are periodically reviewed for possible impairment whenever circumstances or events indicate that the carrying amount of such assets may not be recoverable.  If such review indicates that the carrying amount of the asset is not recoverable, the carrying amount of such asset will be reduced to fair value.

Revenue Recognition

The Company’s revenues from software arrangements currently consist of license fees, fees for installation services and maintenance.  The Company has established vendor specific objective evidence of fair value for its maintenance contracts based on the price of renewals of existing maintenance contracts.  The remaining value of the software arrangement is allocated to license fees and professional

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services based on contractual terms agreed upon by the customer and based on Company-maintained list prices.

Product License Revenue

The Company utilizes both a direct sales model and an indirect sales model whereby it distributes its product through its channel distribution partners, for which the Company receives royalty payments based on percentages of the license fees charged by the distribution partners.  Under the direct sales model, revenue is not recognized until the software is installed.  The Company either receives written acceptance from its clients that the software has been installed and has been accepted or provides receipts for the electronic delivery of the software.  Under the indirect sales model, royalty fees are recognized by SEDONA when the Company receives written acknowledgement from the distribution partners that a contract has been signed with an end-user and monies are owed to SEDONA from the distribution partner.

Revenues from the sale of product licenses are recognized as follows:

·                                          Persuasive evidence of an arrangement exists, generally by receipt of a signed contract

·                                          Delivery and acceptance of the software has been received

·                                          The fee to be paid by the customer is fixed or determinable

·                                          Collection of the fee is reasonably assured. (Our contracts do not contain general rights of return)

Since SEDONA CRM/MRM solutions can be implemented on the Company’s customers’ systems without significant alterations to the features and the functionality of the software, and without significant interfacing, the Company’s license agreements are written so that formal written acceptance of the product is received when installation is complete. Therefore, the timing of license fee revenue recognition coincides with the completion of the installation and acceptance of the software by the customer.

During 2009, 11% of SEDONA’s license revenues were derived from in-house licensing and 89% were derived from subscription fees on SaaS deployments.  Comparatively, during 2008, 57% of the Company’s license revenues were derived from in-house license sales and 43% were derived from subscription fees on SaaS deployments.

Services Revenue

Services revenue includes revenue from professional services (primarily installation and training services) and maintenance revenue.  Installation service revenue is earned from implementation planning, hardware and software set-up, data integration including data aggregation, conversion, cleansing and analysis, and testing and quality assurance.  Installation service revenue is accounted for as a separate element of a software arrangement.

The Company recognizes service revenue as follows:

Installation revenue is recognized upon completed installation and customer acceptance and is based on a contractual hourly rate.  Training revenue is not a material element of a contract and related revenue is recognized as training services are provided.

Annual maintenance revenue is recognized ratably over the life of the related contract.  The Company establishes the value of maintenance revenue based on the price quoted and received for renewals of existing maintenance contracts.

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Software Development Costs

Software development costs are accounted for in accordance ASC 985, Software.  All costs incurred in the research and development of new software products are expensed as incurred until technological feasibility has been established.

The costs incurred for testing and coding of the new software products are capitalized.  Amortization of such costs is the greater of the amount capitalized using: (a) the ratio in which current gross revenues for a product bear to the total of current and anticipated future gross revenues of that product or (b) the straight-line method over the remaining estimated economic life of the product not to exceed three years.  Amortization commences when the product is available for general release to customers.  The Company capitalizes costs related to purchased software used for developmental purposes and amortizes such value over three years consistent with the amortization and capitalization policy discussed above related to capitalized software costs.  During 2009 and 2008, the Company expensed its software development costs related to the Company’s SEDONA CRM/MRM enterprise business application software because the recoverability of these costs in future periods is uncertain.

The Company periodically reviews the carrying value of both internally developed and purchased software costs for impairment.  The Company will record an impairment charge in its operating results if the carrying value exceeds the future estimated undiscounted cash flows of the related assets.

As of December 31, 2004, all software development costs have been fully amortized and the Company has not capitalized any additional costs since that time.

Income Taxes

The Company is taxed as a domestic U.S. Corporation under the Internal Revenue Code.  Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns.  Deferred income tax assets and liabilities are determined based upon the differences between the financial statements and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse.  Deferred tax assets are evaluated and a valuation allowance is established if it is more likely than not that all or a portion of the tax assets will not be utilized.  The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions (tax contingencies).  The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes.  The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.  The Company includes interest and penalties related to its tax contingencies as operating expenses in its consolidated statement of operations.  For additional information, see Note 12 to the Consolidated Financial Statements.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with the recognition and measurement provisions of Accounting Standards Codification (ASC) Topic 718, “Compensation — Stock Compensation”.

ASC Topic 718 requires all share based payments to employees, including grants of employee stock options or warrants, to be recognized as expenses in the statement of operations based on their fair values and vesting periods.

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The Company estimates the fair value of options and warrants at the grant date using the Black-Scholes option pricing model.  The model takes into consideration weighted average assumptions related to the following: risk-free interest rates; expected term; expected volatility; and expected dividend rates.

Recent Accounting Pronouncements

In September 2009, the Company adopted ASC 105-10-05, which provides for the FASB Accounting Standards Codification™ (the “Codification”) to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (“GAAP”) to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The Codification does not change GAAP, but combines all authoritative standards into a comprehensive, topically organized online database. ASC 105-10-05 explicitly recognizes rules and interpretative releases of the Securities and Exchange Commission under federal securities laws as authoritative GAAP for SEC registrants. Subsequent revisions to GAAP will be incorporated into the ASC through Accounting Standards Updates (ASU).  ASC 105-10-05 is effective for interim and annual periods ending after September 15, 2009, and was effective for the Company in the third quarter of 2009. The adoption of ASC 105-10-05 impacted the Company’s financial statement disclosures, as all references to authoritative accounting literature were updated to and in accordance with the Codification. The adoption of ASC 105-10-05 did not have a material impact on the Company’s consolidated results of operations and financial condition.

In June 2008, the FASB issued new guidance regarding the classification of financial instruments that are indexed to a company’s own stock.  The new guidance revised the criteria for determining whether an instrument is indexed to a company’s own stock and the resultant accounting treatment of those instruments.  The new guidance is effective for annual periods beginning after December 15, 2008.  The adoption of this new guidance on January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued an accounting standard codified within ASC 805, “Business Combinations” which changed the accounting for business acquisitions.  Under this standard, business combinations continue to be required to be accounted for at fair value under the acquisition method of accounting, but the standard changed the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date, until either abandoned or completed, at which point the useful lives will be determined; and restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date. The standard is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008. Adoption of the standard did not have a significant impact on the Company’s financial position and results of operations; however, any business combination entered into after the adoption may significantly impact the Company’s financial position and results of operations when compared to acquisitions accounted for under prior GAAP and result in more earnings volatility and generally lower earnings due to the expensing of deal costs and restructuring costs of acquired companies.

In February 2009, the FASB issued an accounting standard codified within ASC 805, “Business Combinations” which amends the provisions related to the initial recognition and measurement, subsequent measurement, and disclosure of assets and liabilities arising from contingencies in a business combination. The standard applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of ASC 450, “Contingencies”, if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in ASC 805. The standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of the standard effective January 1, 2009 did not have an impact on the Company’s financial position and results of operations.

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In March 2008, the FASB issued an accounting standard related to disclosures about derivative instruments and hedging activities, codified within ASC 815, “Derivatives and Hedging”.  Provisions of this standard change the disclosure requirements for derivative instruments and hedging activities including enhanced disclosures about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. This statement was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the standard on January 1, 2009.

In April 2008, the FASB issued an accounting standard codified within ASC 350, “Intangibles - Goodwill and Other” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset  Under this standard, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension.  The intent of the standard is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. Adoption of the standard was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted the standard on January 1, 2009. The Company does not expect the standard to have a material impact on its accounting for future acquisitions of intangible assets.

In November 2008, the FASB issued an accounting standard codified within ASC 350, “Intangibles - Goodwill and Other” that applies to defensive assets which are acquired intangible assets which the acquirer does not intend to actively use, but intends to hold to prevent its competitors from obtaining access to the asset. The standard clarifies that defensive intangible assets are separately identifiable and should be accounted for as a separate unit of accounting in accordance with guidance provided within ASC 805, “Business Combinations” and ASC 820, “Fair Value Measurements and Disclosures”.  The standard was effective for intangible assets acquired in fiscal years beginning on or after December 15, 2008.  The Company adopted this standard effective January 1, 2009 and will apply the provisions of this guidance to intangible assets acquired on or after that date. The Company does not expect the standard to have a material impact on its accounting for future acquisitions of intangible assets.

In April 2009, the FASB issued an accounting standard codified within ASC 825, “Financial Instruments” that requires disclosures about the fair value of financial instruments that are not reflected in the consolidated balance sheets at fair value whenever summarized financial information for interim reporting periods is presented. Entities are required to disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions, if any, during the period. The standard was effective for interim reporting periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009.

In April 2009, the FASB issued an accounting standard codified within ASC 820, “Fair Value Measurements and Disclosures,” which provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales.  The standard reaffirms the objective of fair value measurement, which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The standard is effective for interim and annual periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009. The adoption of this accounting pronouncement did not have a material impact on the Company’s consolidated results of operations and financial condition.

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In May 2009, the FASB issued an accounting standard codified within ASC 855 “Subsequent Events,” which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.  The standard was effective for interim or annual periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009.   In February 2010, the FASB issued Accounting Standards Update No. 2010-09 (“ASC Update 2010-09”) “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” This ASU amends FASB Codification topic 855. The amendments in ASU 2010-09 remove the requirement in ASC 855-10 for a SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. This ASU was effective upon issuance and the Company adopted this ASU as of December 31, 2009. Except for the removal of disclosure requirements in ASC 855-10, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures — Measuring Liabilities at Fair Value.” The ASU provides additional guidance for the fair value measurement of liabilities under ASC 820 “Fair Value Measurements and Disclosures”.  The ASU provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. The ASU also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. It also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.  The Company adopted the ASU in the fourth fiscal quarter of 2009.  The adoption of the ASU did not have a material impact on the Company’s consolidated results of operations and financial condition.

Standards Issued But Not Yet Adopted

In June 2009, the FASB issued an accounting standard codified within ASC 860, “Transfers and Servicing.” This standard amends the existing guidance on transfers of financial assets. The amendments include: (1) eliminating the qualifying special-purpose entity concept, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. This standard is effective for new transfers of financial assets occurring on or after January 1, 2010. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements; however, it could impact future transactions entered into by the Company.

In June 2009, the FASB issued an accounting standard codified within ASC 810, “Consolidation.” This standard amends the consolidation guidance for variable-interest entities under FIN 46(R), “Consolidation of Variable Interest Entities - an interpretation of ARB No. 51.” The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. This standard is effective January 1, 2010. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (ASU 2009-13) and ASU 2009-14, “Certain Arrangements That Include Software Elements, (amendments to ASC Topic 985, Software)” (ASU 2009-14). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently evaluating the impact of the adoption of these ASUs on its consolidated results of operations or financial condition.

In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” which amends ASC 810, “Consolidation” to address the elimination of the concept of a qualifying special purpose entity.  The standard also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE whereas previous accounting

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guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred.  The standard provides more timely and useful information about an enterprise’s involvement with a variable interest entity and will be effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009, which for the Company would be January 1, 2009.  The Company does not expect the adoption of this standard to have a material effect on its consolidated results of operations and financial condition.

In January 2010, the FASB issued ASU No. 2010-6, “Improving Disclosures About Fair Value Measurements,” which provides amendments to ASC 820 “Fair Value Measurements and Disclosures,” including requiring reporting entities to make more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements including information on purchases, sales, issuances, and settlements on a gross basis and (4) the transfers between Levels 1, 2, and 3.  The standard is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

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Results of Operations

Total revenues from operations for the years ended December 31, 2009 and 2008 were $1,250,000 and $1,395,000, respectively.  The decrease of 10% or $145,000 in total revenues is explained below.

Over the last year, the turmoil and uncertainty of the economy, specifically the financial services industry has had an impact the Company’s license sales.  For the year ended December 31, 2009, revenues from product licenses decreased by 25% or $137,000 to $401,000 compared to product license revenues of $538,000 reported for 2008.  License fee revenue from the sale of in-house software applications decreased 86% in the year ended December 31, 2009, however this decrease was offset by a 55% increase in license fee revenue from the sale of SaaS based license (Software as a Service) revenues for the year ended December 31, 2009, as compared to the 2008.  The Company expects that the SaaS based licensing model will continue to show strong results through 2010 as this model provides financial institutions with an immediately available, fully integrated system, including all of the software, hardware and services required for the deployment of a comprehensive, web-based enterprise business application, for an affordable, fixed monthly subscription fee.  SaaS based pricing is especially attractive to financial institutions who lack the resources and IT infrastructure to deploy an in-house enterprise business application.  In addition, it does not involve the significant up-front charges of a perpetual license and does not come out of an organization’s capital expenditures budget.  SaaS based licensing helps the Company build a predictable, recurring revenue stream because the subscription fee is received monthly over a three to five year period.

As of December 31, 2009, the Company has recorded a total of approximately $918,000 in current and non-current accounts receivable and associated deferred revenue for SaaS based subscription fees. This represents a 22% increase over the approximately $751,000 reported as of December 31, 2008.

The Company also believes that the demand for in-house software applications will increase in 2010 as financial institutions seek solutions to help them effectively promote the specific products that will increase their profitability and retain their loyal customers.

Service fee revenues changed by less than 1% to $849,000 compared to $857,000 for the years ended December 31, 2009 and 2008, respectively.  During the last fiscal quarter of 2009, the Company noted an increased interest from its clients for customized services and profitability analysis.  We anticipate that this trend will continue in 2010 as we continue to expand our service offerings specifically tailored to the needs of financial institutions.

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Cost of Revenues

Cost of revenues includes the cost associated with providing professional services such as data mapping, programming services, training, customer support, installation and consulting services.  These services are typically billed on a time and materials basis.

As a percentage of service revenue, cost of sales related to services was 44% of revenue or $374,000 for the year ended December 31, 2009.  In comparison, cost of sales equaled 28% of revenues or $241,000 in 2008.  The increase in cost of sales was a result of a change in the mix of services which were delivered to our clients.  During 2009, a major portion of services revenues were generated from complex projects which required the expert resources of our most senior development staff.  In addition, cost of sales increased due to upgrade and support costs associated with the release of a new version of our software application.

Gross Profit

For the year ended December 31, 2009, the Company reported a gross profit of $876,000 or 70% of revenue compared to the year ended December 31, 2008, in which the Company reported a gross profit of $1,154,000, or 83% of revenue due to the changes in revenues and cost of revenues explained above.

Operating Expenses

Operating expenses generally consists of the following:

Sales, marketing and product support

Sales, marketing and product support expenses generally consist of salaries, employee benefits and related expenses for business development activities.  We anticipate that our expenditures in this area will grow in future years as we increase our market penetration with new direct sales opportunities and expand the opportunities within our indirect channel through the addition of new partners and resellers.

Sales, marketing and product support cost increased by $322,000 or 63% to $835,000 in 2009, compared to $513,000 in 2008.  The increase in expenses is mainly attributable labor and employee benefit costs associated with the expansion of the Company’s direct sales initiatives beginning in December 2008.

Research and Development

Research and development expenses generally consist of salaries, employee benefits and related overhead expenses for product development of our CRM/MRM application solutions.  Research and development costs relate to future products as well as the redesign and maintenance of current products.  We charge all research and development expenses to operations as incurred.  We anticipate that our expenditures in this area will increase significantly in the future as we continue to upgrade and improve our technology to compete effectively with other providers of CRM/MRM applications.

Research and development expenses were $338,000 and $526,000 for the years ended December 31, 2009 and 2008, respectively.  The decrease in expenses of $188,000 is the result of a reduction in outside staffing costs used to supplement product development. In addition in 2009, the research and development team dedicated more time to completing complex custom development projects for clients and upgrading and supporting the release of a new version of our software application; these expenses are included in cost of sales and reduced research and development expenses.

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General and Administrative

General and administrative expenses generally consist of salaries, employee benefits and related overhead expenses for executive, financing, accounting and human resource personnel.  In addition, major components of these expenses include other corporate expenses such legal, accounting, professional services, insurance and facilities expenses.

General and administrative expenses were $1,112,000 and $1,281,000 for the years ended December 31, 2009 and 2008, respectively.  The decrease in expenses of $169,000 or 13% was generally attributable to the Company’s continuing efforts to monitor its expenses and attain savings, whenever possible.  During 2009, the Company achieved savings by reducing its professional services fees for legal and investor relation services.  The savings were also offset by an increase in travel cost.  In the fourth quarter of 2009, the Company launched an initiative for on-site visits with our clients to gain a complete understanding of the challenges they face and determine ways in which the Company can help them overcome the challenges and achieve their future goals and objectives.

Litigation Expenses

Litigation expenses related to the OSI legal case were $131,000 and $1,010,000 for the years ended December 31, 2009 and 2008, respectively.  Litigation expenses relate to a civil action lawsuit filed by the Company against Open Solutions Inc. (OSI) for breach of a software license agreement entered into between the parties in May, 2002 (See Item 3. Legal Proceedings for additional information).  Litigation expenses have decreased from the prior year as the matter was settled in August 2009.

Non-operating Expenses:

Interest Expense:

In 2009, interest expense increased to $4,100,000 compared to $682,000 reported in 2008.  The increase in interest expense mainly reflects $3,402,000 of non-cash interest charges related to the accretion of debt discount on convertible notes as fully explained in Item 13.

Inducement loss on debt conversion

For the year ended December 31, 2008, the Company recorded an inducement loss on debt conversion of $1,299,000 related to the conversion of a portion of the outstanding principal and interest on the debt obligations with David Vey.

As part of David Vey’s debt refinancing transaction on December 31, 2008, Mr. Vey converted principal and accrued interest of his existing outstanding convertible debt in the amount of $1,262,738 into shares of the Company’s common stock at the rate of $0.05 per share, for a total of 25,254,781 shares of common stock.  Due to the reduction of the conversion price from $0.14 per share under the existing debt arrangement to $0.05 per share, the Company recorded a charge of $1,299,000 as an inducement loss upon conversion of the principal and interest on December 31, 2008.

Loss on extinguishment of debt

For the year ended December 31, 2008, the Company recorded a loss on debt extinguishment of $1,156,000 related to the refinancings of its debt obligations with David Vey and William Rucks.

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Effective December 31, 2008, the Company modified the terms of its existing debt obligations with David Vey. Under the revised agreement, Mr. Vey was granted one four-year warrant to purchase 12,637,390 shares of the Company’s common stock at an exercise price of $0.05 per share. The modification was accounted for as a debt extinguishment and the fair value of the stock purchase warrant was included in determining the debt extinguishment loss to be recognized. The fair value of the warrant in the amount of $909,000 was determined using the Black-Scholes option pricing model and was recorded as a loss on extinguishment of debt.

Effective March 6, 2008, the Company modified the terms of the $1,000,000 in convertible notes payable with William Rucks. Under the revised agreement, Mr. Rucks was granted one four-year warrant to purchase 2,777,777 shares of the Company’s common stock at an exercise price of $0.30 per share. The modification was accounted for as a debt extinguishment and the fair value of the stock purchase warrant was included in determining the debt extinguishment loss to be recognized. The fair value of the warrant in the amount of $247,000 was determined using the Black-Scholes option pricing model and was recorded as a loss on extinguishment of debt.

Liquidity and Capital Resources

SEDONA’s operations have been financed through the issuance of short-term convertible notes.   For the fiscal year ended December 31, 2009, SEDONA received net proceeds of approximately $1,625,000 from borrowings under convertible notes.

For the year ended December 31, 2009, the Company used net cash of $1,620,000 for operating activities compared to $1,097,000 in 2008, an increase of $523,000 or 48%.  The increase in net cash used in operating activities was primarily the result of increased sales and marketing activities engaged in by the Company as it entered the direct sales market as well as a reduction in the Company’s accrued expenses specifically related to salary, benefits and severance.

For the year ended December 31, 2009, net cash used in investing activities for the acquisition of property and equipment decreased by $1,000 to $5,000 compared to $6,000 in 2008.

Net cash provided by financing activities increased to $1,628,000 in 2009, compared to $1,088,000 in 2008. In 2009, the proceeds were derived from the issuance of $1,625,000 in short-term convertible notes.  In addition, the Company received proceeds of $3,000 from the sale of common stock through its employee stock purchase plan.

In 2008, the proceeds were derived from $686,000 in payments advanced by David Vey, related to the OSI litigation, plus $285,000 in proceeds from the line of credit and $117,000 from the sale of common stock and exercise of stock options.

Charles F. Mitchell (“Mitchell”) extended a loan to the Company, which was evidenced by a convertible promissory note dated May 31, 2006, in the principal amount of $300,000, with a conversion price of $0.20 per share (the “Mitchell Convertible Note”).  William Rucks (“Rucks”) extended several loans to the Company which were evidenced by the following convertible promissory notes: (i) note dated July 1, 2005 in the principal sum of $250,000; (ii) note dated August 2, 2005 in the principal sum of $250,000; and (iii) $500,000 note dated September 29, 2005 and (iv) a note in the amount of $300,000 dated May 31, 2006 (collectively the “Rucks Notes”). The Notes designated as (i), (ii), and (iii) each had a conversion price of $0.18 per share, while the note designated as (iv) had a conversion price of $0.20 per share.  The Notes designated as (i), (ii), and (iii), in the total sum of $1,000,000 mature and are payable on May 31, 2010, unless theretofore converted. The two $300,000 convertible notes mature and are payable on

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May 31, 2010.  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. 

As more fully described in Item 13, the Company refinanced its existing debt obligations with David Vey on December 31, 2008.  As part of the refinancing, the Company issued Mr. Vey a consolidated secured convertible promissory note, dated as of December 31, 2008, in the principal amount $4,100,000.  The New Convertible Note has a maturity date of May 31, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity. Mr. Vey has the option to convert, at any time, all or part of the unpaid principal and accrued but unpaid interest of the New Convertible Note into shares of Company common stock at a conversion price of $0.05 per share.  The number of shares which would be issuable upon the conversion of the $4,100,000 principal balance of the New Convertible Note is presently 82,000,000.

In addition, the Company has entered into a financing agreement with Vey Associates to borrow up to $2,250,000.  The loan is evidenced by a secured convertible promissory note having a principal amount of up to $2,250,000 (the “Vey Associates Convertible Note”). The Vey Associates Convertible Note has a maturity date of May 31, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity.  Once $1,750,000 of the loan has been paid to the Company, Vey Associates has the option to convert all or part of the unpaid principal and accrued but unpaid interest of the Vey Associates Convertible Note into shares at a conversion price of $0.05 per share.  The number of shares which would be issuable upon the conversion of the $2,250,000 principal balance is 45,000,000.  As of December 31, 2009, the Company has borrowed $1,625,000 of the $2,250,000.  The number of shares which would be issuable upon conversion of the $1,625,000 principal balance is presently 32,500,000.

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.

For 2009, the Company reported a net loss of $5,640,000 which includes non-cash interest charges of $3,402,000 related to the restructuring of its debt obligations.  In addition, the Company had negative working capital of $11,733,000 and a stockholders’ deficit of $11,718,000 as of December 31, 2009.  These factors raise substantial doubt about our ability to continue as a going concern.

Presently, our revenues are not sufficient to meet our operating and capital expenses and as explained above, we have approximately $8,332,000 of convertible and non-convertible debt obligations which become due in 2010, unless converted to Preferred Stock, (See Note 13).  As stated above, there is substantial doubt about our ability to continue as a going concern since the continuation of our business is dependent upon successfully negotiating with existing lenders to refinance or extend the maturity dates of existing debt, obtaining additional financing (both short and long-term), successful and sufficient market acceptance of our products and achieving a profitable level of operations.

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The Company will use any additional financing to: (i) increase our research and development efforts; (ii) expand our marketing and sales activities; (iii) hire additional personnel across all disciplines to support our revenue growth and continued market acceptance of our services. Any additional financing may result in the issuance of additional equity securities by the Company which could cause significant dilution in the equity interests of our current stockholders.

Financial Risk Management

From time to time, the Company 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 years ended December 31, 2009 and 2008, 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 loss per share assuming dilution.  In future periods, the debt may be converted, which may be dilutive and net income per share (assuming dilution) may be reduced.

See Notes 4 and 5 to the accompanying financial statements for additional information with respect to the Company’s long-term debt and convertible preferred stock.

Off-Balance Sheet Arrangements

SEDONA had no off-balance sheet arrangements during 2009 or 2008.

Inflation

Although there can be no assurance that SEDONA’s business will not be affected by inflation in the future, Management believes inflation did not have a material effect on the Company’s results of operations or financial condition during the periods presented herein.

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ITEM 8.                             FINANCIAL STATEMENTS

The Company’s financial statements, and the report of Asher & Company, Ltd, our independent registered public accounting firm, referred to in the Index to Financial Statements appear elsewhere in this Form 10-K on the pages set forth below.

None.

ITEM 9A(T).   CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information we are required to disclose in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. Our disclosure controls and procedures also are designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

In order to monitor compliance with this system of controls, our Board of Directors, which performs the audit committee function for the company, oversees management’s discharge of its financial reporting responsibilities. The Board of Directors meets regularly with SEDONA’s independent registered public accounting firm, Asher & Company, Ltd., and representatives of management to review accounting, auditing, internal control, and financial reporting matters. The Board of Directors is responsible for the engagement of our independent registered public accounting firm.  The consolidated financial statements in this Annual Report on Form 10-K have been audited by Asher & Company, Ltd., for the purpose of determining that the consolidated financial statements are presented fairly, in all material respects, in conformity with accounting principles generally accepted in the United States of America.  Asher & Company, Ltd.’s, report on the financial statements is set forth in “Financial Statements and Schedule” of this Annual Report on Form 10-K.

Our Management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures in effect as of December 31, 2009. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2009, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to SEDONA and its consolidated subsidiaries required to be included in our Exchange Act reports, including this Annual Report on Form 10-K, is

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recorded, processed, summarized, and reported as required, and is made known to Management, including the Chief Executive Officer and Chief Financial Officer, on a timely basis.

Internal Control Over Financial Reporting

Management’s Annual Report on Internal Control Over Financial Reporting

The Management of SEDONA is responsible for the preparation of the financial statements and related financial information appearing in this Annual Report on Form 10-K. The financial statements and notes have been prepared in conformity with accounting principles generally accepted in the United States of America.

The Management of SEDONA also is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company’s internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of SEDONA; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of SEDONA; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of SEDONA’s assets that could have a material effect on the financial statements.

Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that SEDONA’s disclosure controls and internal controls will prevent all error and all fraud. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or detect misstatements.  Further, over time, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.

With the participation of the Chief Executive Officer and Chief Financial Officer, our Management evaluated the effectiveness of SEDONA’s internal control over financial reporting as of December 31, 2009.  In making this evaluation, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on that evaluation, our management has concluded that, as of December 31, 2009, SEDONA’s internal control over financial reporting was effective.

This annual report does not include an attestation report of SEDONA’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by SEDONA’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

None.

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PART III

ITEM 10.                      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The By-laws provide that the Company have a Board of Directors of not less than three or more than nine directors, with the number of directors to be fixed by the Board from time to time.  The number of directors is presently fixed at seven.  The Board of Directors currently consists of five directors due to the vacancies created upon the resignation of Victoria V. Looney in February 2008 and March A. Emrich in September 2008.

The Company is currently evaluating whether it is going to fill the vacancies created on the Board of Directors following the resignations.

The following table presents the names and positions of the persons who serve as SEDONA’s directors, executive officers and key employees, their ages as of March 31, 2010, and the length of time they have served in such positions:

All directors hold office until the next Annual Meeting of the Shareholders of the Company and until their successors are elected and qualified.

All officers serve at the discretion of the Board of Directors, subject to the terms of their employment agreements.

Directors, Executive Officers and Control Persons

The business experience, principal occupation and employment of the Company’s Directors, executive officers and Key Employees are as follows:

David R. Vey has served as Chairman of the Board since May 2003 and has been a Director of the Company since March 2003.  Mr. Vey also serves as the Company’s Chief Executive Officer effective May 2009.  Mr. Vey founded Vey Development, Inc., a privately held residential and commercial real estate development company, with primary real estate holdings in Louisiana and has served as President since 1983. Mr. Vey is a managing member in Oak Harbor Investments. Mr. Vey holds a Bachelor of Arts, Landscape Architecture and a Bachelor of Science, Forest Management from Louisiana State University.

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David C. Bluestone was elected to the Board of Directors in August 2005.  Mr. Bluestone had been with Keybank, N.A. since October 1996, where he was a Senior Real Estate Credit Officer with responsibility for structuring and approval of credit exposure for commercial real estate relationships, maintaining asset quality and portfolio management, and has held the position of Team Leader, Chicago Real Estate Loan Production Officer.  Prior to Keybank, Mr. Bluestone served as Senior Relationship Manager with Mellon Bank N.A.’s Real Estate Department and Section Manager, Credit Review Department from September 1986 to October 1996 with emphasis on new and restructuring of existing multi-million dollar real estate transactions, new business development, as well as underwriting, credit, financial, market and valuation analysis.  From September 1982 to August 1986, he was a Real Estate Representative and Project Manager for The Southland Corporation.  Mr. Bluestone holds a Masters of Business Administration from the University of California, Berkley and a Bachelors of Landscape Architecture from Louisiana State University.

Jack A. Pellicci has served as a Director since 1996. Jack Pellicci joined Intergraph Corporation in September 2006 as the Senior Vice President Security, Government and Infrastructure and General Manager, Federal Solutions and Intelligence Business Units. Prior to this he spent over 14 years at Oracle Corporation where his most recent position was as Group Vice President, North America Public Sector. In this position he led the Business Development and Program Management Group where he was responsible for positioning Oracle’s products and solutions with customers and partners to generate and then capture new business in the Federal/State and Local/Provincial Government markets in the US and Canada. Mr. Pellicci joined Oracle in 1992 after retiring from the U.S. Army as a Brigadier General with 30 years experience leading and training people, managing technology and improving productivity in command and staff assignments in both peace and war. He is a graduate of the U.S. Military Academy at West Point with a Bachelor of Engineering degree, and received a Master of Mechanical Engineering degree from Georgia Institute of Technology.

Roger W. Scearce has served as a Director of the Company since August 2004.  Mr. Scearce is a senior partner with Vanguard Advisors, LLC.  Vanguard’s mission is to provide world-class advisory and consulting services to business and government leaders.  He is a founding member and has been with Vanguard Advisors, LLC since May 2003.  Prior to forming Vanguard Advisors, Mr. Scearce was a Senior Vice President with American Management Systems (AMS), from April 1999 to April 2003, where he led their Department of Defense (DoD) Strategic Account Group.  While at AMS, Mr. Scearce also served as the Deputy Program Manager, DoD Financial Management Enterprise Architecture as a key executive member of “Team IBM” in support of the DoD’s Business Management Modernization Program.  Before joining AMS, Mr. Scearce was a career military officer, rising to the rank of Brigadier General, U.S. Army.  His last active duty assignment was Deputy Director of the Defense Finance and Accounting Service.  Mr. Scearce managed the day-to-day finance and accounting operations and activities of the Defense Department worldwide.  Earlier leadership roles and assignments included serving as Commandant of the U.S. Army Finance School and Chief of the U.S. Army Finance Corps; and Commander 266th Theater Finance Command, U.S. Army, Europe.

Anita M. Primo has served as Vice President and Chief Financial Officer since December 2003. Ms. Primo is charged with leading the Company’s finance and administrative departments. She was appointed Secretary of the Company in July 2003.  Ms. Primo previously served as the Company’s Controller since December 2000.  Prior to joining SEDONA, Ms. Primo was Vice President of Finance and Administration for the Zoological Society of Philadelphia from 1998 to 2000.  She also served as Controller and Treasurer for Action Manufacturing, a major manufacturer of precision ordnance products for the U.S. government, U.S. approved foreign governments and numerous domestic and international commercial firms from 1989 to 1998.  Ms. Primo received a B.S. Degree in Accounting and a B.S. Degree in Business Law from Temple University in Philadelphia, PA.

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Timothy A. Rimlinger has served as Vice President of Engineering since July 2000 and Chief Technology Officer since December 2003.  Mr. Rimlinger is responsible for the design, implementation and delivery of all components of the Company’s CRM application strategy.  Previously, he served as Director of Technology Development since joining the Company in January 1996.  Before joining SEDONA, he was Senior Development Engineer at GE Aerospace and Lockheed Martin from 1985 to 1996.  Mr. Rimlinger received his B.S. Degree in Electrical Engineering from Pennsylvania State University and his M.S. in Electrical Engineering from Villanova University.  Mr. Rimlinger is the spouse of Kimberly Thomas.

Kimberly M. Thomas was promoted to an Executive Officer of SEDONA effective February 2010.  She has been with the Company since 1996 serving as a Senior Software Engineer. Prior to joining SEDONA, Ms. Thomas served as a Senior Software Engineer for Lockheed-Martin from 1989-1996 and as a Software Developer for General Electric from 1980-1989.  Ms. Thomas received her B.S. Degree in Management Science/Operations Research and Marketing from Shippensburg University and her MBA in Finance from Temple University.  Ms. Thomas is the spouse of Timothy Rimlinger.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s Directors and Officers, and persons who beneficially own more than 10% of its common stock, to file reports on their ownership and changes in ownership with the Securities and Exchange Commission and to furnish the Company with copies of any reports that they file.  Based solely on review of the copies of these reports received or written representations that no reports on Form 5 were required, the Company believes that, for the year ended December 31, 2009 all reporting persons, except David R. Vey, complied on a timely basis with the filing requirements applicable to them.

Code of Ethics

On June 1, 2004, the Board of Directors adopted a Code of Conduct and Business Ethics pursuant to Section 406 of the Sarbanes-Oxley Act that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, and any other persons performing similar functions.  The Code is posted on the Company’s internet website at www.sedonacorp.com.  Copies may be obtained by following the instructions in Item 1. Available Information.

Corporate Governance

Director Independence

The Board of Directors annually determines the independence of directors.  No director is considered independent unless the Board has determined that he or she has no material relationship with the Company, either directly or as a partner, shareholder, or officer of an organization that has a material relationship with the Company or otherwise.  Material relationships can include commercial, banking, consulting, legal, accounting, charitable, and familial relationships, among others.

Independent directors are directors who, in the view of the Board of Directors, are free of any relationship that would interfere with the exercise of independent judgment.   The Board of Directors has adopted the standards for “independent directors” defined under Rule 5605(a)(2) of NASDAQ.

Audit Committee

The Board of Directors has an Audit Committee consisting of:  Roger W. Scearce (Chair), David C. Bluestone and Jack A. Pellicci.  The Board of Directors has determined that Roger W. Scearce qualifies as

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an “audit committee financial expert” under SEC rules.   The function of the Audit Committee is guided by its charter to assist the Board of Directors in preserving the integrity of the financial information published by the Company through the review of financial and accounting controls and policies, financial reporting systems, alternative accounting principles that could be applied and the quality and effectiveness of the independent public accountants.  In addition, the function of the Audit Committee includes recommending to the Board of Directors, the engagement or discharge of the independent auditors, discussing with the auditors their review of the Company’s quarterly results and their annual audit of the financial statements. The Board has made a determination that Messrs. Scearce, Bluestone and Pellicci qualify as independent directors under the independence requirements of NASDAQ.

Nominations & Corporate Governance Committee

The Board of Directors has a Nominating & Corporate Governance Committee, consisting of Jack A. Pellicci (Chair) and David C. Bluestone.  The Board has made a determination that Mr. Pellicci and Mr. Bluestone qualify as independent directors under the independence requirements of NASDAQ.  The function of the Nominations & Corporate Governance Committee is: (i) to establish criteria for selecting candidates for nomination to the Board of Directors; seeking candidates to meet those criteria; and making recommendations to the Board of Directors of nominees to fill vacancies on, or as additions to, the Board of Directors;  (ii) serve as an independent and objective component of the Board to facilitate Board stewardship of its responsibilities to shareholders and all other constituencies consistent with best corporate governance practices; and (iii) monitor, review and appraise the corporate governance systems of checks and balances, including the Company’s code of ethics and standards of conduct.

The Nominations & Corporate Governance Committee will consider director candidates who have relevant business experience, are accomplished in their respective fields and who possess the skills and expertise to make a significant contribution to the Board of Directors, the Company and its Shareholders.  Director nominees should have high-leadership business experience, knowledge about issues affecting the Company and the ability and willingness to apply sound and independent business judgment.  The Nominations & Corporate Governance Committee applies the same criteria to nominees recommended by the shareholders.

Compensation Committee

The Board of Directors also has a Compensation Committee, consisting of Jack A. Pellicci and David Bluestone (Chair).  The Board has made a determination that Mr. Pellicci and Mr. Bluestone qualify as independent directors under the independence requirements of the NASDAQ.  The Compensation Committee is responsible for developing and executing plans for the compensation of the Company’s executive officers, including the Chief Executive Officer of the Company.  Additionally, the Compensation Committee administers the 1992 Plan and the SEDONA Corporation 2000 Incentive Stock Option Plan (the “2000 Plan”), including the determination, subject to the 2000 Plan’s provisions, of the individuals eligible to receive awards, the individuals to whom awards should be granted, the nature of the awards to be granted, the number of awards to be granted, the exercise price, vesting schedule, term and all other conditions and terms of the awards to be granted.

Executive Committee

The function of the committee is to exercise the powers of the Board between meetings to the extent permitted by law.  The committee members consist of David R. Vey (Chair) and Roger W. Scearce.  Mr. Scearce qualifies as an independent director under the independence requirements of applicable law and

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of the NASDAQ but Mr. Vey does not qualify as an independent director under the independence requirements (See “Certain Relationship and Related Transaction”).  In addition, Mr. Vey currently serves as the Company’s Principal Executive Officer and Chairman of the Board.

ITEM 11.                      EXECUTIVE COMPENSATION

Employment and Separation Agreements

Appointment of Interim President and CEO

Effective September 18, 2008, the Company appointed Scott C. Edelman as the interim Chief Executive Officer and President of the Company.  Mr. Edelman served as the interim Chief Executive Officer of the Company until the appointment of David R. Vey as Chief Executive Officer in May 2009.  Mr. Edelman replaced Marco A. Emrich who resigned from his position as Chief Executive Officer, President, and Director of the Company effective September 17, 2008.

Mr. Edelman and the Company entered into a three month consulting agreement effective September 18, 2008 and expiring December 18, 2008.  Under the agreement, Mr. Edelman’s duties included but were not limited to: (1) directing the day to day management of the Company; (2) formulating and executing the Company’s business strategy; (3) providing senior level counsel as to the business and operations of the Company; (4) representing the Company in relationships and business dealings within the financial services industry and other markets pursued by the Company; and (5) supporting the activities of the Board of Directors.

Mr. Edelman received compensation of $60,000 under the three month consulting agreement.  Upon extension of the agreement, Mr. Edelman received compensation equal to $20,000 per month.  In addition, the Company provided reimbursement to Mr. Edelman for COBRA health insurance premiums, not to exceed $1,200 per month, during the term of the consulting engagement.

Separation Agreement

Effective January 31, 2009, the Company entered into a separation agreement with Marco Emrich, the Company’s former President, Chief Executive Officer and Director of the Company.  Marco Emrich resigned his positions at the Company effective September 17, 2008.  Under the terms of the separation agreement, Mr. Emrich received a total of $63,176 for services to the Company through and including September 17, 2008.  The Company also paid Mr. Emrich severance based on three month’s salary, totaling $56,250.  The wages and severance amounts were paid to Mr. Emrich on a biweekly basis over a one year period.

In addition, in lieu of cash compensation for accrued vacation, the Company granted Mr. Emrich 450,000 shares of unrestricted common stock under the Company’s 2000 Plan.  These shares were issued in March 2009.  The Company also paid for the cost of six months of medical, dental and vision coverage for Mr. Emrich and his spouse.

Mr. Emrich agreed to act as a consultant to the Company, on a limited basis, should the Company require his services, through December 31, 2009.

Under the terms of his Separation Agreement, Mr. Emrich is subject to certain covenants, including a non-disclosure covenant with respect to the Company’s confidential information, non-competition and non-solicitation covenants, a non-disparagement covenant, and certain other covenants.

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2009 DIRECTOR COMPENSATION

The Directors of the Company elected to defer the issuance of a total of 300,000 non-qualified stock options each, which were earned in 2007, 2008 and 2009.  When the incentive stock options are issued, the value of the award is calculated based upon the fair value of each common stock option issued on the date of grant, in accordance with Statement of Financial Accounting Standards (SFAS) 123R.  The fair value estimate is calculated using the Black-Scholes model. 

The following table sets forth certain compensation information awarded to, earned by, or paid for services rendered to the Company in all capacities, for the full fiscal year two years ended December 31, 2009 and 2008 for the Company’s President and Chief Executive Officer and the top three most highly compensated Company Vice Presidents, whose aggregate salary for such years exceeded $100,000, (no bonus was paid to the named executive officers in such years):

Summary Compensation Table

* S. Edelman terminated 05-09

* M. Emrich terminated 09-08

* D. Bobrowski terminated 06-08

+If an executive served in a capacity during any part of a fiscal year with respect to the information required, information is provided as to all compensation for the full fiscal year.

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Base Salary

Base salaries for all executive officers, including the Company’s Chief Executive Officer, are reviewed by the Compensation Committee on an annual basis. In determining appropriate base salaries, the Compensation Committee considers external competitiveness, the roles and responsibilities of the individual, the internal equity of compensation relationships and the contributions of the individual to the Company’s success.

Annual Cash Incentive Opportunities

The Compensation Committee believes that executive officers should be rewarded for their contributions to the success and profitability of SEDONA and as such, approves the annual cash incentive awards. Incentive awards are linked to the achievement of revenue and net income goals by SEDONA and/or specific business units and the achievement by the executive officers of certain assigned objectives. The individual objectives set for the Company’s executive officers are generally objective in nature and include such goals as revenue, profit and budget objectives, and increased business unit productivity. The Compensation Committee believes that these arrangements tie the Executive’s performance closely to key measures of the success of SEDONA or the executive officer’s business unit. All executive officers, including the Chief Executive Officer, are eligible to participate in this program.

Long-Term Stock-Based Incentives

The Compensation Committee also believes that it is essential to align the interests of executive officers and the shareholders of the Company.  The Compensation Committee grants options as a component of executive compensation.  As such, from time to time, the Compensation Committee grants stock options to executive officers and other employees under the 2000 Plan.  In determining actual awards, the Compensation Committee considers the externally competitive market, the contributions of the individual to the Company’s success and the need to retain the individual over time.  All executive officers, including the Chief Executive Officer, are eligible to participate in this program.  The exercise price of any long-term stock-based incentives granted is equal to the fair market value on the date of grant.

The Company did not issue any long-term stock based incentives during 2009.

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2009

Compensation of Directors

Cash Compensation

Any board member participating on a board committee will be reimbursed $500 per year for their participation, with the exception of the members of the Audit Committee who will be reimbursed $1,000 per year for their participation in that committee.  The reimbursement will be made at the end of the twelve-month period following participation in the various board committees administered from the annual shareholders’ meeting date each year.

As of December 31, 2009, there was a total of $146,351 in accrued compensation due to current and past members of the Board of Directors for prior service.  As of December 31, 2008, there was a total of $140,434 accrued compensation due to current and past members of the Board of Directors for prior service.  Since 2007, the Directors of the Company elected to defer the issuance of 300,000 non-qualified stock options each, which were earned in 2009, 2008 and 2007.

Equity Compensation

As of the date of each annual shareholder meeting, each existing board member, who is not an employee of the Company, will be granted the option to purchase 100,000 incentive stock options under the Company’s 2000 Incentive Stock Option Plan at the fair market value on the date of grant, as determined in accordance with the Plan.  The options will vest and become fully exercisable upon grant.

In addition, any new Director elected to the Company’s Board of Directors, who is not an employee of the Company, will be granted an option to purchase 50,000 shares of common stock, at the then current fair market value.  The shares underlying these options will vest at the rate of 10,000 shares per year for five years, on the anniversary date of the new Director’s election to the Company’s Board of Directors.

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If unexercised, each option shall expire on the tenth (10th) anniversary of the date of grant.  Once vested, options shall remain fully exercisable until the earlier of: (i) the expiration of their term; (ii) three years following the optionee’s separation from Board of Directors service for any reason, other than death; or (iii) one year following the death of the optionee.

Equity Compensation Plans as of December 31, 2009:

Equity Compensation Plan Information

(1)          These plans consist of the 1992 Plan and 2000 Plan which replaced the 1992 plan. The current plan includes a formula that automatically increases the number of securities available for issuance equal to 20% of the number of shares issued and outstanding.

(2)          The Company does not maintain any equity compensation plans that have not been approved by the stockholders.

The following table sets forth information regarding the beneficial ownership of the common stock as of March 26, 2010 with respect to:

Each person or group known to the Company who beneficially owns five (5%) percent or more of the outstanding shares of the Company’s common stock;

Each Director and named executive officer; and

The Company’s executive officers and members of its Board of Directors as a group.

Except as indicated in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares beneficially owned. The business address of each person named in the table below is c/o SEDONA Corporation, 1003 West Ninth Avenue, Second Floor, King of Prussia, Pennsylvania 19406.

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Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of the date of this annual report, are deemed outstanding for the purpose of computing the percentage ownership of any person. These shares, however, are not considered outstanding when computing the percentage ownership of any other person.

*                                         Owner holds less than 1% of the class.

(1)                                  Unless otherwise indicated, each person possesses sole voting and investment power with respect to the shares identified in the table as beneficially owned. The table includes shares which the following directors and executive officers have a right to acquire within 60 days from March 26, 2010, upon the exercise of outstanding options and warrants:

Mr. Bluestone — 250,000 options, none of which are in the money as of 12-31-09

Mr. Pellicci — 396,500 options, none of which are in the money as of 12-31-09

Ms. Primo — 201,227 options, none of which are in the money as of 12-31-09

Mr. Rimlinger — 101,905 options, none of which are in the money as of 12-31-09

Mr. Scearce — 245,000 options, none of which are in the money as of 12-31-09

Mr. Vey — 310,000 options, none of which are in the money as of 12-31-09; 12,627,390 warrants

(2)                               Mr. Vey has a right to acquire 82,000,000 shares within 60 days upon a notice of conversion related to a $4,100,000 convertible note due January 4, 2010 and an additional 32,500,000 shares upon notice of conversion related to a $1,625,000 convertible note due January 4, 2010.  The Company and Mr. Vey have agreed that Mr. Vey shall not be permitted to convert any portion of this convertible note until such time as the Company has adequate authorized shares.

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ITEM 13.                      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND, DIRECTOR INDEPENDENCE

The Company has entered into the following financing agreements to provide working capital with Mr. David R. Vey, Chairman of the Board of Directors and currently its Chief Executive Officer.  Mr. Vey is a shareholder who directly or indirectly owns approximately 38% of the Company’s outstanding common stock at March 26, 2010.

David Vey and Oak Harbor

Oak Harbor Note

As part of a refinancing of certain obligations to Oak Harbor Investment Properties LLC (“Oak Harbor”), the Company issued a promissory note to Oak Harbor dated as of August 17, 2006 in the principal amount of $1,040,402 (the “Oak Harbor Note”).  Oak Harbor is a limited liability company in which David Vey and Richard T. Hartley are managing members. The Oak Harbor Note has a maturity date of May 31, 2010, at which time all outstanding principal and interest was due.  The Oak Harbor Note bears interest at a rate of eight percent (8%) per year.

Convertible Note with David Vey

On December 31, 2008, the Independent Committee of the Company’s Board of Directors recommended to the Board of Directors that the Company consolidate, amend, and extend the term of three existing promissory notes previously issued to David Vey into a single secured convertible promissory note in the principal amount of $4,100,000. On December 31, 2008, the Board of Directors approved such consolidation, amendment and extension and the parties executed a Loan and Refinancing Agreement setting forth the terms of the Refinancing Transaction (the “Refinancing Agreement”).

The Old Notes

Pursuant to the terms of the Refinancing Agreement, the following old notes, issued by the Company to Mr. Vey, having a total principal amount of $4,595,216, immediately prior to the Refinancing Transaction, were consolidated, amended and extended:

1. A convertible promissory note, dated as of October 23, 2006, in the principal amount $2,691,263 (the “Old Convertible Note”), which had a maturity date, as previously extended, of January 1, 2009, unless theretofore converted, and bore interest at the rate of eight percent (8%) per year, which interest was due upon maturity.  Pursuant to the Old Convertible Note, Mr. Vey had the option to convert all or part of the unpaid principal and accrued but unpaid interest thereunder into shares at a conversion price of $0.14 per share.  The number of shares which would have been issuable upon the conversion of the $2,691,263 principal balance of the Old Convertible Note was 19,223,309.

2. A promissory note, dated as of October 23, 2006, in the principal amount of $1,213,953 (the “Bridge Note”), which had a maturity date, as previously extended, of January 1, 2009 and bore interest at a rate of eight percent (8%) per year.

3. A secured revolving promissory note dated as of September 27, 2006, in the principal amount of $690,000 (the “Revolving Note”).  The Revolving Note was payable by application of the proceeds of the receivables of the Company, together with accrued interest at the rate of eight percent (8%) per year.  The Revolving Note, as previously extended, had a maturity date of January 1, 2009.

The Old Convertible Note, the Bridge Note and the Revolving Note are collectively referred to below as the “Old Notes.”

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Partial Conversion of Interest and Principal

In connection with the Refinancing Transaction, Mr. Vey converted principal and accrued interest under the Existing Notes in the amount of $1,262,739 into shares of the Company’s common stock at the rate of $0.05 per share, for a total of 25,254,781 shares (the “Conversion”). After the Conversion, as described below, the Company issued to Mr. Vey a new convertible note in the amount of $4,100,000, which represented the total balance of the principal currently due and owing to Mr. Vey by the Company under the Old Notes.  Due to the fact that the original conversion price on the existing convertible note was $0.14 per share and interest and principal were converted at $0.05 per share, the Company recorded an inducement loss of $1,298,817 on December 31, 2008.

Warrants

In consideration for Mr. Vey’s agreement to refinance the Existing Notes and to effect the Conversion, the Company granted Mr. Vey one warrant to purchase 12,627,390 shares of Company common stock at a price of $0.07 per share.  The warrant expires in December 2012.  This modification was accounted for as a debt extinguishment and the fair value of the stock purchase warrant was included in determining the debt extinguishment loss to be recognized.  The fair value of warrant in the amount of $909,172 was determined using the Black-Scholes option pricing model and was recorded as a loss on extinguishment of debt.

The warrants have anti-dilution and other additional terms consistent with other warrants previously issued by the Company to Mr. Vey.

The New Convertible Note

In exchange for the Old Notes, the Company issued to Mr. Vey a consolidated secured convertible promissory note, dated as of December 31, 2008, in the principal amount $4,100,000 (the “New Convertible Note”).  The New Convertible Note has a maturity date of May 31, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity.  Mr. Vey has the option to convert, at any time, all or part of the unpaid principal and accrued but unpaid interest of the New Convertible Note into shares of Company common stock at a conversion price of $0.05 per share.  The number of shares which would be issuable upon the conversion of the $4,100,000 principal balance of the New Convertible Note is presently 82,000,000. The New Convertible Note is secured by substantially all of the assets of the Company pursuant to the terms of a Security Agreement between Mr. Vey and the Company, dated as of October 23, 2006.

Since the fair value of the Company’s common stock was $0.08 per share on December 31, 2008, the intrinsic value of the beneficial conversion feature for the difference between the fair value per share and the conversion price was $2,460,000.  The Company is accreting this debt discount to interest expense over the one year term of the New Convertible Note, beginning with the funding of the first installment on January 5, 2009. For the year ended December 31, 2009, the Company recorded accretion of the debt discount of approximately $2,440.  For the year ended December 31, 2008, there was no accretion of the debt discount.

The New Convertible Note contains certain mandatory prepayment provisions.  In the event that the Company receives total net proceeds from (i) sales of the Company’s securities (other than to Mr. Vey and his affiliates) and (ii) litigation awards exceeding $1,000,000; or in the event that the Company maintains current cash on hand in excess of $2,000,000 for a period exceeding thirty (30) days, an amount equal to fifty percent of such proceeds or cash shall be paid by the Company to Mr. Vey as a mandatory prepayment.

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The New Convertible Note contains customary anti-dilution provisions and the Company has agreed that it will use its best efforts to register for resale with the Securities and Exchange Commission all shares to be issued under the New Convertible Note.

Financing with Vey Associates

On December 31, 2008, the Independent Committee recommended to the Board of Directors that the Company enter into a new agreement to borrow up to $2,250,000 from Vey Associates (the “New Loan”). Vey Associates has agreed to fund the New Loan in five (5) installments as follows:

On March 11, 2009, the funding schedule was amended as follows:

Payment of the fifth installment was subject to the Company achieving a certain profitability level, referred to as “EBITDA Break Even”, at the end of the third quarter of Fiscal year 2009, which was not achieved.

The first installment of this financing agreement was not received until January 2009.  As of December 31, 2009, the outstanding balance on this loan was $1,625,000.  Subsequent to December 31, 2009 the Company received an additional $225,000 in proceeds bringing the outstanding balance on this loan to $1,850,000 as of April 15, 2010.

The New Loan is evidenced by a secured convertible promissory note having a principal amount of up to $2,250,000 (the “Vey Associates Convertible Note”). The Vey Associates Convertible Note has a maturity date of May 31, 2010, unless theretofore converted, and bears interest at the rate of eight percent (8%) per year, which interest will be due upon maturity.  Once $1,750,000 of the New Loan has been paid to the Company, Vey Associates has the option to convert all or part of the unpaid principal and accrued but unpaid interest of the Vey Associates Convertible Note into shares at a conversion price of $0.05 per share.  The number of shares which would be issuable upon the conversion of the $2,250,000 principal balance is presently 45,000,000.

Since the fair value of the Company’s common stock was $0.08 per share on December 31, 2008, the intrinsic value of the beneficial conversion feature for the difference between the fair value per share and the conversion price was $.03 per share.  The Company is accreting this debt discount to interest expense over the one year term of the New Convertible Note, beginning on the date each respective tranche was funded to the Company.  For the year ended December 31, 2009, the Company recorded accretion of the debt discount of approximately $962,000.  For the year ended December 31, 2008, there was no accretion of the debt discount.

The Vey Associates Convertible Note contains certain mandatory prepayment provisions.  In the event that total net proceeds received by the Company from (i) sales of Company securities (other than to Mr. Vey and his affiliates) and (ii) litigation awards exceed $1,000,000; or the Company maintains current

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cash on hand in excess of $2,000,000 for a period exceeding thirty (30) days, an amount equal to fifty percent of such proceeds or cash shall be paid by the Company to Vey Associates as a mandatory prepayment.

The Vey Associates Convertible Note is secured by substantially all of the assets of the Company pursuant to a Security Agreement dated as of December 31, 2008 between the Company and Vey Associates (the “Vey Associates Security Agreement”).

The Vey Associates Convertible Note contains customary anti-dilution provisions and the Company has agreed that it will use its best efforts to register for resale the shares with the Securities and Exchange Commission all shares to be issued under the Vey Associates Convertible Note.

On December 31, 2008, the Board of Directors approved the terms of the New Loan and the parties executed the Refinancing Agreement.

Security Agreement

The New Oak Harbor Note is secured by substantially all of the assets of the Company pursuant to an Amended and Restated Security Agreement dated as of August 17, 2006 between the Company and Oak Harbor (the “Amended Security Agreement”).  The Amended Security Agreement amends and restates the Security Agreement between Oak Harbor and the Company effective as of January 13, 2003 which granted to Oak Harbor a lien and security interest in the assets of the Company (the “Oak Harbor Security Agreement”).  The changes to the Security Agreement were effected by the Amended and Restated Security Agreement which include: (i) the modification of the term “Obligations” to mean all of the obligations, indebtedness, and liabilities of the Company to Oak Harbor and Vey; (ii) the acknowledgement and consent of Oak Harbor to the grant of a subordinate security interest in the assets of the Company set forth in the Amended Security Agreement (the “Collateral”) to Vey; and (iii) the modification of Appendix A to the Security Agreement to reflect the current outstanding permitted liens in the Collateral and references the subordinate security interest to the Collateral granted to Vey pursuant to the Security Agreement between the Company and Vey dated as of October 23, 2006 (the “Vey Security Agreement”).

Amended and Restated Intercreditor Agreement

Mr. Vey, Vey Associates, the Company and Oak Harbor, a company in which Mr. Vey is a managing member and 35% owner, entered into an Amended and Restated Intercreditor Agreement, dated as of December 31, 2008 (the “Intercreditor Agreement”).  The Intercreditor Agreement provides (i) that Oak Harbor shall have a first priority interest in substantially all of the assets of the Company with regard to the obligations of Sedona to Oak Harbor under an existing promissory note and related security agreement, and (ii) that the security interests of Vey Associates under the Vey Associates Convertible Note shall be junior to those of Oak Harbor but senior to those of Mr. Vey.

Cross Default Provisions of the Notes

The New Consolidated Notes contain cross default provisions.  Consequently an event of default under any of the Notes would constitute an event of default under each of the Notes.  An event of default under the Notes will also have occurred if a default occurs under any other loan, extension of credit, security right, instrument, document, agreement or obligation from the Company to Vey or Oak Harbor.

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Approval for Additional Shares

The Articles of Incorporation of the Company provides for 175,000,000 of which 127,364,064 were issued and outstanding as of March 26, 2010.  At the present time, the Company does not have sufficient authorized shares to issue all of the shares to Mr. Vey and Vey Associates as required upon full conversion of notes and exercise of options and warrants.  The Company intends to seek approval of its shareholders for an amendment to its Articles of Incorporation to increase its authorized shares by at least an amount necessary to cover its share issuance obligations at its next annual shareholders’ meeting.  Mr. Vey and Vey Associates have agreed to refrain from converting any notes or exercising any options or warrants which they respectively hold until the Company has a sufficient number of authorized shares in exchange for an agreement by the Company to allow Vey Associates to pledge the Vey Associates Convertible Note or Mr. Vey to pledge the New Convertible Note in the future.

The table below details the total outstanding principal balance and accrued interest expense owed to David Vey and Oak Harbor as of December 31, 2009.

David Vey and OSI Litigation

On September 4, 2007, SEDONA entered into an agreement with Vey Associates, Inc. in which Vey Associates agreed to provide funding to assist SEDONA in the payment of certain fees and expenses related to the lawsuit captioned Sedona Corp. v. Open Solutions, Inc., Action No. 3:07-CV-00171-VLB (the “litigation”), in the United States District Court for the District of Connecticut. David Vey, the Chairman, CEO and a shareholder of SEDONA, is an officer, director and majority shareholder of Vey Associates, Inc.

Under the agreement, Vey Associates agreed to advance up to $750,000 to SEDONA to pay fees and expenses in connection with the litigation. Any proceeds received from the settlement, verdict or other conclusion of the litigation will to be first applied to repay Vey Associates and SEDONA for expenses incurred. Thereafter, SEDONA would receive twenty-five (25%) percent of any proceeds and Vey Associates will receive seventy-five (75%) percent of the proceeds. In the event that SEDONA is unsuccessful in the litigation and does not receive any litigation proceeds, it will have no obligation to repay any sums to Vey Associates.

In a ruling filed August 19, 2009, the court denied SEDONA’s motion for summary judgment. In accordance with the terms of the litigation support agreement, the Company had no obligation to repay any sums to Vey Associates and reclassified approximately $846,000 of principal and accrued interest to additional paid in capital.

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ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees.  This category includes: the audit of the Company’s annual financial statements included in the Company’s reports on 10-K; the timely review of the interim financial statements included in the Company’s quarterly reports on Form 10-Q for the periods ended March 31, June 30 and September 30, 2009 and 2008; and services that are normally provided by the independent auditors in connection with engagements for those fiscal periods.  This category may also include advice on audit and accounting matters that arose during, or as a result of, the audit or review of interim financial statements.  This category also includes services in connection with statutory and regulatory filings or engagements.

Audit-Related Fees.  This category consists of assurance and related services by the independent auditors that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported above under “Audit Fees”.  The services for the fees disclosed under this category include financial information systems design and implementation services rendered by the independent auditor.

Tax Fees.  This category consists of professional services rendered by the independent auditors for tax compliance and tax advice.  The services for the fees disclosed under this category include tax return preparation and technical tax advice.  The independent auditors do not assist the Company with the preparation of its corporate taxes; the Company retains another firm for tax compliance and advice.

All Other Fees.  This category includes services rendered by the independent auditors other than for services reported above.

The only fees paid to Asher & Company, Ltd. were audit fees.

Pre-Approval of Audit and Non-Audit Services

All audit and non-audit services provided by independent accountants to the Company are pre-approved by the Audit Committee.  The Audit Committee utilizes the following procedures in pre-approving all audit and non-audit services.  At or before the first meeting of the Audit Committee each year, the Audit Committee is presented with a proposal of the cost for audit and non-audit services expected to be performed by the principal accountant during the year.  Quarterly, the Audit Committee is presented with the total fees assessed for such services during the quarter with a comparison to the amounts previously presented.  An explanation of any variances is presented, if necessary.  The Audit Committee is also presented with an update of any new audit or non-audit services to be performed.  The Audit Committee reviews the update and approves the services outlined therein if such services are acceptable to the Audit Committee.

To ensure the prompt response of any unexpected matters, the Audit Committee may delegate to a designated member or members of the Audit Committee, the authority to amend or modify the audit and non-audit services and fees; provided however, that such additional or amended services may not affect the independence under applicable SEC rules.  The member or members of the Audit Committee must report any such action taken to the Audit Committee at its next scheduled meeting.

All audit fees in fiscal year 2009 and 2008 were pre-approved by the Audit Committee.

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PART IV

ITEM 15.           EXHIBITS

The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where indicated by footnote, exhibits, which have been previously filed, are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parenthesis.

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