--------------------------------------------------------------------------------

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10 - KSB

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
      1934

                   For the fiscal year ended December 31, 2005

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
      ACT OF 1934

                  For the transition period from _____ to _____

                         Commission file number 0-25159

                                   LION, INC.
                 (Name of Small Business Issuer in its charter)

               WASHINGTON                                  91-2094375
     (State or other jurisdiction of           (IRS Employer Identification No.)
     incorporation or organization)

4700-42ND AVE. SW, SUITE 430, SEATTLE, WA                     98116
 (Address of principal executive offices)                  (Zip code)

                                (206) 577 - 1440
                           (Issuer's telephone number)

         Securities registered under Section 12 (b) of the Exchange Act

                                      None

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

                         Common Stock - $.001 par value

      Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. |_|

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will 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 -
KSB or any amendment to this Form 10 - KSB. |X|

      Indicate by check mark whether the registrant is a shell company (as
defined in rule 12b-2 of the Exchange Act). Yes |_| No |X|

      State issuer's revenues for its most recent fiscal year $15,789,000

      The aggregate market value of the voting common stock held by
non-affiliates of the Company as of March 10, 2006 was approximately $11,899,585
based upon 33,054,402 shares held by such persons and the closing bid price of
$.36 on that date. Shares of common stock held by each officer and director and
by each person who owns 10% or more of the outstanding common stock have been
excluded because these people may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for any other
purpose.

      On March 10, 2006, approximately 38,463,822 shares of the Company's common
stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

      No documents are incorporated by reference.

      Transitional Small Business Disclosure Format (check one):
      Yes |_| No |X|

<PAGE>

                                   LION, INC.

                                   FORM 10-KSB

                   For the Fiscal Year Ended December 31, 2005

                                      INDEX

                                                                            Page
PART I
ITEM 1.      Description of Business                                          1
ITEM 2.      Description of Property                                          8
ITEM 3.      Legal Proceedings                                                8
ITEM 4.      Submission of Matters To a Vote of Security Holders              8

PART II
ITEM 5.      Market for Common Equity and Related Stockholder Matters         9
ITEM 6.      Management's Discussion and Analysis                             9
ITEM 7.      Financial Statements                                            28
ITEM 8.      Changes In and Disagreements With Accountants on
             Accounting and Financial Disclosure                             50
ITEM 8A      Controls and Procedures                                         50
ITEM 8B      Other Information                                               50

PART III
ITEM 9.      Directors and Executive Officers of the Registrant              51
ITEM 10.     Executive Compensation                                          56
ITEM 11.     Security Ownership of Certain Beneficial Owners and
             Management and Related Stockholder Matters                      58
ITEM 12.     Certain Relationships and Related Transactions                  60
ITEM 13.     Exhibits                                                        61
ITEM 14.     Principal Accounting Fees and Services                          63
             Signatures                                                      64


                                       ii
<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

      LION, Inc. is a leading online mortgage lead generator and provider of
advanced business solutions that streamline the mortgage loan fulfillment
process. From Leads to Loans to Capital Markets, LION offers consistent,
integrated business solutions to consumers, brokers, realtors, originators and
lenders. LION provides an integrated technology platform offering online loan
productivity, mortgage pipeline hedging and risk management, software
development and data communication tools.

      During the fourth quarter of 2003, we acquired strategic assets from
Ignition Mortgage Technology Solutions Inc. ("IGNITION") expanding the breadth
of our product and service offerings which had previously been focused on the
front end of the mortgage loan process, such as lead generation, mortgage
content, rate publishing and web site hosting. During the fourth quarter of
2004, we acquired Tuttle Risk Management Services Inc., a Delaware corporation
("TRMS"), now operating as a Washington limited liability company. TRMS provides
hands-on mortgage pipeline risk management for financial institutions that
originate and then sell loans into the secondary market.

      LION maintains executive offices at 4700-42nd Ave. SW, Suite 430, Seattle
Washington 98116. Our telephone number is 206-577-1440. We maintain a website at
www.lionmts.com. Our SEC reports can be accessed through the investor relations
section of our website. There we make available, free of charge, our annual
report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form
8-K and any amendments to those reports as soon as reasonably practicable after
we electronically file such material with, or furnished to, the Securities and
Exchange Commission ("SEC"). These reports are also available from the SEC
website at www.sec.gov. The information found on our website is not part of this
or any other report we file with or furnish to the SEC.

CUSTOMERS, PRODUCTS AND SERVICES

      Our product groupings are organized to align our business objectives by
product with the customers we serve. More specifically, we are organized into
three product groups focused on Leads, Loans and Capital Markets.

      The Leads product group is comprised of Mortgage 101.

      MORTGAGE 101 is an interactive service provided through LION's
www.mortgage101.com consumer portal which connects potential mortgage applicants
with a network of mortgage lenders who offer mortgage programs, rates and
services. Mortgage 101 also provides education to home buyers and owners through
informative articles, interactive calculators and real-time rate comparison
technology. This product is one of the leading sources of leads for real estate
financing by mortgage originators and is a preferred platform for them to market
to their customers. Mortgage 101 placed from number 1 to number 2 in search
engine placement on Google, MSN and Yahoo for the keyword "mortgage" throughout
most of 2005. Our Mortgage 101.com Internet portal attracts over 1 million
unique visitors per month. Revenues are generated from mortgage brokers or
originators who participate in the pay-per-lead program or advertise through the
Mortgage 101 site.


                                       1
<PAGE>

      The Loans product group is comprised of LION Pro, Retail Websites,
LockPoint Xtra(R), and our Precision marketing productivitY suite, which
combines the best features of all three products in addition to Pipeline Tools
interest rate risk management software for midsized mortgage originators.

      LION PRO, used by over 7,500 mortgage brokers nationwide, consists of LION
Loan Search, LoanLink (subprime loan exchange platform), News Now (high-value
market data) and Ratesheets on Demand (aggregated mortgage ratesheets). It is
packaged and often private labeled for both large companies and origination
teams along with individual or small mortgage brokers. Through this password
protected product, originators can access one of the nation's largest databases
of wholesale mortgage rate, fee, and program information to instantly price any
mortgage loan. This database is updated daily for 77 regions nationwide and
includes 86 participating lenders. Revenues from the LION Pro product line are
generated from mortgage brokers and originators subscribing to the service,
origination teams private-labeling this service for their own companies, and
from participating lenders.

      RETAIL WEB SITES are offered to mortgage companies and individual
originators to help educate consumers about mortgages, market their services to
borrowers, build brand identity, generate more business, efficiently connect
with service providers and better serve their borrowers. This product is
intended to create and foster relationships between consumers and mortgage
originators while enabling mortgage companies and originators to more
efficiently manage their online production channel and maximize the business
value received from their online operations. Both template and custom design
solutions deliver a combination of standard and custom content to approximately
2,850 web sites and over 5,600 user accounts. Revenues are generated from web
site set up and monthly hosting fees along with fees for related functionality
tools.

      LOCKPOINT XTRA(R) ("LPX") is a Point-of-Sale and back office suite of
products that provide rate distribution, float registration, real-time
risk-based pricing and rate locking capabilities in a customer's website, loan
center or call center environment. The LockPoint Xtra(R) service is provided to
lenders, investors and conduits that are LION licensees and delivers the ability
to maintain their product and pricing rules and expressions, and to publish
risk-based lockable loan prices to their customer base via LPX client
applications. Revenues are generated from implementation fees, recurring monthly
billings based on locked loan amount volumes with monthly minimums which may
vary from customer to customer, and custom development services.

      PRECISION MARKETING PRODUCTIVITY SUITE ("PRECISIONMTS") is a complete
marketing, pricing and delivery solution for retail, wholesale and correspondent
mortgage origination channels. This product suite streamlines the loan
fulfillment process and reduces the cost of originating a loan by creating a
centralized platform to manage a company's products and pricing. The product
suite features corporate wholesale and retail websites, online advertising, lead
generation, loan productivity tools, a product eligibility and pricing engine,
mortgage pipeline hedging and risk management, software development and data
communications tools. Lenders have the flexibility to acquire a powerful turnkey
mortgage marketing and price distribution system or install each component
separately to accommodate an organization's growing needs.


                                       2
<PAGE>

      The Capital Markets product group includes our Pipeline Tools technology
and TRMS Risk Management Services.

      PIPELINE TOOLS ("PT") is a complete risk management and pipeline tracking
system that provides financial institutions with the tools necessary to manage
interest rate risk. PT tracks and examines current loan inventory, which allows
lenders to extrapolate and manipulate data to make more informed trading
decisions. Typical users of PT include secondary marketing executives, traders,
risk managers, pricing desks and shipping managers. Revenues are generated from
implementation fees, recurring monthly billings based on loan amount volumes
with monthly minimums which may vary from customer to customer, and custom
development services.

      RISK MANAGEMENT SERVICES are provided by TRMS, a registered Commodity
Trading Advisor. The services are structured to provide mortgage pipeline risk
management for mortgage companies and savings and loan associations that seek to
originate and then sell loans into the secondary mortgage market. The solutions
are tailored to firms that lack capital market expertise and offer a wide array
of services under the managed account umbrella that include pricing, best
execution analysis, rate sheet generation, policy and procedure formulation,
trading and investor relations assistance. Clients leverage the "second set of
eyes" provided by TRMS to validate their day-to-day secondary marketing
decisions or to outsource significant aspects of the secondary marketing role to
TRMS rather than developing the primary capability to fill these roles within
their organizations. Revenues are generated from recurring monthly billings
based on closed loan amount volumes with monthly minimums which may vary from
customer to customer. We consider TRMS to be a separate business segment of our
operations.

SALES AND MARKETING

      Our principal customer base consists of mortgage brokers, lenders
(wholesale, retail and correspondent), and industry affiliates. Our sales and
marketing efforts are as follows:

      SALES FORCE. We maintain two professional sales groups in our Denver and
Gig Harbor offices with regional sales representatives covering both coasts.
Each group is targeted toward a specific market segment representing
corresponding product offerings. With the launch of our Precision Marketing
Productivity Suite, each sales group has the opportunity to sell this product,
creating better synergies and up sell opportunities across all product lines.
The sales associates are compensated on a commission basis largely derived from
setup and hosting fees. Initial sales efforts are made through a combination of
outbound calls following a marketing campaign, inbound phone inquires, and
brokers who register online for services. For our more complex products with
longer sales cycles, formal presentations are made through customer site visits
or by multimedia conferencing achieved via the Internet.

      TRADE SHOWS. The Company attends a number of tradeshows each year
sponsored by state and national mortgage brokers and mortgage banking
associations. We exhibit at most of these shows as well as participate as guest
speakers and industry panelists. In conjunction with utilizing booth space on
the trade floor, we secure additional meeting space for more formal
presentations. The majority of these customer meetings are set up prior to each
show. Appointments are acquired through a combination of direct mail campaigns
and initial sales calls. These shows are predominately attended by mortgage
brokers, lenders, industry affiliates and technology companies.


                                       3
<PAGE>

      PRESS RELEASES AND OTHER PRESS COVERAGE. We issue press releases on
product launches, new product releases, new customer acquisitions and
achievement of certain milestones. We also have been the subject of published
reviews of mortgage technology products, quoted in trade journals and have been
the subject of articles written about the Company.

      SPEAKING ENGAGEMENTS. Representatives of the Company from time to time
speak at other industry functions not connected to trade shows.

      CONSUMER INTERNET ADVERTISING. In purchasing a home, the first Internet
web site that consumers typically visit is a real estate listing or related
site. In refinancing, the consumer typically finds Internet sites by searching a
web portal. To attract these consumers to our network of sites, we purchase
banner advertising and content placement on real estate sites and consumer
portals.

      REALTOR MARKETING. We provide a free content package for real estate and
related sites. The free content delivers a Mortgage Center with Mortgage101.com
technology with live rates, interactive calculators, an extensive library, and
online applications with the "look and feel" of the real estate site.

      LISTING WITH SEARCH ENGINES. We have arranged to be listed in all major
"search engines." The URLs of the network of consumer sites appear if the user
enters key words such as "mortgage" or "mortgage interest rates."

RESEARCH AND DEVELOPMENT

      We develop our own proprietary software for providing products and
services to our customers. These efforts are funded primarily through
operations. Research and development expense was approximately $2,392,000 and
$2,500,000 for 2005 and 2004, respectively.

COMPETITION

      LION is a leading competitor in the highly diverse and competitive field
of providing technology, products and services to the mortgage industry. The
diversity of LION's customer constituency and the breadth of its offerings,
coupled with the fact that most of LION's competitors are privately held
companies that publish limited information about their performance, limit the
number of companies against which LION can compare itself in a meaningful way.

      Many of LION's competitors target one or perhaps two verticals within the
mortgage fulfillment space. LION serves a number of verticals and distinguishes
itself through its ability to streamline the mortgage fulfillment process while
providing the tools and technology to enhance the ability of its customers to
market themselves to potential customers.

      LION markets itself to retail borrowers through its Mortgage101.com
Internet portal, sells directly to mortgage brokers through a telephonic and
email sales effort, markets to realtors directly and through third parties and
sells to mortgage originators and lenders through a professional sales staff.

      The market for Internet-based products and services remains intensely
competitive, rapidly evolving, and subject to rapid technological change. We
expect competition to intensify and increase


                                       4
<PAGE>

in the future. Additionally, we expect to face competition from various
e-commerce businesses and other companies targeting both consumers and
businesses, whether or not they focus on our business model.

      Our competitors may include companies with longer operating histories,
greater market presence and name recognition, and with larger customer bases and
greater financial, technical and marketing resources than we have. These
companies could be strong competitors if they decided to develop a focused
business effort in our Internet space. Furthermore, to the extent that our
products achieve market acceptance, competitors can be expected to offer
competitive products or embark on pricing strategies, which, if successful,
could have a material adverse effect on the results of our operations and
financial condition.

      The consumer mortgage arena is intensely competitive. Well capitalized
companies spend millions of dollars marketing to the consumer to achieve brand
awareness. Consumers search the Internet looking for information and will
commonly shop two to three companies before making a decision. Also, consumers
prefer to "shop globally and buy locally." Our network of consumer sites
delivers value to consumers on both issues. As an unbiased source of rate and
fee information provided by local brokers, our network of consumer sites has
become a leading mortgage portal destination when measured by reported consumer
traffic.

      The broker home page development market is as competitive and is comprised
of a few strong competitors. In addition, several industry affiliates, such as
the Loan Origination Software providers, participate in the market. The market
also consists of small, local web companies who provide services for a wide
range of industries. These small, local web companies generally do not have the
ability to provide mortgage brokers current technology specific to the mortgage
industry. We license mortgage brokers the technology that allows a developer to
facilitate a local relationship. The industry affiliates who have entered the
market view broker home page development as an ancillary product. We have the
ability to deliver competitive technology and aggressive advertising campaigns.
In addition, the broker home page product benefits from the market share
resulting from our product and service offerings.

      The field of competitors providing sophisticated lender pricing solutions
that compete with our LockPoint Xtra(R) product has been expanded. LockPoint
Xtra(R) provides hosted pricing capabilities coupled with loan application
capture interfaces. It is differentiated from competitive products by
integration of pricing interfaces with its central price engine. Our Pipeline
Tools product provides a risk management and a pipeline tracking system. The
technology is coupled with hosted services and does not offer a licensed
software version. Several direct competitors offer hosted or licensed pipeline
risk management technology. The market for licensed technology is comprised of
large vendors with expertise in the complexities of setting conversion
parameters and risk assessment algorithms.

      The Capital Markets group competes against a number of firms that provide
similar technologies, analytics and services to those offered by the firm.
Competition in the Pipeline Tools segment of the market is to a large extent
driven by client perceptions regarding the quality of financial analytics
provided, product price and the scope and functionality of the Pipeline Tools
product offering. Scope, in this case, refers to products that have the ability
to extend beyond traditional pipeline risk management and can offer solutions in
areas such as asset/liability management, servicing hedging and accounting
interface. Given the complexity of developing and


                                       5
<PAGE>

supporting the analytics required to quantify pipeline risk management, we
compete against a handful of firms in the Pipeline Tools only space.

      Competition in the risk management services space is intense and the
intensity shows little sign of abating. This competition is to some extent a
consequence of the relatively low barriers to entry the industry presents and
the fact that most meaningful intellectual property is in the public realm. In
addition to full-blown competitors who offer both software and advisory
services, there exists a cottage industry of hedge advisors who have little to
offer in the way of proprietary software but who are intimately involved in
advising their clients on daily operations and secondary marketing matters.

      As we seek to expand our market share, there can be no assurance that we
will be able to compete successfully, that competitors will not develop
technologies, products or strategic alliances and affiliations that make our
products less marketable or less useful or desirable. In general, the market for
Internet-based products and services remains intensely competitive, rapidly
evolving, and subject to rapid technological change. We may not be able to
successfully enhance our products and services, develop new products or services
or attain lower costs, when and as we need them. Our competitors may include
companies with longer operating histories, greater market presence and name
recognition, and with larger customer bases and greater financial, technical and
marketing resources than we have. Various companies could be strong competitors
if they decided to develop a focused business effort in our Internet space or
duplicate our business model. Increased competition, price or other
circumstances could result in erosion of our market share and may require price
reductions and increased spending in marketing and product development.
Increasing competition for our products and services could have a material
adverse effect on our business, operating results and financial condition.

GOVERNMENT REGULATION

      Our mortgage pipeline risk management services are provided by TRMS, a
Commodity Trading Advisor registered with the Commodity Futures Trading
Commission and the National Futures Association. Commodity Trading Advisors are
subject to detailed disclosure, reporting, and recordkeeping requirements. The
U.S. commodity markets are subject to on-going and substantial regulatory
changes, and we cannot predict what statutory, administrative or exchange
imposed restrictions may become applicable to or adversely affect TRMS in the
future.

      Our other operations are subject to general business regulations and laws,
as well as regulations and laws specifically governing the Internet and
e-commerce. Existing and future laws and regulations could impede the growth of
the Internet or other online services which in turn could decrease the demand
for our products and services, increase the cost of doing business, or otherwise
have an adverse effect on our business, operating results or financial
condition. These regulations and laws may cover taxation, user privacy, data
protection, pricing, content, copyrights, distribution, electronic contracts and
other communications, consumer protection, the provision of online payment
services, broadband Internet access, and the characteristics and quality of
products and services not currently subject to direct regulation by any
government agency. Other than regulations applicable to businesses generally,
there are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, the applicability to the Internet of existing
laws governing issues such as property ownership, sales and other taxes, libel
and personal privacy is developing. We cannot predict the impact, if any, that
future regulation or regulatory changes might have on our


                                       6
<PAGE>

business. Unfavorable resolution of these issues may harm our business, diminish
the demand for our products and services or increase our cost of doing business.

PROPRIETARY RIGHTS

      We rely on a combination of copyright and trademark laws, trade secrets,
software security measures, license agreements and nondisclosure agreements to
protect our proprietary technology and software products. We have a variety of
registered Internet domain names. Regulations governing domain names may not
protect our trademarks and similar proprietary rights. We may be unable to
prevent third parties from acquiring domain names that are similar to, infringe
upon, or diminish the value of our trademarks and other proprietary rights. We
currently have federally registered trademarks on LockPoint Xtra(R),
Lockpoint(R) and Ratesheet Plus(R) anD one pending patent; "User Interface for
On-line Real Estate Service."

      Policing unauthorized use of our proprietary rights is inherently
difficult, and we may not be able to determine the existence or extent of any
such unauthorized use. The protection of our intellectual property may require
the expenditure of significant financial and managerial resources. Moreover, we
cannot be certain that the steps we take to protect our intellectual property
will adequately protect our rights or that others will not develop substantially
equivalent or superseding proprietary technology, or that equivalent products
will not be marketed in competition with our products, thereby substantially
reducing the value of our proprietary rights. Furthermore, there can be no
assurance that any confidentiality agreements between us and our employees or
any license agreements with our customers will provide meaningful protection of
our proprietary information in the event of any unauthorized use or disclosure
of such proprietary information.

      Although we believe that our trademarks and proprietary technology do not
and will not infringe patents or violate proprietary rights of others, it is
possible that our trademark and proprietary rights may not be valid or that
other parties may claim that we infringed their proprietary rights. In the event
our products infringe proprietary rights of others, we may be required to modify
the design of our products, change the name of products or obtain a license.
There can be no assurance we will be able to do so in a timely manner, upon
acceptable terms and conditions, or at all. The failure to do any of the
foregoing could have a material effect upon us. In addition, there can be no
assurance that we will have the financial or other resources necessary to
enforce or defend an intellectual property infringement or proprietary rights
violation action. Moreover, if our products infringe patents, trademarks or
proprietary rights of others, we could, under certain circumstances, become
liable for damages, which could have a material adverse effect on us.

EMPLOYEES

      At December 31, 2005, we had 115 employees of which 104 were full-time.
There are 14 commissioned marketing associates. Our future success will depend,
in part, on our ability to continue to attract, retain and motivate highly
qualified technical and management personnel, particularly highly skilled
technical engineers involved in new product development. From time to time, we
may employ independent consultants or contractors to support our research and
development, marketing, customer service and administrative organizations. Our
employees are not represented by any collective bargaining unit, and we have
never experienced a work stoppage. We believe relations with our employees are
good.


                                       7
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

      Our executive offices are located in Seattle, Washington, where we
currently lease approximately 8,274 square feet. The lease expires on July 31,
2007. We have the right to use this space for computer information services and
related business uses.

      For sales, marketing and website development efforts, we lease
approximately 8,053 square feet in Denver, Colorado. This lease expires November
30, 2007.

      For research and development, computer information services, product
support, sales, and related business use, we lease 8,376 square feet in Gig
Harbor, Washington. This lease expires March 31, 2009.

      For risk management services, computer information services, research and
development, product support, and related business use, we lease 7,534 square
feet in San Rafael, California. The lease expires July 17, 2010.

      All leases are operating leases. We believe that our current facilities
are adequate and suitable for their current use, and that additional facilities
will be available, when needed, upon commercially reasonable terms. We also
believe that all of the leased space and all property maintained within are
adequately insured.

ITEM 3. LEGAL PROCEEDINGS

      We are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2005.


                                       8
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF
        EQUITY SECURITIES.

MARKET INFORMATION

      The Company's common stock trades on the OTC Bulletin Board under the
symbol "LINN." The range of high and low bid prices for the Company's common
stock for each quarter during the two most recent fiscal years is as follows:

      Fiscal Year Ended December 31,              2005                 2004
                                            ---------------      ---------------
                                             HIGH      LOW        HIGH      LOW
                                             ----      ---        ----      ---
      First Quarter                         $0.47     $0.31      $0.60     $0.20
      Second Quarter                         0.41      0.25       0.74      0.42
      Third Quarter                          0.36      0.23       0.61      0.30
      Fourth Quarter                         0.39      0.27       0.55      0.39

      This table reflects the range of high and low bid prices for our common
stock during the indicated periods, as published by the OTC Bulletin Board. The
quotations merely reflect the prices at which transactions were proposed, and do
not necessarily represent actual transactions. Prices do not include retail
markup, markdown or commissions.

      There were approximately 1,418 holders of record of our common stock as of
March 10, 2006.

DIVIDEND POLICY

      We have not paid dividends on our common stock since our inception.
Dividends on common stock are within the discretion of the Board of Directors
and are payable from profits or capital legally available for that purpose. Our
current policy is to retain any future earnings to finance the operations and
growth of our business. Accordingly, we do not anticipate paying any dividends
on common stock in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

OVERVIEW

      LION, Inc. is a leading online mortgage lead generator and provider of
advanced business solutions that streamline the mortgage loan fulfillment
process. From Leads to Loans to Capital Markets, LION offers consistent,
integrated business solutions to consumers, brokers, realtors, originators and
lenders. LION provides an integrated technology platform offering online loan
productivity, mortgage pipeline hedging and risk management, software
development and data communication tools.


                                       9
<PAGE>

      Our efforts in 2005 were keenly focused on investing in and implementing
the key technology, leadership and organizational strategies that will serve as
the foundation to grow revenue and profitability in 2006 and beyond, recognizing
that these investments may have cost us some revenue growth and profitability in
the short term. Critical actions and investments included: realignment of our
product groups and restructuring the organization to support our Leads to Loans
to Capital Markets strategy; completing the migration to a substantially more
robust technology platform; launching our PrecisionMTS product suite and adding
new leadership at Mortgage 101. We have now completed the transformation of the
Company that we began in late 2004. We have diversified our revenue base and
built a strong balance sheet that provides the financial strength and
flexibility to support growth.

      Two trends emerged in 2005 that have us particularly optimistic about our
future: the emerging potential for Mortgage 101 and the sales momentum that has
developed for PrecisionMTS. During 2006, we will be devoting more of our
existing development resources to Mortgage 101 which will accelerate our ability
to take advantage of a large number of opportunities. We intend to invest in
redesigning our web site to improve efficiencies and functionality to support
what we expect to be revenue growth for the year in Mortgage 101. Through the
latter half of 2005, we began to sell our PrecisionMTS product suite more
aggressively as the enhanced, more streamlined version of our LockPoint Xtra(R)
rate lock and pricing engine. We now have 14 customers under contract with an
expanding sales pipeline. While gaining momentum, we are nevertheless selling
into a challenging market environment. We have found that sales lead time has
lengthened as potential customers have felt the pinch of lower performance in
2005 compared to prior results. Lenders arguably need our product more now than
ever, and we are working on strategies to ensure that they have an opportunity
to experience the value added work flow solutions represented by this product
suite.

      An example of the kind of additional value and functionality that will be
available to our customers during first quarter 2006 includes introduction of a
new subprime search engine, fulfilling one of our most frequent requests from
existing and prospective customers. The ability to utilize an expanded set of
web based management tools, to access a more comprehensive and lockable set of
loan price and program data and the ability to search subprime loan price and
program information are significant enhancements to our product suite that we
expect will attract more customers and enhance our opportunity in the coming
year to generate incremental revenue.

      We have made a number of important improvements in our Retail Web Site
service offerings that we believe will result in both new revenue and help lower
expenses through back office efficiency gains. Included among them are the
addition of enhanced website templates with customizable subject matter and
content management that deliver customer flexibility while minimizing the LION
resources necessary for customer support.

      Performance in our capital markets unit in the fourth quarter was affected
by a seasonal slowdown in mortgage origination and the decline generally in the
housing market and loan production. As interest rates have edged upward and loan
volume has constrained the ability of small to mid sized lenders to manage their
production, it has adversely impacted the transaction fees received from both
our managed services clients as well as service bureau customers. Many of our
customers are at or near their monthly minimum fees, and we do have some
exposure to customers who abandon an interest rate risk management strategy in
favor of selling loans on a best efforts basis as a result of an inability to
maintain infrastructure and volume in an environment of declining mortgage
origination. Transaction fees will continue to be constrained until such time as
loan


                                       10
<PAGE>

production increases either seasonally or due to shifts in market conditions in
general. One such factor may well be the tremendous number of intermediate ARMs
that will reset in the next twelve plus months that may serve as a catalyst for
consumers to refinance their mortgages. Our capital markets business is poised
to benefit from just such a scenario. The key to more sustainable growth in the
business, however, will be driven by our ability to continue to add to our
customer base. In this kind of market environment it is natural to expect some
level of customer attrition. It is important, therefore, that we continue to add
to the approximately 65 lenders we already provide interest rate risk management
services for. To that end, we intend to expand our existing sales infrastructure
to continue to attract customers that will benefit from our risk management
offerings.

      One of our key objectives through our technology migration was to complete
the work necessary to merge or replace LION's existing technology with the more
robust platform acquired from Ignition. As an indication of the progress we have
made, in the middle of 2005 we were still expending a large percentage of our
research and development resources on integration or system fixes instead of
being more keenly focused on development agendas more specific to generating
revenue. We established a goal of moving from an environment at that time in
which our development resources were utilized approximately 75% of the time
fixing and integrating, to a year end goal of devoting no more than 30% of our
research and development focus to those important but less productive pursuits.
At the end of 2005, we not only achieved that goal, but surpassed it, having
reached a point where no more than 25% of our research and development resources
were utilized for maintenance and integration. This means that we have made a
sizable shift in resources to the kinds of things more likely to generate
revenue.

      Our proprietary network of over 12,000 mortgage brokers, approximately
71,000 realtors and 200 lenders, coupled with the over 1 million unique visitors
each month to our consumer portal, provide a backdrop against which to expand
our addressable market even in an economic climate in which rates are rising,
new home sales are declining and home price escalation is moderating. Despite
rumblings of a housing slowdown, mortgage origination is still expected to be
well over $2 trillion for 2006 which is considered extraordinary in historical
terms.

      Our Leads to Loans to Capital Markets business model, while somewhat
complex compared to some in the industry, will not only allow LION to weather a
potentially stormy economic environment, but will also facilitate an expansion
of the opportunities available to us to generate transactional revenue
throughout the mortgage loan fulfillment process, thereby expanding the breadth
of our market while establishing a defensive beachhead against erosion of
revenues in market runoff.

SEGMENT OPERATIONS

      Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company's
chief operating decision maker in deciding how to allocate resources and to
assess operating performance. Company management has determined that we have two
operating segments, TRMS and the integrated software, services and lead
generation businesses in which the Company is engaged. Management's election to
report on each segment separately is based upon, among other things, TRMS being
a registered Commodity Trading Advisor and generating revenues through hands on
delivery of Risk Management Services, while LION's other combined operations
generate revenues primarily for sales of software related products and services.
Intercompany revenues represent fees for Pipeline Tools technology and


                                       11
<PAGE>

services purchased by TRMS from its parent, LION, which are generally accounted
for at current market prices and are eliminated in consolidation. Management
evaluates segment performance primarily based on segment revenues, expenses and
operating income (loss) before intercompany revenues and expenses. Segment
operations will be discussed throughout this management and discussion analysis
as appropriate.

CONDENSED RESULTS (dollars in thousands, except per share data)

                                                           For the year ended
                                                               December 31,
                                                          ----------------------
                                                              2005          2004
                                                          --------      --------

Revenues
     LION                                                 $  9,300      $ 13,713
     TRMS                                                    6,489         1,479
                                                          --------      --------
          Total revenue                                     15,789        15,192
Operating expenses                                          15,878        15,076
                                                          --------      --------
     Operating income (loss)                                   (89)          116
Other income - net                                               1           407
                                                          --------      --------
     Net income (loss) before tax                              (88)          523
Income tax benefit (expense)                                   (14)           93
                                                          --------      --------
          Net income (loss)                               $   (102)     $    616
                                                          ========      ========

Net income per common share,
    Basic and diluted                                     $     --      $    .02
                                                          ========      ========

      While our revenue grew year over year, fourth quarter results compared
unfavorably with fourth quarter a year ago due to seasonally lower activity in
each of our business lines, and previously announced customer attrition, most
notably in our repositioned pricing engine business. Despite lower revenue, we
posted a small profit for the fourth quarter. When comparing our operating
results for 2005 compared to 2004, it should be noted that TRMS was acquired in
October 2004, and only impacted fourth quarter 2004 whereas it was part of
LION's operations for all of 2005.

      For 2005, we reported record revenue of $15.8 million, an increase of 4%
compared to 2004. This increase was attributable mostly to our capital markets
group reflective of the acquisition of TRMS in October 2004. See additional
comments below under "Capital Markets."

      Operating expenses increased to $15.9 million for 2005 from $15.1 million
in the prior year. Of consolidated operating expense, TRMS accounted for $2.4
million and $525,000 in 2005 and 2004, respectively. During 2005, we achieved
significant progress in our product and IT integration efforts related to our
acquisitions of Ignition and TRMS and were able to reduce operating expenses for
our software, services and lead generation segment by approximately $1.1 million
in 2005 compared to 2004.

      For 2005 we reported an operating loss of $89,000 compared to operating
income of $116,000 in 2004. For 2005, our software, services and lead generation
segment recorded an operating loss of $389,000 which was offset by TRMS segment
operating income of $300,000. For 2004, the software, services and lead
generation segment operating loss was $23,000 which was offset by TRMS


                                       12
<PAGE>

operating income of $139,000. Even with the previously announced non-renewal of
two customer contracts early in the fourth quarter, the Company's was able to
record an operating profit in fourth quarter 2005 and narrow the overall
operating loss for the year due to planned consolidation and streamlining of
Company operations throughout 2005, completion of our first phase of regulatory
compliance activities related to Sarbanes-Oxley Section 404 during the first
half of the year and positive TRMS operating results.

      Our net loss for 2005 was $102,000 compared to net income of $616,000, or
$0.02 per share in the prior year. Net income in 2004 included a one-time gain
of $433,000 related to settlement of an insurance claim and a $150,000 tax
benefit recorded as a result of a decrease in deferred tax assets valuation
allowance.

DETAILED RESULTS OF OPERATIONS

REVENUES (dollars in thousands)

<TABLE>
<CAPTION>
                                                                    For the year
                                         ---------------------------------------------------------------------
                                                 2005                   2004                     Change
                                         -------------------     -------------------      --------------------
      <S>                                <C>             <C>     <C>             <C>      <C>              <C>
      LEADS
      Mortgage 101                       $ 1,781          11%    $ 1,959          13%     $  (178)          (9)%
                                         -------     -------     -------     -------      -------      -------

      LOANS
      Lion Pro                             2,991          19%      3,145          21%        (154)          (5)%
      Retail web sites                     2,592          17%      2,542          17%          50            2%
      LockPoint Xtra                       1,181           7%      1,923          12%        (742)         (39)%
                                         -------     -------     -------     -------      -------      -------
                                           6,764          43%      7,610          50%        (846)         (11)%
                                         -------     -------     -------     -------      -------      -------

      CAPITAL MARKETS
      Pipeline Tools                         755           5%      4,144          27%      (3,389)         (82)%
      Risk Management Services (TRMS)      6,489          41%      1,479          10%       5,010          359%
                                         -------     -------     -------     -------      -------      -------
                                           7,244          46%      5,623          37%       1,621           29%
                                         -------     -------     -------     -------      -------      -------

      Total revenues                     $15,789         100%    $15,192         100%     $   597            4%
                                         =======     =======     =======     =======      =======      =======
</TABLE>

      Our product groupings are organized to more closely align our business
objectives by product with the customers we serve. These product groups are
Leads, Loans, and Capital Markets.

LEADS

      Our Leads product group comprised 11% and 13% of total revenue for the
years ended December 31, 2005 and 2004, respectively. Revenue for 2005 for our
Leads product group, which consists of Mortgage 101, was $1.8 million down 9%
compared to 2004. This decrease is indicative of lower loan volumes due to lower
refinancing activity. We continue to attract heavy consumer traffic to our
Mortgage101.com Internet portal due to strong search engine placement
attributable to being number 1 or 2 on Google, MSN or Yahoo for keyword search
"mortgage." We added new leadership early in third quarter 2005 to develop and
execute new strategies in our Mortgage 101 product group, and at the beginning
of the fourth quarter, we expanded our Mortgage 101 sales infrastructure with
the goal of significantly increasing Mortgage 101 related revenue in 2006. Our
plan is to broaden our lead distribution universe to include more large brokers
and lenders, develop


                                       13
<PAGE>

new strategies to generate higher advertising revenue, add more partnerships,
connect our users with more vendor services and become licensed in key states to
enable us to penetrate more deeply into the loan origination and fulfillment
process to generate higher transactional revenue.

LOANS

      Our Loans product group, comprised of LION Pro, Retail Websites, LockPoint
Xtra(R) and PrecisionMTS, accounted for approximately 43% and 50% of total
revenue for the years ended December 31, 2005 and 2004, respectively. Revenue
for 2005 for the loans product group totaled $6.8 million down 11% compared to
the prior year. The decrease is primarily due to the repositioning of our
pricing engine business within our LockPoint Xtra(R) product line combined with
both seasonality and declining refinancing activity. LION Pro decreased modestly
due to a seasonal decline in loan volumes in the mortgage industry. These
decreases were offset by an increase in our Retail Website product and the
addition of 5 new PrecsionMTS customers during the fourth quarter, increasing
the number of users on the platform to 14.

      We now have a substantially more robust and stable platform to accommodate
our expanding customer base and facilitate expansion of the product bundling
opportunities associated with our Precision MTS marketing initiative. By early
2006, we plan to add alternative mortgage products, such as subprime, second and
interest only mortgages, which will add new customers and enable us to capture
incremental transaction fee revenue.

CAPITAL MARKETS

      Our Capital Markets product group, comprised of our Pipeline Tools
technology, which is part of the software, services and lead generation segment,
and risk management services provided by our TRMS segment, combined for
approximately 46% and 37% of total revenue for the years ended December 31, 2005
and 2004, respectively. Revenue for 2005 for the Capital Markets product group
was $7.2 million, an increase of 29% compared to the prior year and was
primarily due to the impact of the acquisition of TRMS in October 2004.
Performance in our capital markets unit in the fourth quarter was affected by a
seasonal slowdown in mortgage origination and the decline generally in the
housing market and loan production and increase in interest rates. See
"Overview" above.

      Prior to the acquisition of TRMS, TRMS was LION's largest customer for
Pipeline Tools. LION provided TRMS a license to have access to and use of
Pipeline Tools. LION also provided second-line support to TRMS. In return, LION
was paid a fee which was recorded as Pipeline Tools revenue and comprised
approximately 72% of Pipeline Tools revenue pre-acquisition. LION's Pipeline
Tools revenues include these fees through October 12, 2004. As of the TRMS
acquisition date of October 13, 2004, the fees between LION, the parent, and
TRMS, the subsidiary, are now eliminated when combining results of the two
companies. Post-acquisition, revenue from TRMS customers comprises all of the
Risk Management Services revenue.


                                       14
<PAGE>

OPERATING EXPENSES (dollars in thousands)

                                             2005                   2004
                                      -------------------    ------------------
                                                   % of                   % of
                                       Amount    Revenue      Amount    Revenue
                                      -------    -------     -------    -------

      Direct costs                    $ 6,338         40%    $ 5,775         38%
      Selling and marketing             2,526         16%      2,027         13%
      General and administrative        4,089         26%      4,199         28%
      Research and development          2,392         15%      2,500         16%
      Depreciation and amortization       533          3%        575          4%
                                      -------    -------     -------    -------

      Total operating expenses        $15,878        101%    $15,076         99%
                                      =======    =======     =======    =======

DIRECT COSTS

      Direct costs are comprised primarily of website fulfillment, technology
infrastructure support, product and contract support, product deployment, and
TRMS trading desk and support services. For 2005, direct costs were $6.3
million, up from $5.8 million for the prior year. Direct cost associated with
the TRMS operation increased approximately $1.4 million as TRMS was part of
LION's consolidated operations for just under one quarter in 2004. This increase
was offset by a reduction of approximately $884,000 in direct costs for the
remainder of LION's operations as a result of lower headcount and related costs
required for LION in 2005 due to product and IT integration efforts throughout
2004 and the first half of 2005.

SELLING AND MARKETING

      Selling and marketing expenses are comprised primarily of advertising and
marketing costs, sales salaries and related support costs. For 2005, selling and
marketing expenses increased to $2.5 million compared to $2.0 million for the
prior year. This increase was due to the addition of the TRMS operations, ads in
periodicals and increased advertising for Mortgage 101 leads.

GENERAL AND ADMINISTRATIVE

      General and administrative expenses are comprised primarily of management
and administrative salaries and related costs, legal and audit fees, outside
consulting services, certain telecommunications expenses, occupancy costs, and
other administrative related expenses. For 2005, general and administrative
expenses decreased to $4.1 million from $4.2 million for the prior year. General
administrative expenses associated with the TRMS operation increased
approximately $160,000 as TRMS was part of LION's consolidated operations for
just under one quarter in 2004. This increase was offset by a reduction of
approximately $270,000 in general and administrative expenses for the remainder
of LION's operations due to the completion during 2005 of consolidation efforts
related to the acquisition of Ignition in late 2003.


                                       15
<PAGE>

RESEARCH AND DEVELOPMENT

      Research and development expenses are comprised primarily of engineering
salaries and related costs. For 2005, research and development expenses
decreased to $2.4 million compared to $2.5 million in the prior year. The
reduction in research and development costs in 2005 reflects our consolidation
efforts related to product development and the relocation of research and
development efforts into one location.

DEPRECIATION AND AMORTIZATION

      The decrease in depreciation and amortization expense in 2005 compared to
the prior year is due to certain internally developed software for internal use
being fully depreciated by the end of 2004, offset by additional depreciation
related to the purchase of equipment, computers and software.

INTEREST EXPENSE AND INTEREST INCOME

      For 2005, interest expense increased to $86,000 from $40,000 in the prior
year. It is comprised of interest on 10 percent promissory notes which were paid
off in mid-February 2005, 8 percent promissory notes totaling $972,000 related
to the TRMS acquisition, and various debt related to capitalized leases. The
promissory notes did not exist during the first nine months of 2004.

      For 2005, interest income increased to $84,000 compared to $12,000 for the
prior year. The increase is due to additional funds that could be invested along
with a rising interest rate environment. Investments during 2005 had maturities
of not greater than three months so as to take advantage of an environment of
rising short term interest rates.

OTHER INCOME

      Other income reported in 2004 includes $433,000 net of legal expenses
related to a settlement with our insurance carrier for the reimbursement of
defense and indemnity costs related to litigation completed in June 2002.

INCOME TAX EXPENSE (BENEFIT)

      The income tax expense for 2005 was $14,000 compared to the benefit for
income tax for 2004 of $93,000. The (16) % effective tax rate for 2005 is
primarily due to payment of certain minimum state LLC fees and taxes and the
recording of full deferred tax valuation allowances for 2005 operating results.
The 2004 effective tax rate of 11% is primarily attributable to the impact of
utilizing our net operating loss carryforwards. Absent these items, we would
expect our effective tax rate to approximate 36%.

      Because of the uncertainty relating to the realization of deferred tax
assets in future periods, we maintained a valuation allowance which offsets all
but a $150,000 portion of our net deferred tax assets at December 31, 2005 and
2004. We will continue to evaluate the realizability of our net deferred tax
assets in future periods and may recognize additional income tax benefits in
earnings if we determine that the realization of these assets is more likely
than not. The amount of the deferred tax asset considered realizable, however,
could be reduced if estimates of future taxable income during the carryforward
period are reduced.


                                       16
<PAGE>

FINANCIAL POSITION

      At December 31, 2005, we had approximately $4.2 million in cash, cash
equivalents and short-term investments. The change in cash and cash equivalents
is as follows (in thousands):

                                                               2005       2004
                                                             -------    -------

      Net income (loss) before extraordinary items           $  (102)   $   616
      Non-cash items                                             725        776
      Changes in working capital                                (158)       637
                                                             -------    -------
      Net cash provided by operating activities                  465      2,029
                                                             -------    -------

      Purchase of available-for-sale securities - net           (800)        --
      Purchase of property and equipment and other              (447)      (454)
                                                             -------    -------
      Net cash used in investing activities                   (1,247)      (454)
                                                             -------    -------

      Restricted cash for letter of credit                      (280)        --
      Other net uses of cash for financing activities            (85)        60
                                                             -------    -------
      Net cash (used in) provided by financing activities       (365)        60
                                                             -------    -------

      Net (decrease) increase in cash and cash equivalents    (1,147)     1,635
      Cash and cash equivalents at beginning of year           4,518      2,883
                                                             -------    -------
      Cash and cash equivalents at end of year               $ 3,371    $ 4,518
                                                             =======    =======

      During 2005, we funded our activities from cash provided by operations,
from payments on accounts receivable and from the exercise of stock options.
Cash and cash equivalents are expected to fund near-term operations.

NON-CASH ITEMS

      Non-cash items are primarily depreciation and amortization and stock
option expense for both 2005 and 2004.

WORKING CAPITAL AND OPERATING ACTIVITIES

      Our working capital was $4.1 million at December 31, 2005 compared to $4.0
million at December 31, 2004.

      Our working capital was $4.0 million at December 31, 2004 compared to $2.8
million at December 31, 2003. During 2004, our working capital increased due to
overall payoffs of accounts receivable during 2004 including the pay down of
large receivables outstanding at the end of 2003 related to the purchase of the
Ignition assets, an increase in accounts payable due to our normal business
operating cycle, increases in deposits from customers related to the Mortgage
101 pay per lead program, revenue growth, primarily from the Retail Web Sites,
LockPoint Xtra(R), Pipeline Tools and Risk Management Services product lines,
and a settlement with our insurance carrier related to the reimbursement of
defense and indemnity costs related to litigation completed in June 2002. This
increase was offset by payments for the acquisition costs associated with the
Ignition assets and


                                       17
<PAGE>

TRMS acquisitions and a decrease in deferred revenue associated with a large
customer contract acquired with the Ignition assets.

INVESTING ACTIVITIES

      During 2005, investing activities used cash of approximately $1.2 million,
which primarily consisted of the net purchase of short-term available-for-sale
securities totaling $800,000 with the remainder of the increase due to upgrades
to computer hardware and software and capital expenditures on our new lease
space for our California operations which consolidated our TRMS, Pipeline Tools
and IT infrastructure groups.

      During 2004, investing activities used cash of $454,000 and primarily
consisted of the capitalized portion of software development costs related to
the enhancement of underlying infrastructure delivering various product lines
and upgrades to computer hardware and software.

FINANCING ACTIVITIES

      During 2005, net cash used in financing activities totaled $365,000 which
included $280,000 of cash that was restricted for a letter of credit related to
the office lease for our California operations, payoff of our 10 percent
promissory notes totaling approximately $193,000 related to the TRMS
acquisition, and payments on capitalized lease obligations related to the
acquisition of application and database software, computers, servers, furniture
and telecommunications systems upgrades. This was offset by proceeds received
from the exercise of stock options during the year totaling approximately
$171,000.

      During 2004, net proceeds from financing activities were $60,000. Warrants
and stock options were exercised during the period totaling approximately
$197,000 along with tax benefits on stock options exercised totaling
approximately $56,000. This was offset by payments totaling approximately
$193,000 on notes payable and capitalized lease obligations related to the
acquisition of application and database software, computers, servers, furniture
and telecommunications systems upgrades over the previous two years and payments
on the one-year notes assumed during the TRMS acquisition.

OVERALL LIQUIDITY AND CAPITAL RESOURCES

      It is management's assessment that current working capital and that which
will be created organically through operations should be sufficient for our
growth plans and capital expenditure needs throughout 2006 and into 2007.


                                       18
<PAGE>

AGGREGATE CONTRACTUAL OBLIGATIONS

      The following table represents the Company's total contractual obligations
as of December 31, 2005. See "Note 4 - Long-term Obligations" and "Note 6 -
Commitments and Contingencies" in the Company's "Notes to Financial Statements"
below for additional information.

<TABLE>
<CAPTION>
                                                 Payments Due by Period
                                  ----------------------------------------------------
                                                Less Than
                                     Total        1 Year      1-3 Years      4-5 Years
                                  ----------    ----------    ----------    ----------
<S>                               <C>           <C>           <C>           <C>
(in thousands)
Contractual Obligations
   Long-term debt                 $  972,209    $       --    $  972,209    $       --
   Capital lease obligations          23,986        23,986            --            --
   Operating lease obligations     2,128,515       825,267       994,069       309,179

                                  ----------    ----------    ----------    ----------
Total contractual obligations     $3,124,710    $  849,253    $1,966,278    $  309,179
                                  ==========    ==========    ==========    ==========
</TABLE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make a number of estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. Our estimates are based on
historical experience and on various other assumptions that are believed 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. The reporting of results of our
operations and financial condition in the preparation of our financial
statements could differ significantly from our estimates under different
assumptions and conditions. Significant estimates include allowances for
doubtful accounts, long-lived assets valuation, estimated useful lives and
recoverability, realizability of deferred tax assets, and the allocation of
purchase price.

      We believe that the following discussion addresses our most critical
accounting policies, which are those that are most important to the portrayal of
our financial condition and results of operations and require our most
difficult, subjective, and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. For a
summary of our significant accounting policies, including the critical
accounting policies discussed below, see Note 1, Description of Business and
Summary of Significant Accounting Policies, to our consolidated financial
statements.

      REVENUE RECOGNITION

      We recognize revenue from product sales or services rendered when the
following four revenue recognition criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
selling price is fixed or determinable, and collectibility is reasonably
assured. For multiple-element arrangements, the Company applies Emerging Issues
Task Force ("EITF") Issue 00-21, REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES
that meet the following criteria: the delivered item has value to the customer
on a standalone basis; there is objective and reliable evidence of the fair
value of undelivered items; and delivery of any undelivered item is probable.


                                       19
<PAGE>

      In certain hosting arrangements where the customer has the option to take
possession of the software at any time during the hosting period without
significant penalty and it is feasible for the customer to either run the
software on its own hardware or contract with another party unrelated to us to
host the software, we account for the licensing of software in accordance with
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 97-2, SOFTWARE REVENUE RECOGNITION.

      Revenue from services is generally determined based on time and materials
or monthly subscription fees. Revenue for services is recognized as the services
are performed.

      DEFERRED TAXES

      We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." In accordance with SFAS No. 109, deferred tax assets arise
from the tax benefit of amounts expensed for financial reporting purposes but
not yet deducted for tax purposes and from unutilized tax credits and NOL carry
forwards. We evaluate our deferred tax assets on a regular basis to determine if
a valuation allowance is required. To the extent it is determined the
recoverability of the deferred tax assets is unlikely, we will record a
valuation allowance against deferred tax assets.

      During 2004, the Company recognized a tax benefit of $150,000. This tax
benefit was the result of the recognition of a net deferred tax asset.
Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of net operating loss carryforwards. At
December 31, 2005, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $3.1 million available to offset future
income which expire in 2018 through 2023. Although realization is not assured,
management believes it is more likely than not that a portion of the deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced if estimates of future taxable income
during the carryforward period are reduced. The Company has established a
valuation allowance of approximately $1.1 million as of December 31, 2005 and
2004 due to the uncertainty of future realization of the net deferred tax
assets. Utilization of these carryforwards could further be limited due to a
change of control in the Company's ownership as defined by the Internal Revenue
Code Section 382.

      IMPAIRMENT OF GOODWILL

      We periodically assess goodwill for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset or other valuation methods. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.


                                       20
<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      In December 2004, the FASB issued SFAS No. 123 (revised 2004) ("SFAS No.
123R"), SHARE-BASED PAYMENT. This Standard requires companies to measure
share-based payments at grant-date fair value and recognize the compensation
expense in their financial statements. We previously adopted the fair value
based method of accounting pursuant to SFAS No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION, prospectively. Management is in the process of evaluating the
requirements of SFAS No. 123R. The adoption of the provisions of this statement
is not expected to have a material effect on the Company's financial condition
or results of operations.

      In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY
ASSETS, an amendment of APB Opinion No. 29, which replaces the exception from
fair value measurement for nonmonetary exchanges of similar productive assets,
with a general exception from fair value measurement for exchanges of
nonmonetary assets that do not have commercial substance. This statement is to
be applied prospectively and is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of the
provisions of this statement is not expected to have a material effect on the
Company's financial condition or results of operations.

      In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS, a replacement of APB Opinion No. 20 and FASB Statement No. 3. The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. Statement No. 154 requires retrospective application to prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. Statement No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The adoption of the provisions of this statement is not expected to
have a material effect on the Company's financial condition or results of
operations.

FACTORS THAT MAY AFFECT FORWARD-LOOKING STATEMENTS

      This Annual Report on Form 10-KSB contains statements that are
forward-looking. These statements are based on current expectations and
assumptions that are subject to risks and uncertainties. All statements that
express expectations and projections with respect to future matters may be
affected by changes in the Company's strategic direction, as well as
developments beyond the Company's control. We cannot assure you that our
expectations will necessarily come to pass. Actual results could differ
materially because of issues and uncertainties such as those discussed below and
elsewhere in this report, including the sections entitled "Competition,"
"Proprietary Rights," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." These factors, among others, may adversely
impact and impair our business and should be considered in evaluating our
financial outlook.

WE HAVE A LIMITED HISTORY OF PROFITS AND OUR FUTURE PROFITABILITY REMAINS
UNCERTAIN. IN ADDITION, FINANCIAL RESULTS FOR ANY PARTICULAR PERIOD WILL NOT
PREDICT RESULTS FOR FUTURE PERIODS.

      We are working toward a goal of revenue growth and sustained
profitability. Annual revenues increased to $15.8 million in 2005 from $15.2
million in 2004 and from $8.1 million for 2003. However, during those years
revenues quarter to quarter have at times remained flat. Had it not been for the
strategic acquisition of the Ignition assets in December 2003 and the
acquisition of TRMS in October 2004, revenue growth targets year over year would
not have been achieved in 2005


                                       21
<PAGE>

and the likelihood of achieving targets for 2006 much more difficult. We had ten
consecutive quarters of profitability beginning with the third quarter of 2002
through the fourth quarter of 2004, but incurred a net loss for each of the
first two quarters of 2005 before returning to profitability in the third and
fourth quarters.

      Our prospects must be considered in view of the risks, expenses and
difficulties frequently encountered by companies in rapidly evolving markets,
including uncertainty of revenues, markets, and profitability. We cannot assure
you that we will be successful in addressing these risks or that we can be
operated profitably, which depends on many factors, including the success of our
marketing program, control of expense levels and the success of our business
activities. Our future operating results will depend on a variety of factors,
including those discussed in the other factors set forth below.

WE ARE LARGELY DEPENDENT ON KEY PERSONNEL WHO MAY NOT CONTINUE TO WORK FOR US.

      We are substantially dependent on the continued services of our key
personnel, including our officers, engineers and other significant employees.
These individuals have acquired specialized knowledge and skills with respect to
LION. We are continuing to create the redundancies that will reduce the reliance
on these individuals, but have not completed this task and will not for at least
the remainder 2006. Furthermore, we have not entered into employment agreements
with these significant employees except for our executive officers. If any of
these individuals were to leave LION unexpectedly, we could face substantial
difficulty in hiring qualified successors and could experience a loss in
productivity while any such successor obtains the necessary training and
experience. We provide stock options or restricted stock grants, which serve to
retain and motivate key employees as they become vested in their equity. At our
2005 annual meeting, stockholders approved a stock incentive plan which will
allow a flexible stock compensation program which we believe will be important
in our ability to attract and retain the best available employees. We expect
that we will need to attract, train, retain and motivate additional technical,
managerial, marketing and customer support personnel. Competition for these
personnel may be intense, particularly for individuals with suitable experience.
We face the risk that if we are unable to attract and integrate new personnel,
or retain and motivate existing personnel, our business will be adversely
affected.

WE ARE SUBSTANTIALLY DEPENDENT ON A LIMITED NUMBER OF SIGNIFICANT CUSTOMERS.

      Our success depends on our ability to expand, retain and enhance our
advanced business solution customers. Our expanded product line through the
acquisition of Ignition assets and TRMS carries with it the risk that our
revenues may be dependent on a limited number of significant customers, rather
than a broad-based broker and customer network. In connection with its
acquisitions, LION became the assignee of certain customer contracts, most of
which have initial contract periods or renewals expiring during 2005 and into
2006 and typically have renewable successive one-year terms and in a few cases
successive two-year terms. Revenues from these acquired contracts comprised
approximately 53% of our total revenues for 2005. Several LockPoint Xtra(R) and
Pipeline Tools customers did not renew their contracts with us during 2004 and
2005. Included among those customer terminations was an LPX customer that did
not renew its contract at the end of third quarter and a Pipeline Tools customer
that also did not renew its contract during the fourth quarter with the combined
revenue loss in the fourth quarter totaling approximately $170,000. However, we
have signed 5 new Precision MTS customers during the fourth quarter of 2005
bringing to 14 the number of customers using the LPX / Precision MTS platform
and 2 new lender customers


                                       22
<PAGE>

during the fourth quarter of 2005 for our Pipeline Tools and TRMS risk
management Capital Markets group bringing to 16 the number of new customer wins
in 2005.

      There can be no assurance that the existing large customers will renew
their contracts, or that we will be able to attract new customers at rates
sufficient to maintain a stable or growing revenue base. We have also
experienced an anticipated but significant decline in loan volumes in the LPX,
Pipeline Tools, and Risk Management Services product lines compared to 2004,
although volumes improved in the second and third quarters of 2005 compared to
first quarter, but cyclically pulled back during the fourth quarter. If we are
unsuccessful in enrolling new customers to equalize the attrition rate of
existing customers, or to offset a decline in transactional volume, our overall
share of the advanced business solution market could be reduced, and
consequently our business operating results and financial condition may be
materially adversely affected.

OUR OPERATIONS MAY BE VULNERABLE TO DISRUPTION PROBLEMS.

      We do not have multiple site capacity for our LION Pro, Mortgage 101 or
Retail Web Site services, however, we do have this in place for our LockPoint
Xtra(R) and Pipeline Tools services. We are in the process of developing
multiple site capacity for all of our services, but this will not be completed
until some time in 2006. We have in place comprehensive data tape backup
procedures for our operational and administrative databases. Our replication
software provides a high level of hardware backup for the database by
duplicating our database across several powerful servers. However, despite
protective measures, our operations could be vulnerable to damage from floods,
fire, earthquakes, power loss, telecommunications failures, break-ins,
terrorism, and similar events. The prospect of such unscheduled interruptions is
possible in the foreseeable future, and we are unable to predict their
occurrence, duration or cessation.

      Despite the implementation of security measures which are constantly
updated, our systems may be vulnerable to unauthorized access, computer viruses
and other disruptive problems. We could experience interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. Unauthorized access might lead to interruptions,
delays or cessation in service to subscribers or deter potential subscribers.
Although we intend to constantly update industry-standard security measures,
these measures have been circumvented in the past, and there can be no assurance
that measures we adopt will not be circumvented in the future. We do not carry
sufficient business interruption insurance to compensate us for losses that may
occur as a result of any of these events. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our subscribers, which could have a materially adverse
affect on our business, operating results and financial condition.

OUR BUSINESS DEPENDS ON INCREASING USE OF THE INTERNET BY USERS SEARCHING FOR
INFORMATION, ADVERTISERS MARKETING PRODUCTS AND SERVICES AND WEB SITES SEEKING
TO EARN REVENUE TO SUPPORT THEIR WEB CONTENT. IF THE INTERNET INFRASTRUCTURE
DOES NOT GROW AND IS NOT MAINTAINED TO SUPPORT THESE ACTIVITIES, OUR BUSINESS
WILL BE HARMED.

      Our success will depend on the continued growth and maintenance of the
Internet infrastructure. This includes maintenance of a reliable network
backbone with the necessary speed, data capacity and security for providing
reliable Internet services. Internet infrastructure may be unable to support the
demands placed on it if the number of Internet users continues to increase, or
if existing or future Internet users access the Internet more often or increase
their bandwidth requirements. In addition, viruses, worms and similar programs
may harm the performance of the


                                       23
<PAGE>

Internet. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure, and it could face outages
and delays in the future. These outages and delays could reduce the level of
Internet usage as well as our ability to provide our solutions.

GOVERNMENT REGULATION

      Our mortgage pipeline risk management services are provided by TRMS, a
Commodity Trading Advisor registered with the Commodity Futures Trading
Commission and the National Futures Association. Commodity Trading Advisors are
subject to detailed disclosure, reporting, and recordkeeping requirements. The
U.S. commodity markets are subject to on-going and substantial regulatory
changes, and we cannot predict what statutory, administrative or exchange
imposed restrictions may become applicable to or adversely affect TRMS in the
future.

      Our other operations are subject to general business regulations and laws,
as well as regulations and laws specifically governing the Internet and
e-commerce. Existing and future laws and regulations may impede the growth of
the Internet or other online services, which in turn could decrease the demand
for our products and services, increase the cost of doing business, or otherwise
have an adverse effect on our business, operating results or financial
condition. These regulations and laws may cover taxation, user privacy, data
protection, pricing, content, copyrights, distribution, electronic contracts and
other communications, consumer protection, the provision of online payment
services, broadband Internet access, and the characteristics and quality of
products and services not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet. However, the applicability to the Internet of
existing laws governing issues such as property ownership, sales and other
taxes, libel and personal privacy is developing. We cannot predict the impact,
if any, that future regulation or regulatory changes might have on our business.
Unfavorable resolution of these issues may harm our business, diminish the
demand for our products and services or increase our cost of doing business.

IF WE DO NOT CONTINUE TO INNOVATE AND PROVIDE PRODUCTS AND SERVICES THAT ARE
USEFUL TO OUR USERS AND CUSTOMERS, WE MAY NOT REMAIN COMPETITIVE, AND OUR
REVENUES AND OPERATING RESULTS COULD SUFFER.

      Our success depends on providing products and services that our users and
customers use for a high quality Internet experience. Our competitors are
constantly developing innovations in web search, web functionality, online
advertising and providing information to people. As a result, we must continue
to invest significant resources in research and development in order to enhance
our technology and our existing products and services and introduce new
high-quality products and services that our users and customers can easily and
effectively use. If we are unable to ensure that our users and customers have a
high quality experience with our products and services, then these users and
customers may become dissatisfied and move to other competitors' products. In
addition, if we are unable to predict user and customer preferences or industry
changes, or if we are unable to modify our products and services on a timely
basis, we may lose users and customers. Our operating results would also suffer
if our innovations are not responsive to the needs of our users and customers,
are not appropriately timed with market opportunity or are not effectively
brought to market. As technology continues to develop, our competitors may be
able to offer results that are, or that are perceived to be, substantially
similar or better than those generated by our products and services. This may
force us to expend significant resources in order to remain competitive.


                                       24
<PAGE>

WE ARE REQUIRED TO EVALUATE OUR INTERNAL CONTROL OVER FINANCIAL REPORTING UNDER
SECTION 404 OF THE SARBANES OXLEY ACT OF 2002, AND ANY ADVERSE RESULTS FROM SUCH
EVALUATION COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL
REPORTS AND HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.

      Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be
required to furnish a report by our management on our internal control over
financial reporting, beginning with our Annual Report on Form 10-KSB for the
fiscal year ending December 31, 2007. Such a report will contain, among other
matters, an assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year. This assessment must
include disclosure of any material weaknesses in our internal control over
financial reporting identified by management. Our Annual Report must also
contain a report that our independent auditors have issued attesting to
management's assessment of our internal controls.

      The Committee of Sponsoring Organizations of the Treadway Commission
(COSO) provides a framework for companies to assess and improve their internal
control systems. The Public Company Accounting Oversight Board's Auditing
Standard No. 2 ("Standard No. 2") provides the professional standards and
related performance guidance for auditors to attest to, and report on,
management's assessment of the effectiveness of internal control over financial
reporting under Section 404. Management's assessment of internal controls over
financial reporting requires management to make subjective judgments and,
particularly because Standard No. 2 is newly effective, some of the judgments
will be in areas that may be open to interpretation and therefore the report may
be uniquely difficult to prepare, and our auditors may not agree with
management's assessments. We are still performing the system and process
documentation and evaluation needed to comply with Section 404, which is both
costly and challenging.

      During this process, if our management identifies one or more material
weaknesses in our internal control over financial reporting, we will be unable
to assert such internal control is effective. If we are unable to assert that
our internal control over financial reporting is effective as of December 31,
2007 (or if our auditors are unable to attest that our management's report is
fairly stated or they are unable to express an opinion on the effectiveness of
our internal controls), we could lose investor confidence in the accuracy and
completeness of our financial reports, which would have an adverse effect on our
stock price.

      We cannot be certain as to the timing of completion of our evaluation,
testing and any required remediation due in large part to the fact that there is
very little precedent available by which to measure compliance with the new
Auditing Standard No. 2. If we are not able to complete our assessment under
Section 404 in a timely manner, we and our auditors would be unable to conclude
that our internal control over financial reporting is effective as of December
31, 2007.

OUR INTELLECTUAL PROPERTY RIGHTS ARE VALUABLE, AND ANY INABILITY TO PROTECT THEM
COULD REDUCE THE VALUE OF OUR PRODUCTS, SERVICES AND BRAND.

      We rely on a combination of copyright and trademark laws, trade secrets,
software security measures, license agreements and nondisclosure agreements to
protect our proprietary technology and software products. We have a variety of
registered Internet domain names. Regulations governing domain names may not
protect our trademarks and similar proprietary rights. We may be unable to
prevent third parties from acquiring domain names that are similar to, infringe
upon, or diminish the value of our trademarks and other proprietary rights. We
currently have federally registered


                                       25
<PAGE>

trademarks on LockPoint Xtra(R), Lockpoint(R), and Ratesheet Plus(R) aND one
pending patent; "User Interface for On-line Real Estate Service."

      Policing unauthorized use of our proprietary rights is inherently
difficult, and we may not be able to determine the existence or extent of any
such unauthorized use. The protection of our intellectual property may require
the expenditure of significant financial and managerial resources. Moreover, we
cannot be certain that the steps we take to protect our intellectual property
will adequately protect our rights or that others will not develop substantially
equivalent or superseding proprietary technology, or that equivalent products
will not be marketed in competition with our products, thereby substantially
reducing the value of our proprietary rights. Furthermore, there can be no
assurance that any confidentiality agreements between us and our employees or
any license agreements with our customers will provide meaningful protection of
our proprietary information in the event of any unauthorized use or disclosure
of such proprietary information.

      Although we believe that our trademarks and proprietary technology do not
and will not infringe patents or violate proprietary rights of others, it is
possible that our trademark and proprietary rights may not be valid or that
other parties may claim that we infringed their proprietary rights. In the event
our products infringe proprietary rights of others, we may be required to modify
the design of our products, change the name of products or obtain a license.
There can be no assurance we will be able to do so in a timely manner, upon
acceptable terms and conditions, or at all. The failure to do any of the
foregoing could have a material adverse effect upon us. In addition, there can
be no assurance that we will have the financial or other resources necessary to
enforce or defend an intellectual property infringement or proprietary rights
violation action. Moreover, if our products infringe patents, trademarks or
proprietary rights of others, we could, under certain circumstances, become
liable for damages, which could have a material adverse effect on us.

ACQUISITIONS COULD RESULT IN OPERATING DIFFICULTIES, DILUTION AND OTHER HARMFUL
CONSEQUENCES.

      We have evaluated, and expect to continue to evaluate, a wide array of
potential strategic transactions. From time to time, we may engage in
discussions regarding potential acquisitions. Any of these transactions could be
material to our financial condition and results of operations. In addition, the
process of integrating an acquired company, business or technology may create
unforeseen operating difficulties and expenditures and is risky. The areas where
we may face risks include:

      o     The need to implement or remediate controls, procedures and policies
            appropriate for a public company at companies that prior to the
            acquisition lacked these controls, procedures and policies.

      o     Diversion of management time and focus from operating our business
            to acquisition integration challenges.

      o     Cultural challenges associated with integrating employees from the
            acquired company into our organization.

      o     Retaining employees from the businesses we acquire.


                                       26
<PAGE>

      o     The need to integrate each company's accounting, management
            information, human resource and other administrative systems to
            permit effective management.

      The anticipated benefit of many of these acquisitions may not materialize.
Future acquisitions or dispositions could result in potentially dilutive
issuances of our equity securities, the incurrence of debt, contingent
liabilities or amortization expenses, or write-offs of goodwill, any of which
could harm our financial condition. Future acquisitions may require us to obtain
additional equity or debt financing, which may not be available on favorable
terms or at all.

THE TRADING PRICE FOR OUR COMMON STOCK IS AND MAY CONTINUE TO BE VOLATILE.

      The Company's common stock trades on the OTC Bulletin Board under the
symbol "LINN." The trading price of our common stock has been historically
volatile and will likely continue to be volatile. The trading price of our
common stock may fluctuate widely in response to various factors, some of which
are beyond our control. These factors include:

      o     Quarterly variations in our results of operations or those of our
            competitors.

      o     Announcements by us or our competitors of acquisitions, new
            products, significant contracts, commercial relationships or capital
            commitments.

      o     Disruption to our operations or our data centers.

      o     The emergence of new sales channels in which we are unable to
            compete effectively.

      o     Our ability to develop and market new and enhanced products on a
            timely basis.

      o     Commencement of, or our involvement in, litigation.

      o     Any major change in our board or management.

      o     Changes in governmental regulations or in the status of our
            regulatory approvals.

      o     Recommendations by securities analysts or changes in earnings
            estimates.

      o     Announcements by our competitors of their earnings that are not in
            line with analyst expectations.

      o     The volume of shares of common stock available for public sale.

      In addition, the OTC Bulletin Board, stock market in general, and the
market for technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of those companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our actual operating performance.


                                       27
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

The following consolidated financial statements of LION, Inc. are included in
Item 7:

         Report of Independent Registered Public Accounting Firm
         Consolidated Balance Sheets
         Consolidated Statements of Operations
         Consolidated Statement of Stockholders' Equity
         Consolidated Statements of Cash Flows
         Notes to Consolidated Financial Statements


                                       28
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
LION, Inc.

We have audited the accompanying  consolidated  balance sheets of LION, Inc. and
Subsidiary  as of  December  31,  2005 and 2004,  and the  related  consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of LION,  Inc. and
Subsidiary as of December 31, 2005 and 2004, and the results of their operations
and their  cash flows for the years then  ended in  conformity  with  accounting
principles generally accepted in the United States of America.


/s/ Grant Thornton LLP

Seattle, Washington
April 10, 2006


                                       29
<PAGE>

                            LION, Inc. and Subsidiary
                           Consolidated Balance Sheets
                                  December 31,
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                     ASSETS

                                                                                         2005           2004
                                                                                       --------       --------
<S>                                                                                    <C>            <C>
Current assets
    Cash and cash equivalents                                                          $  3,371       $  4,518
    Short-term investments - available for sale securities                                  800             --
    Accounts receivable, less allowance for doubtful accounts of
       $100 and $58 in 2005 and 2004, respectively                                        1,161          1,842
    Deferred income taxes                                                                   150            150
    Prepaid expenses and other                                                              448            437
                                                                                       --------       --------

         Total current assets                                                             5,930          6,947

Property and equipment, net                                                                 844            931
Goodwill                                                                                  2,590          2,590
Other assets                                                                                325             77
                                                                                       --------       --------

                                                                                       $  9,689       $ 10,545
                                                                                       ========       ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
    Accounts payable                                                                   $    212       $    294
    Accrued salaries and benefits                                                           709          1,002
    Accrued liabilities                                                                     249            333
    Current maturities of long-term obligations                                              23            256
    Deferred revenue                                                                        649          1,050
                                                                                       --------       --------

         Total current liabilities                                                        1,842          2,935
Long-term obligations, less current maturities                                              972            995
                                                                                       --------       --------
         Total liabilities                                                                2,814          3,930
                                                                                       --------       --------

Commitments and contingencies                                                                --             --

Stockholders' equity
    Preferred stock, par value $.001 per share; authorized 5,000,000 shares; none
       issued or outstanding                                                                 --             --
    Common stock - authorized, 50,000,000 shares of $.001 par
       value 38,463,822 and 37,431,537 issued and outstanding
       at December 31, 2005 and 2004, respectively                                           38             37
    Additional contributed capital                                                       14,091         13,730
    Accumulated deficit                                                                  (7,254)        (7,152)
                                                                                       --------       --------
                                                                                          6,875          6,615
                                                                                       --------       --------

                                                                                       $  9,689       $ 10,545
                                                                                       ========       ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       30
<PAGE>

                            LION, Inc. and Subsidiary
                      Consolidated Statements of Operations
                             Year ended December 31,
                   (In thousands, except net income per share)

                                                          2005            2004
                                                       --------        --------

Revenues                                               $ 15,789        $ 15,192
                                                       --------        --------

Expenses
    Direct costs                                          6,338           5,775
    Selling and marketing                                 2,526           2,027
    General and administrative                            4,089           4,199
    Research and development                              2,392           2,500
    Depreciation and amortization                           533             575
                                                       --------        --------
         Total expenses                                  15,878          15,076
                                                       --------        --------

         Operating (loss) income                            (89)            116

Other income (expense)
    Interest expense                                        (86)            (40)
    Interest income                                          84              12
    Other                                                     3             435
                                                       --------        --------

         (Loss) income before income tax                    (88)            523

    Income tax (expense) benefit                            (14)             93
                                                       --------        --------

         Net (loss) income                             $   (102)       $    616
                                                       ========        ========

Net income (loss) per common share - basic             $     --        $    .02
                                                       ========        ========
Net income (loss) per common share - diluted           $     --        $    .02
                                                       --------        --------

Weighted average number of shares - basic                37,983          34,222
                                                       ========        ========
Weighted average number of shares - diluted              37,983          37,220
                                                       ========        ========

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       31
<PAGE>

                            LION, Inc. and Subsidiary
                 Consolidated Statement of Stockholders' Equity
                     Years ended December 31, 2005 and 2004
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                         Preferred stock              Common stock       Additional
                                    ------------------------    -----------------------  contributed  Accumulated
                                      Shares        Amount        Shares       Amount      capital       Deficit        Total
                                    ----------    ----------    ----------   ----------  -----------  -----------    ----------

                                    ----------    ----------    ----------   ----------   ----------   ----------    ----------
<S>                                 <C>           <C>           <C>          <C>          <C>          <C>           <C>
Balance at December 31, 2003         1,500,000    $        1    31,819,094   $       32   $   11,812   $   (7,768)   $    4,077

Conversion of preferred stock
   into common stock                (1,500,000)           (1)    1,541,550            2           --           --             1
Issuance of common stock in
   conjunction with exercise
   of stock options                         --            --       362,884           --           63           --            63
Issuance of common stock in
   conjunction with exercise
   of warrants                              --            --       333,334           --          133           --           133
Issuance of common stock upon
   exercise of stock options,
   net of common stock repurchase           --            --       165,000           --           --           --            --
Common stock issued for services
   received                                 --            --       115,385           --           60           --            60
Employee compensation from stock
   options                                  --            --            --           --          279           --           279
Issuance of common stock in
   conjunction with purchase
   of TRMS                                  --            --     3,094,290            3        1,328           --         1,331
Tax benefit as a result of stock
   option exercises                         --            --            --           --           55           --            55
Net income for the year                     --            --            --           --           --          616           616
                                    ----------    ----------    ----------   ----------   ----------   ----------    ----------
Balance at December 31, 2004                --            --    37,431,537           37       13,730       (7,152)        6,615
Issuance of common stock in
   conjunction with exercise of
   stock options                            --            --       989,285            1          170           --           171
Employee compensation from stock
   options and restricted stock             --            --        43,000           --          191           --           191
Net loss for the year                       --            --            --           --           --         (102)         (102)
                                    ----------    ----------    ----------   ----------   ----------   ----------    ----------
Balance at December 31, 2005                --    $       --    38,463,822   $       38   $   14,091   $   (7,254)   $    6,875
                                    ==========    ==========    ==========   ==========   ==========   ==========    ==========
</TABLE>

The  accompanying  notes are an  integral  part of this  consolidated  financial
statement.


                                       32
<PAGE>

                            LION, Inc. and Subsidiary
                      Consolidated Statements of Cash Flows
                             Year ended December 31,
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                              2005          2004
                                                                           ---------     ---------
<S>                                                                        <C>           <C>
Cash flows from operating activities
    Net income (loss)                                                      $    (102)    $     616
    Adjustments to reconcile net income (loss) to net cash
       provided by operating activities
          Depreciation and amortization                                          533           575
          Write off of capitalized software development costs                     --            14
          Stock options and restricted stock issued to employees                 191           279
          Common stock issued for services received                               --            60
          Deferred income tax assets                                              --          (150)
          Loss (gain) on sale of assets                                            1            (2)
          Changes in assets and liabilities
              Accounts receivable                                                681         1,073
              Other receivables                                                   --           621
              Prepaid expenses and other                                         (11)            4
              Accounts payable                                                   (83)          105
              Accrued salaries and benefits                                     (293)         (159)
              Accrued liabilities                                                (84)         (338)
              Deferred revenue                                                  (401)         (377)
              Other assets                                                        33          (292)
                                                                           ---------     ---------
                  Net cash provided by operating activities                      465         2,029
                                                                           ---------     ---------

Cash flows from investing activities
    Purchase of available-for-sale securities                                 (1,200)           --
    Sale of available-for-sale securities                                        400            --
    Capitalized software development costs                                       (40)         (288)
    Cash received on purchase of TRMS                                             --            22
    Cash received on sale of assets                                               --             2
    Purchases of property and equipment                                         (407)         (190)
                                                                           ---------     ---------
                  Net cash used in investing activities                       (1,247)         (454)
                                                                           ---------     ---------

Cash flows from financing activities
    Tax benefit on stock options exercised                                        --            56
    Restricted cash for letter of credit                                        (280)           --
    Payments on long-term obligations                                           (256)         (193)
    Proceeds from issuance of common stock and exercise of stock
       options and warrants                                                      171           197
                                                                           ---------     ---------
                  Net cash provided by (used in) financing activities           (365)           60
                                                                           ---------     ---------
Net increase (decrease) in cash and cash equivalents                          (1,147)        1,635
Cash and cash equivalents at beginning of year                                 4,518         2,883
                                                                           ---------     ---------
Cash and cash equivalents at end of year                                   $   3,371     $   4,518
                                                                           =========     =========

Supplemental cash flow information and non-cash investing and
    financing activities - see Note 9
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       33
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 1 - Description of business and summary of significant accounting policies

DESCRIPTION  OF BUSINESS - LION,  Inc. (the  "Company" or "LION"),  a Washington
corporation,  generates  mortgage leads through the Internet and is a technology
and service provider of advanced business solutions that streamline the mortgage
loan  fulfillment  process in the  mortgage  industry.  Through its  subsidiary,
Tuttle Risk Management  Services LLC ("TRMS"),  LION provides  hands-on mortgage
pipeline risk management for financial institutions that originate and then sell
loans into the secondary  market.  From Leads to Loans to Capital Markets,  LION
offers consistent, integrated business solutions to consumers, mortgage brokers,
realtors,  originators  and  lenders.  LION  provides an  integrated  technology
platform offering online loan  productivity,  mortgage pipeline hedging and risk
management,  software  development  and data  communications  tools  through its
LockPoint Xtra(R), Pipeline Tools, and Risk Management Services product lines.

A summary of significant  accounting  policies applied in the preparation of the
accompanying consolidated financial statements follows.

USE OF ESTIMATES - In preparing  consolidated financial statements in conformity
with accounting  principles  generally accepted in the United States of America,
management is required to make estimates and  assumptions  that affect  reported
amounts  of  assets  and  liabilities,   disclosure  of  contingent  assets  and
liabilities  at the date of the financial  statements,  and reported  amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those  estimates.  Significant  estimates  include  allowances for doubtful
accounts,   long-lived   assets   valuation,    estimated   useful   lives   and
recoverability,  realizability  of deferred tax assets,  and the  allocation  of
purchase price.

PRINCIPLES OF CONSOLIDATION - The consolidated  financial statements include the
accounts  of  LION,  Inc.  and  its  wholly-owned  subsidiary,   TRMS  LLC.  All
significant intercompany accounts and transactions have been eliminated.

CASH AND CASH  EQUIVALENTS  - For purposes of the  statement of cash flows,  the
Company  considers  all  highly-liquid  instruments  purchased  with a remaining
maturity of three months or less to be cash equivalents.

SHORT-TERM  INVESTMENTS - The Company's short-term investments consist primarily
of Auction Rate  Securities.  These securities are variable rate securities with
underlying  interest rates that reset  periodically (7-28 days) based on a Dutch
auction.  At the reset date, the holders can choose to hold their  securities at
the rate  determined by auction or opt out of the investment.  These  securities
are  classified  as  available-for-sale.   Available-for-sale   securities  with
remaining maturities of less than one year and those identified by management at
time of purchase for funding  operations in less than one year are classified as
short-term.

REVENUE  RECOGNITION  - LION  generates  revenue  throughout  the mortgage  loan
origination and fulfillment  process.  Subscription  revenues are generated from
mortgage brokers and agents who are provided  electronic access to a database of
mortgage  offerings from LION's  proprietary  network of lenders  throughout the
United States.  LION also generates  revenue from  advertisers who pay marketing
fees for ad banners, web site promotion, and lead generation. Additionally, fees
are earned related to mortgage  originator and lender web site  development  and
hosting.   Revenues  from  the  LockPoint  Xtra(R),  Pipeline  Tools,  and  Risk
Management  Services product lines are generated primarily from transaction fees
on  closed  and  locked  loan  volumes  as  well  as fees  for  related  website
development and implementation.


                                       34
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 1 - Description of business and summary of significant  accounting policies
- continued

The Company  accounts  for its  software  products  with  external  licensing in
accordance with Statement of Position 97-2,  SOFTWARE REVENUE  RECOGNITION,  and
Staff  Accounting  Bulletin 104,  REVENUE  RECOGNITION IN FINANCIAL  STATEMENTS.
Revenue from licensing fees relating to the use of the LockPoint Xtra(R) product
is  recognized  when all  elements of the  contract  have been  delivered to the
customer.  Revenue from monthly recurring charges from use of the Pipeline Tools
and Risk Management  Services  products is recognized in the period in which the
service is provided.

Revenue is recognized from product sales or services provided when the following
four revenue recognition criteria are met: persuasive evidence of an arrangement
exists,  delivery has occurred or services have been provided, the selling price
is  fixed  or  determinable,  and  collectibility  is  reasonably  assured.  For
multiple-element  arrangements,  the Company applies  Emerging Issues Task Force
("EITF") Issue 00-21, REVENUE ARRANGEMENTS WITH MULTIPLE  DELIVERABLES that meet
the  following  criteria:  the  delivered  item has value to the  customer  on a
standalone basis;  there is objective and reliable evidence of the fair value of
undelivered items; and delivery of any undelivered item is probable.

Subscription  and service fees are  recognized  as revenue  over the  respective
subscription  periods or at the time the  services  are  provided.  Revenue from
services is generally  determined based on time and materials.  Deferred revenue
is recorded on prepaid subscriptions for periods ranging from 3 to 12 months and
on  advance  billings  or cash  received  for  contracts  that have  undelivered
elements.

ACCOUNTS  RECEIVABLE - The Company's accounts  receivable are due from companies
in the mortgage  industry,  including  lenders and mortgage  brokers.  Credit is
extended to most customers,  and generally collateral is not required.  Payments
for accounts  receivable are due upon receipt of the invoice,  but in some cases
they may be due  within 15 to 60 days  depending  on the  products  or  services
provided.

Accounts receivable are stated at amounts due from customers net of an allowance
for doubtful accounts.  Accounts outstanding longer than the contractual payment
terms  are  considered  past  due.  The  Company  determines  its  allowance  by
considering  a number of factors,  including  the length of time trade  accounts
receivable  are past due, the Company's  previous loss history,  the  customer's
current  ability to pay its obligation to the Company,  and the condition of the
general  economy and the  industry as a whole.  The Company  writes off accounts
receivable when they become uncollectible,  and payments subsequently  collected
on such accounts are credited to the allowance for doubtful accounts.

PROPERTY  AND  EQUIPMENT  -  Property  and  equipment  are  stated  at cost less
accumulated depreciation and amortization.  Maintenance and repairs are expensed
as  incurred.   Depreciation  and  amortization  are  provided  for  in  amounts
sufficient to relate the cost of  depreciable  assets to  operations  over their
estimated service lives of 3 to 5 years for computer hardware and software and 5
years  for  equipment  on a  straight-line  basis.  Leasehold  improvements  are
amortized  over the lives of the  respective  leases or the service lives of the
improvements, whichever is shorter.


                                       35
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 1 - Description of business and summary of significant  accounting policies
- continued

CAPITALIZED  SOFTWARE  DEVELOPMENT  COSTS - The Company  accounts for internally
developed  software costs in accordance with SOP 98-1,  ACCOUNTING FOR THE COSTS
OF  COMPUTER  SOFTWARE  DEVELOPED  OR OBTAINED  FOR  INTERNAL  USE.  Capitalized
software development costs,  intended for internal use, approximated $40,000 and
$288,000  for the years ended  December 31, 2005 and 2004,  respectively.  These
costs are  included in  computer  software in  property  and  equipment  and are
amortized over a period of three years.

GOODWILL - Statement of Financial  Accounting Standards (SFAS) No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS, provides that goodwill should not be amortized, but
should  rather be reviewed  at least  annually  to assess  recoverability.  This
statement requires that goodwill and long-lived assets and certain  identifiable
intangibles   be  reviewed  for  impairment   whenever   events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison  of the  carrying  amount of an asset to future net  discounted  cash
flows expected to be generated by the asset or other valuation methods.  If such
assets are considered to be impaired, impairment to be recognized is measured by
the amount by which the carrying  amount of the assets  exceeds the asset's fair
value.

In accordance  with SFAS 142, the Company tests  goodwill for  impairment at the
reporting  unit level on an annual  basis and  between  annual  tests in certain
circumstances.  As described in Note 10 - Segment Reporting and Major Customers,
the Company has determined that it has two reporting  units,  consisting of LION
and TRMS.  SFAS 142  requires a two-step  goodwill  impairment  test whereby the
first step, used to identify potential impairment,  compares the fair value of a
reporting unit with its carrying amount including goodwill. If the fair value of
a reporting  unit  exceeds its  carrying  amount,  goodwill  in  considered  not
impaired,  thus the second step of the goodwill impairment test used to quantify
impairment is unnecessary. Company management has estimated that the fair values
of the Company's  reporting  units to which goodwill has been  allocated  exceed
their carrying  amounts,  and  accordingly no provision for impairment is deemed
necessary.

NET INCOME  (LOSS) PER COMMON SHARE - Basic income  (loss) per share is based on
the weighted average number of shares outstanding  during each period.  Dilutive
common stock equivalents,  which consist of options to purchase common stock for
2,997,085  shares in 2004,  are included in  determining  dilutive  earnings per
share.  The diluted  share  calculation  for 2005 and 2004  excludes  options to
purchase   3,789,867  and   3,599,271   shares,   respectively,   due  to  their
anti-dilutive effect.

ADVERTISING  COSTS -  Advertising  costs are expensed as  incurred.  Advertising
expense was approximately $798,000 and $417,000 for the years ended December 31,
2005 and 2004, respectively.

RESEARCH AND DEVELOPMENT  COSTS - All  expenditures for research and development
costs  are  expensed  in the year  incurred.  These  expenses  consist  of costs
incurred for  proprietary  research and include  related  salaries and benefits,
contract and other outside service fees, and facilities and overhead costs.


                                       36
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 1 - Description of business and summary of significant  accounting policies
- continued

INCOME TAXES - The Company  accounts for income  taxes in  accordance  with SFAS
109,  ACCOUNTING FOR INCOME TAXES. In accordance with SFAS No. 109, deferred tax
assets arise from the tax benefit of amounts  expensed for  financial  reporting
purposes,  but not yet deducted for tax purposes and from unutilized tax credits
and NOL carry  forwards.  The  Company  records  deferred  income tax assets and
liabilities based upon differences  between  financial  statement and income tax
bases of assets and  liabilities  using enacted  income tax rates.  Deferred tax
assets are evaluated on a regular basis to determine if a valuation allowance is
required.  To the extent it is  determined  the  recoverability  of deferred tax
assets is not  considered  more likely than not, a valuation  allowance  against
deferred tax assets is  recorded.  Income tax expense is comprised of taxes paid
and payable for the period and change  during the period in net deferred  income
tax assets and liabilities.

STOCK  ISSUED  FOR  SERVICES -  Issuances  of shares of the  Company's  stock to
employees or  third-parties  for  compensation  or services are valued using the
closing price on the date of grant.

STOCK OPTIONS - The Company has adopted the fair value recognition  provision of
FASB   Statement   No.   123,   "Accounting   for   Stock-Based   Compensation,"
prospectively,  to all  employee  awards  granted  on or after  January 1, 2003,
pursuant to FASB Statement No. 148,  "Accounting for Stock-Based  Compensation -
Transition and Disclosure."

The Company  issued  options to purchase  320,000 and 993,751  shares during the
years  ended  December  31,  2005 and 2004,  respectively,  under the 1998 Stock
Option Plan (the "Plan"). Compensation expense is based on the fair value of the
options at the  respective  grant dates  utilizing the  Black-Scholes  model for
estimating  fair  value.  The Company  will  recognize  compensation  expense of
$71,000 and $428,000 over the vesting  period for these options  granted  during
the years ended December 31, 2005 and 2004,  respectively.  The following  table
illustrates  the effect on net income  (loss) and net income (loss) per share if
the Company had applied the fair value recognition provisions of SFAS 123 to all
employee awards (in thousands, except net income (loss) per share).

<TABLE>
<CAPTION>
                                                                           2005        2004
                                                                        --------    --------
      <S>                                                               <C>         <C>
      Net income (loss), as reported                                    $   (102)   $    616
      Add: Stock-based employee compensation expense included in
      reported net income (loss)                                             191         279
      Deduct:  Total stock-based employee compensation expense
      determined under fair value based method for all awards, net
      of related tax effects                                                (199)       (363)
                                                                        --------    --------
      Pro forma net income (loss)                                       $   (110)   $    532
                                                                        ========    ========
      Net income (loss) per share:
          Basic - as reported                                           $     --    $    .02
          Diluted - as reported                                         $     --    $    .02
          Basic - pro forma                                             $     --    $    .02
          Diluted - pro forma                                           $     --    $    .01
</TABLE>


                                       37
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 1 - Description of business and summary of significant  accounting policies
- continued

FAIR VALUE OF FINANCIAL  INSTRUMENTS  - The fair value of financial  instruments
are accounted for in accordance with SFAS No. 107,  DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL  INSTRUMENTS,  which  requires  that the Company  disclose the fair
value of its financial  instruments for which it is practicable to estimate fair
value.   The  carrying  amounts  of  cash  and  cash   equivalents,   short-term
investments,  prepaid expenses and other current assets,  accounts  receivables,
accounts payable, accrued salaries and benefits, and accrued liabilities meeting
the definition of a financial  instrument  approximate fair value because of the
short  term  maturity  of  these  instruments.   The  fair  value  of  long-term
obligations  approximates  fair value based on the  incremental  borrowing  rate
currently available to the Company for loans with similar terms and maturities.

CONCENTRATION  OF  CREDIT  RISK - Cash is held in  interest  bearing  or  demand
deposit bank accounts.  Short-term  investments are comprised of marketable debt
securities. The Company and its subsidiary maintain cash balances and short-term
investments at several financial institutions.  Accounts at each institution are
insured by the Federal Deposit Insurance  Corporation up to $100,000.  Uninsured
balances aggregated approximately $4.2 million at December 31, 2005. The Company
has not  experienced  any losses in such accounts and believes it is not exposed
to any  significant  credit  risk on cash and cash  equivalents  and  short-term
investments,  as these deposits and  investments are held by high credit quality
financial institutions.

RECENTLY ISSUED  ACCOUNTING  PRONOUNCEMENTS  - In December 2004, the FASB issued
SFAS No.  123  (revised  2004)  ("SFAS No.  123R"),  SHARE-BASED  PAYMENT.  This
Standard requires companies to measure  share-based  payments at grant-date fair
value and recognize the compensation expense in their financial  statements.  We
previously  adopted the fair value based method of  accounting  pursuant to SFAS
No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION,  prospectively.  Management is
in the process of evaluating the  requirements of SFAS No. 123R. The adoption of
the  provisions of this  statement is not expected to have a material  effect on
the Company's financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS,
an amendment of APB Opinion No. 29, which replaces the exception from fair value
measurement  for  nonmonetary  exchanges of similar  productive  assets,  with a
general  exception  from fair value  measurement  for  exchanges of  nonmonetary
assets that do not have  commercial  substance.  This statement is to be applied
prospectively  and is effective for  nonmonetary  asset  exchanges  occurring in
fiscal periods  beginning after June 15, 2005. The adoption of the provisions of
this  statement  is not  expected  to have a  material  effect on the  Company's
financial condition or results of operations.

In May  2005,  the FASB  issued  SFAS No.  154,  ACCOUNTING  CHANGES  AND  ERROR
CORRECTIONS,  a replacement  of APB Opinion No. 20 and FASB Statement No. 3. The
Statement applies to all voluntary changes in accounting principle,  and changes
the  requirements  for  accounting  for and  reporting of a change in accounting
principle.  Statement  No.  154  requires  retrospective  application  to  prior
periods'  financial  statements of a voluntary  change in  accounting  principle
unless it is  impracticable.  Statement  No.  154 is  effective  for  accounting
changes and  corrections of errors made in fiscal years beginning after December
15, 2005.  The adoption of the  provisions of this  statement is not expected to
have a  material  effect on the  Company's  financial  condition  or  results of
operations.


                                       38
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 2 - Business Combinations

In October 2004,  LION, Inc.  acquired all of the  outstanding  common shares of
Tuttle Risk  Management  Services  Inc.,  a Delaware  corporation  ("TRMS"),  in
connection with a merger of TRMS with and into LION's  wholly-owned  subsidiary,
LION Acq. LLC, a Washington limited liability company.  As a result, TRMS became
a wholly-owned subsidiary of LION operating as a limited liability company under
the name "Tuttle Risk  Management  Services LLC." The acquisition is intended to
qualify as a "reorganization"  under Section 368(a) of the Internal Revenue Code
of 1986, as amended.  As a result, none of the goodwill recorded has a tax basis
and is not deductible for tax purposes.

The  transaction  was  accounted  for in  accordance  with SFAS  141,  "Business
Combinations."  The  results  of TRMS'  operations  have  been  included  in the
consolidated  financial  statements  since the  acquisition  date.  The  Company
acquired all TRMS assets having an estimated  fair value of $892,000 and assumed
the  liabilities  having an estimated  fair value of  $608,000,  in exchange for
Company  three-year  promissory  notes  totaling  $972,000 due at maturity  with
interest paid  annually at 8 percent and  3,094,290  shares of LION common stock
valued at $1.33  million.  The  number of shares  of  common  stock  issued  was
determined based on the lesser of the closing price of LION common stock for the
20 trading days ending on the trading day immediately  prior to the closing date
and $.65 per  share.  The  total  purchase  price  was $2.6  million,  including
acquisition costs of approximately $297,000.

The  following  table  summarizes  the fair  values of the assets  acquired  and
liabilities assumed at October 13, 2004, the date of acquisition (in thousands):

      ASSETS
      Cash                                                          $   22
      Accounts receivable                                              773
      Prepaid expenses                                                  79
      Property and equipment                                            18
      Goodwill                                                       2,316
                                                                    ------

              Total assets                                           3,208

      LIABILITIES
      Accrued liabilities                                               95
      Deferred revenue                                                 121
      Accrued payroll obligations                                       88
      Notes payable                                                    303
                                                                    ------

             Total liabilities                                         608
                                                                    ------

                  Net assets acquired                               $2,600
                                                                    ======


                                       39
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 2 - Business Combinations - continued

TRMS operating results for the period from October 13, 2004 to December 31, 2004
are included in the  historical  consolidated  results of operations of LION for
the  year  ended  December  31,  2004.  On a pro  forma  basis  as if  the  TRMS
acquisition  had taken place at January 1, 2004,  pro forma  revenues would have
approximated  $17.4  million,  pro  forma net  income  would  have  approximated
$750,000  and basic and diluted net income per share would have been $0.02.  The
pro forma results of operations do not purport to indicate the actual results of
operations  which would have been achieved had the acquisition  been consummated
at the beginning of the period.

In December 2003,  the Company  purchased  certain  assets of Ignition  Mortgage
Technology  Solutions,  Inc.  ("Ignition"),  a  wholly-owned  subsidiary  of the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). In addition, the Company
received $1.0 million in  consideration  for  satisfying  obligations  under the
assigned  customer  agreements  and  $777,000  related to  amounts  prepaid by a
customer under an assigned customer  agreement.  The assigned customer agreement
included  deferred  revenue at a fair value of  approximately  $921,000 of which
$545,000 was recognized in 2004 with the remaining $331,000 recognized in 2005.

The  transaction  was  accounted  for in  accordance  with SFAS  141,  "Business
Combinations."  LION  paid  $1,000  and  assumed  liabilities  of  $141,000  for
substantially all of Ignition's assets. Under the terms of the transaction, LION
assumed a deferred  payroll  obligation  of $621,000 for severance to be paid in
2004 to certain employees that transferred to LION from Ignition.  The severance
was paid in full and funded by Freddie Mac on June 30, 2004.

The fair value of the net assets acquired in the  transaction  exceeded the cost
of the acquired assets.  The excess of the fair value of the net assets over the
cost of the  acquired  assets  was  allocated  as a pro  rata  reduction  to the
non-current  assets  acquired.  Accordingly,  the fair value of the property and
equipment acquired in the transaction was reduced to zero.

Note 3 - Property and Equipment

Property  and  equipment  consist  of  the  following  as  of  December  31  (in
thousands):

                                                           2005        2004
                                                          ------      ------

      Computer equipment                                  $  869      $  798
      Computer software                                    1,956       2,012
      Equipment                                              427         362
      Leasehold improvements                                 102          12
                                                          ------      ------
                                                           3,354       3,184
      Less accumulated depreciation and amortization       2,510       2,253
                                                          ------      ------

                                                          $  844      $  931
                                                          ======      ======

Fixed assets acquired under capital leases approximated $227,000 at December 31,
2005 and 2004, and related accumulated  amortization  approximated  $187,000 and
$132,000 at December 31, 2005 and 2004, respectively.


                                       40
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 4 - Long-term Obligations

The Company's  long-term  obligations are comprised of the following at December
31 (in thousands):

<TABLE>
<CAPTION>
                                                                                               2005        2004
                                                                                            --------    --------
      <S>                                                                                   <C>         <C>
      Capital lease obligations payable in monthly installments of $1,328 at a
         fixed rate of 16.9%; final payments due  November 2005                             $     --    $     14

      Capital lease obligations payable in monthly installments of $1,301 at a
         fixed rate of 15.9%; final payments due at various dates through January 2006             1          15

      Capital lease obligations payable in monthly installments of $115 at a fixed
         rate of 1%; final payment due May 2006                                                    1           2

      Capital lease obligations payable in monthly installments of $3,209 at a
         fixed rate of 12%; final payment due July 2006                                           21          55

      Notes payable to various TRMS shareholders at a fixed rate of 10%; paid off
         in February 2005                                                                         --         193

      Notes payable to various TRMS shareholders at a fixed interest rate of 8%;
         interest is accrued and payable annually with the principal and unpaid
         accrued interest due in October 2007                                                    972         972
                                                                                            --------    --------
                                                                                                 995       1,251
      Less current maturities                                                                     23         256
                                                                                            --------    --------

                                                                                            $    972    $    995
                                                                                            ========    ========
</TABLE>

Following is a schedule of annual minimum  payments under such  obligations  (in
thousands):

<TABLE>
<CAPTION>
        Year ending December 31,            Capital Leases      Note Payable         Total
     ---------------------------------      --------------      ------------      -----------
     <S>                                      <C>                <C>              <C>
                  2006                        $        24        $        --      $        24
                  2007                                 --                972              972
                                              -----------        -----------      -----------

     Total minimum payments                            24                972              996

     Less amount representing interest                  1                 --                1
                                              -----------        -----------      -----------

     Net principal payments                   $        23        $       972      $       995
                                              ===========        ===========      ===========
</TABLE>

At December 31,  2005,  the Company had $280,000 of  restricted  cash,  which is
classified as other noncurrent  assets. The restricted cash serves as collateral
for an  irrevocable  letter of credit with respect to a lease for the  Company's
San Rafael,  California  office  space.  The cash is held in custody by the bank
that issued the letter of credit,  is restricted as to withdrawal or use, and is
currently  invested in money market funds. In January 2007, the letter of credit
may be reduced to $180,000.  In July 2008, the letter of credit may be cancelled
and replaced by a security deposit equal to the then current monthly rent.


                                       41
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 5 - Income taxes

The income tax benefit  (expense) is comprised  of the  following  for the years
ended December 31 (in thousands):

                                                       2005         2004
                                                     -------      -------

      Current:
        Federal                                      $    --      $   150
        State                                            (14)         (57)
                                                     -------      -------

              Total                                  $   (14)     $    93
                                                     =======      =======

The income tax (expense) benefit reconciled to the tax computed at the statutory
federal rate was as follows for the years ended December 31 (in thousands):

                                                       2005         2004
                                                     -------      -------

      Tax benefit (provision) at statutory rate      $    30      $  (178)
      State income taxes                                 (14)         (57)
      Non-deductible expenses                            (15)         (17)
      Other                                              (20)         (22)
      Decrease in valuation allowance                      5          367
                                                     -------      -------

           Total                                     $   (14)     $    93
                                                     =======      =======

The components of deferred taxes are as follows at December 31 (in thousands):

                                                       2005         2004
                                                     -------      -------
      Deferred tax assets:
          Intangible assets                          $    17      $    21
          Accrued liabilities                             94          112
          Allowance for doubtful accounts                 36           21
          Stock options issued to employees               66          103
          Deferred revenue                                --          119
          Depreciation                                    --            9
          Net operating loss carryforwards             1,054          836
                                                     -------      -------
               Total deferred tax assets               1,267        1,221
      Deferred tax liabilities:
          Depreciation                                    51           --
                                                     -------      -------
                                                       1,216        1,221

      Valuation allowance                             (1,066)      (1,071)
                                                     -------      -------

                                                     $   150      $   150
                                                     =======      =======


                                       42
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 5 - Income taxes - continued

During the fourth  quarter of 2004,  the  Company  recognized  a tax  benefit of
$150,000.  This tax benefit was the result of  recognition of a net deferred tax
asset.  Realization  of the net deferred  tax asset is  dependent on  generating
sufficient   taxable   income  prior  to  expiration   of  net  operating   loss
carryforwards.  At  December  31,  2005,  the  Company  had net  operating  loss
carryforwards  for federal  income tax  purposes of  approximately  $3.1 million
available to offset future  income which expire in 2018 through  2023.  Although
realization is not assured,  management believes it is more likely than not that
a portion of the deferred tax asset will be realized. The amount of the deferred
tax asset  considered  realizable,  however,  could be reduced if  estimates  of
future taxable income during the carryforward period are reduced.

The Company has established a valuation  allowance of approximately $1.1 million
as of December 31, 2005 and 2004, due to the  uncertainty of future  realization
of deferred tax assets.  The  valuation  allowance  was  decreased by $5,000 and
$367,000 during the years ended December 31, 2005 and 2004, respectively,  based
upon management's estimate of realization of deferred tax assets. Utilization of
these  carryforwards  could be  limited  due to a change of  control  in Company
ownership as defined by the Internal Revenue Code Section 382.

Note 6 - Commitment and Contingencies

The Company  conducts a portion of its  operations  in leased  facilities  under
operating lease agreements.  The following is a schedule of approximate  minimum
annual rental  payments  under such  operating  leases,  which expire at various
dates through April 2010 (in thousands):

            Year ending December 31,
                      2006                               $    825
                      2007                                    649
                      2008                                    345
                      2009                                    241
                      2010                                     69
                                                         --------

         Total minimum payments required                 $  2,129
                                                         ========

Various  leases  provide for payment of taxes and other expenses by the Company.
Rent expense for leased facilities totaled  approximately  $830,000 and $753,000
for the years ended December 31, 2005 and 2004, respectively.

The  Company  from time to time is  involved in certain  legal  matters  arising
during the normal course of business. In the opinion of management,  the outcome
of these  matters  will not have a material  effect on the  Company's  financial
position or results of operations.


                                       43
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 6 - Commitment and Contingencies - continued

In December 2003,  the Company  entered into a three-year  employment  agreement
with Randall D. Miles, its CEO. The employment agreement provides for an initial
annual  salary of $200,000 and may include a bonus.  In the event  employment is
terminated  by the  Company  without  cause,  Mr.  Miles will be  entitled  to a
severance payment of 50% of his annual compensation.  Mr. Miles is also entitled
to receive,  at the  Company's  expense,  continuation  of  medical,  dental and
disability benefits for 6 months following termination without cause.

In June 2004,  the  Company  entered  into new  employment  agreements  with its
President and its CFO, which provide for initial annual salaries of $150,000 and
$135,000,  respectively.  Each  agreement has a term of three years and provides
that the compensation  will include a base and may include a bonus. In the event
that  employment  is  terminated  by the  Company  without  cause,  they will be
entitled to a severance  payment of 50% of their annual  compensation.  They are
also entitled to receive,  at the Company's  expense,  continuation  of medical,
dental and disability benefits for 6 months following termination without cause.

In 2004, the Company settled its lawsuit  against and received  payment from its
insurance  carrier.  LION had initiated  litigation for reimbursement of defense
and indemnity costs related to a lawsuit which was settled for $340,000 in 2002.
The Company and the insurance  carrier reached a mediated  settlement of claims,
and in June 2004, LION received payment of approximately  $433,000, net of legal
expenses,  which is included in "Other Income" in the accompanying  December 31,
2004 Statement of Operations.

Note 7 - Stock Options

In June 2005, the Company  established  the 2005 Stock Incentive Plan (the "2005
Plan") under which a total of 5 million  shares have been  reserved for issuance
as incentive  stock  options,  non-qualified  stock  options,  restricted  stock
awards,  restricted stock units and stock appreciation rights. Not more than 2.5
million  shares may be used for  restricted  stock awards and  restricted  stock
units.  As of December 31, 2005,  43,000 shares of restricted  common stock were
outstanding  under the 2005 Plan which vest  quarterly  over a four year period.
The average grant date fair value of the restricted  common stock granted during
2005 was $.32 per share.  No other stock  incentive  awards  under the 2005 Plan
were granted during 2005.


                                       44
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 7 - Stock Options - continued

In October 1998, the Company  established  the 1998 Stock Option Plan (the "1998
Plan") under which 15 million  shares have been reserved for issuance.  The 1998
Plan allows the Company to grant options to employees for up to 50,000 shares of
common stock per employee.  Employee  directors  are eligible to receive  option
grants and direct stock issuances.  Non-employee directors receive as an initial
grant options to purchase 50,000 shares of common stock, exercisable at not less
than the fair market  value of the  Company's  common stock on the day of grant.
Thereafter,  non-employee directors receive automatic option grants each year to
purchase  50,000  shares of common  stock  upon their  reelection  at the annual
meeting  of  shareholders.  Non-employee  chairs of the  audit and  compensation
committees receive an automatic option grant each year to purchase an additional
25,000 shares of common  stock.  At December 31, 2005,  approximately  4,138,000
shares are  available  for future  issuance  under the plan.  Options  currently
outstanding vest over a zero to four year period.  Stock options are exercisable
at not less than the market value of the  Company's  common stock on the date of
grant.

The fair value of option grants are  estimated  using the  Black-Scholes  option
pricing model with the following weighted average assumptions used for grants in
fiscal year 2005: expected volatility of approximately 125%;  risk-free interest
rate ranging from 3.7% to 4.2%;  expected lives of 4 years;  and, a zero percent
dividend yield. The following weighted average  assumptions were used for grants
in fiscal  year 2004:  expected  volatility  of  approximately  130%;  risk-free
interest rate ranging from 3.9% to 4.3%;  expected lives of 4 years; and, a zero
percent dividend yield.

A summary of the Company's 1998 Plan activity is as follows:

<TABLE>
<CAPTION>
                                                             2005                                2004
                                                 ----------------------------        ----------------------------
                                                                    Weighted                             Weighted
                                                                     average                             average
                                                                    exercise                             exercise
                 Stock options                      Shares            price            Shares             price
    --------------------------------------       ------------      ----------        ------------      ----------
    <S>                                            <C>             <C>                 <C>             <C>
    Outstanding at beginning of year                6,596,359      $      .30           7,928,409      $      .36
    Granted                                           320,000             .27             993,751             .50
    Forfeited                                      (2,137,207)            .48          (1,762,917)            .76
    Exercised                                        (989,285)            .17            (562,884)            .14
                                                 ------------      ----------        ------------      ----------

    Outstanding at end of year                      3,789,867      $      .22           6,596,359      $      .30
                                                 ============      ==========        ============      ==========

    Options exercisable at end of year              2,752,767      $      .23           4,026,502      $      .32
                                                 ============      ==========        ============      ==========

    Weighted-average fair value of options
      granted during the year                                      $      .22                          $      .43
                                                                   ==========                          ==========
</TABLE>


                                       45
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 7 - Stock Options - continued

Following is a summary of stock options outstanding at December 31, 2005:

<TABLE>
<CAPTION>
                                Outstanding Options                                           Options Exercisable
   ----------------------------------------------------------------------------       ---------------------------------
                                             Weighted-             Weighted-                                 Weighted-
                                              average        average remaining                                average
    Exercise price            Number           price           contractual life           Number          exercise price
   -------------------     -----------     ------------      ------------------       --------------      --------------
   <S>                       <C>              <C>                  <C>                  <C>                  <C>
   $  .04 - $  .25           3,084,450        $  0.18              6.7 years            2,251,100            $   0.18
   $  .26 - $  .50             480,417        $  0.31              4.7 years              307,917            $   0.33
   $  .51 - $  .61             225,000        $  0.59              5.3 years              193,750            $   0.60
                           -----------                                                -----------
                             3,789,867                                                  2,752,767
                           ===========                                                ===========
</TABLE>

Note 8 - Retirement Plan

The Company has adopted a salary deferral  retirement  plan, or 401(k) plan. The
plan  covers  all  employees  who  meet  the  plan's  eligibility  requirements.
Employees  are  eligible  if they are at least age 18, they have  completed  the
earlier  of 1  year  of  service  or  3  consecutive  full  calendar  months  of
employment, their employment is not governed by terms of a collective bargaining
agreement and they are not non-resident  aliens who do not receive earned income
from LION.  The Company can make  discretionary  contributions  to the plan.  No
contributions were made by the Company for the years ended December 31, 2005 and
2004.

Note 9 - Supplemental Cash Flow Information and Non-cash Investing and Financing
Activities

Supplemental  disclosure  of cash flow  information  and non-cash  investing and
financing  activities  is as  follows  for  the  years  ended  December  31  (in
thousands):

                                                                  2005      2004
                                                                ------    ------
      Supplemental disclosure of cash flow information:
         Cash paid during the year for interest                 $   92    $   19
         Cash paid during the year for income taxes             $   76    $   90

      Non-cash operating, investing and financing activities
         Common stock issued for services received              $   --    $   60


                                       46
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 10 - Segment Reporting and Major Customers

Operating  segments  are  components  of  an  enterprise  about  which  separate
financial  information is available that is evaluated regularly by the Company's
chief operating  decision maker in deciding how to allocate resources and assess
operating  performance.  Management  has  determined  that the  Company  has two
operating  segments,  TRMS  and  the  integrated  software,  services  and  lead
generation  businesses  in which the  Company is engage.  Management  elected to
report on each segment based upon,  among other things,  TRMS being a registered
Commodity  Trading Advisor and generating  revenues through hands on delivery of
Risk  Management  Services,  while LION's  other  combined  operations  generate
revenues  primarily  for  sales  of  software  related  products  and  services.
Intercompany  revenues represent fees for Pipeline Tools technology and services
purchased by TRMS from its parent,  LION,  which are generally  accounted for at
current market prices and are eliminated in consolidation.  Management evaluates
segment performance primarily based on segment revenues,  expenses and operating
income (loss) before intercompany revenues and expenses. Accounting policies for
segments  are the same as those  described in Note 1. The  following  sets forth
information for reportable segments and consolidated totals (in thousands):

<TABLE>
<CAPTION>
              Year ending December 31,                             LION              TRMS           Consolidated
   ----------------------------------------------------------   ---------          ---------        ------------
   <S>                                                          <C>                <C>                <C>
   Year ended December 31, 2005:
         Revenues from external customers                       $   9,300          $   6,489          $  15,789
         Revenues from internal customers                           3,783                  -                  -
         Operating income (loss)                                     (389)               300                (89)
         Depreciation and amortization                                512                 21                533
         Capital expenditures                                         397                 50                447
         Goodwill                                                     274              2,316              2,590
         Total assets                                               6,174              3,515              9,689

   Year ended December 31, 2004:
         Revenues from external customers                        $ 13,713          $   1,479          $  15,192
         Revenues from internal customers                             814                  -                  -
         Operating income (loss)                                      (23)               139                116
         Depreciation and amortization                                572                  3                575
         Capital expenditures                                         478                  -                478
         Goodwill                                                     274              2,316              2,590
         Total assets                                               6,762              3,783             10,545
</TABLE>


                                       47
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 10 - Segment Reporting and Major Customers - continued

The  Company's  product  groupings are  comprised of Leads,  Loans,  and Capital
Markets. Revenues for the years ended December 31, 2005 and 2004 were as follows
(in thousands):

                                                      2005           2004
                                                    -------        -------
      LEADS
        Mortgage 101                                $ 1,781        $ 1,959
                                                    -------        -------

      LOANS
        LION Pro                                      2,991          3,145
        Retail Websites                               2,592          2,542
        LockPoint Xtra                                1,181          1,923
                                                    -------        -------
                                                      6,764          7,610
                                                    -------        -------
      CAPITAL MARKETS
        Pipeline Tools                                  755          4,144
        Risk Management Service                       6,489          1,479
                                                    -------        -------
                                                      7,244          5,623
                                                    -------        -------

           Total revenues                           $15,789        $15,192
                                                    =======        =======

The Leads product grouping consists of the Company's Mortgage 101 product, which
generates revenues from LION's subscription and pay-per-lead based lead programs
along with broker ad banner programs.

The Loans product grouping consists of LION Pro, Retail Websites,  and LockPoint
Xtra(R).  LION  Pro  revenues  are  comprised  of LION Pro  Corporate,  LION Pro
Individual,  and lenders who  participate in the underlying  database.  Web Site
revenues  consist  of site  development  and  hosting  fees.  LockPoint  Xtra(R)
revenues are generated from  implementation  fees with new customers,  recurring
monthly  billings based on loan amount  volumes with monthly  minimums which may
vary from customer to customer, and custom development services.

The  Capital  Markets  product  grouping  consists  of  Pipeline  Tools and Risk
Management  Services.  Pipeline Tools revenues are generated from implementation
fees from new customers, recurring monthly billings based on closed loan volumes
with  monthly  minimums  which may vary from  customer to  customer,  and custom
development  services.  Risk  Management  Services  are provided by TRMS and are
generated  by  recurring  monthly  billings  based on closed loan  volumes  with
monthly minimums which may vary from customer to customer.

Prior to the  acquisition  of TRMS in  October  2004,  TRMS was  LION's  largest
customer for Pipeline Tools.  LION provides TRMS a license to have access to and
use of Pipeline Tools, and also provides  second-line support to TRMS, for which
LION is paid fees, which are recorded as Pipeline Tools revenue. LION's Pipeline
Tools  revenues   include  these  fees  through  October  12,  2004.  Since  the
acquisition date, fees between LION, the parent,  and TRMS, the subsidiary,  are
eliminated in consolidation.

A portion of the Company's revenue from large customers in the mortgage industry
exceed ten percent of the total  revenues.  Prior to the  acquisition of TRMS on
October 13, 2004, TRMS accounted for 18% of the Company's  revenues for the year
ended December 31, 2004.  Other than TRMS in 2004,  there were no customers with
revenues in excess of ten percent of consolidated revenues during 2004 and 2005,
and no  customers  had  accounts  receivable  in excess of ten  percent of total
accounts receivable.


                                       48
<PAGE>

                            LION, Inc. and Subsidiary
                   Notes to consolidated financial statements
                           December 31, 2005 and 2004

Note 11 - Quarterly Financial Data (Unaudited)

Following is a summary of unaudited  quarterly results of operations in 2005 and
2004 (in thousands, except income per share):

<TABLE>
<CAPTION>
                                                                               Net          Net
                                                                              income      income
                                                                              (loss)        per
                                                  Operating        Net       per basic    diluted
      Fiscal Year ended                             Income       Income       common       common
      December 31, 2005:               Revenues     (Loss)       (Loss)        share       share
                                       --------     ------       ------        -----       -----
      <S>                               <C>         <C>          <C>          <C>         <C>
      First Quarter                     $4,041      $ (137)      $ (149)      $   --      $   --
      Second Quarter                    $3,999      $ (173)      $ (179)      $   --      $   --
      Third Quarter                     $4,020      $  212       $  213       $  .01      $  .01
      Fourth Quarter                    $3,729      $    9       $   13       $   --      $   --

      Fiscal Year ended
      December 31, 2004:
                                        $3,870      $    9       $    6       $   --      $   --
      First Quarter                     $3,576      $  (44)      $  384       $  .01      $  .01
      Second Quarter                    $3,574      $   62       $  113       $   --      $   --
      Third Quarter                     $4,172      $   89       $  113       $   --      $   --
      Fourth Quarter
</TABLE>


                                       49
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES

      None.

ITEM 8A. CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

      Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Disclosure controls and procedures are defined under SEC rules as controls and
other procedures that are designed to ensure that information required to be
disclosed by a company in reports that it files under the Exchange Act are
recorded, processed, summarized and reported within the required time periods.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.

(b) Changes in internal control over financial reporting.

      We are assessing the effectiveness of our internal controls over financial
reporting on an account by account basis as a part of our on-going accounting
and financial reporting review process in order to comply with Section 404 of
the Sarbanes-Oxley Act of 2002, which requires our management to assess the
effectiveness of our existing internal controls for the fiscal year ended
December 31, 2007. This effort includes documenting, evaluating the design of
and testing the effectiveness of our internal controls over financial reporting.
We intend to continue to refine and improve our internal controls on an ongoing
basis. During this process, we may identify items for review or deficiencies in
our system of internal controls over financial reporting that may require
strengthening or remediation.

      There have been no changes in our internal controls over financial
reporting during our most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.

ITEM 8B. OTHER INFORMATION

None.


                                       50
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT

      Set forth below is information concerning our directors, executive
officers and other key employees.

           NAME                    AGE               POSITION
           ----                    ---               --------

    DIRECTORS:
    Randall D. Miles (3)           49        Chairman, Director
    John A. McMillan (2) (3)       74        Director
    Griffith J. Straw (2)          57        Director
    James Russo (1)                59        Director
    David Stedman                  56        Director
    J.C. "Tuck" Marshall (1)       56        Director
    Sam Ringer                     46        Director

    EXECUTIVE OFFICERS:
    Randall D. Miles               49        CEO
    David Stedman                  56        President
    Steve Thomson                  53        CFO, Corporate Secretary, Treasurer

      (1)   Member of the Audit Committee
      (2)   Member of the Compensation Committee
      (3)   Member of Nominating Committee

      All directors were elected to a one-year term at the Annual Meeting held
June 23, 2005. Directors Randall Miles, CEO, and David Stedman, President, are
full-time employees of the Company. The other directors devote only such time as
may be necessary to our business and affairs. There are no family relationships
among any of the directors or executive officers of the Company. Following is a
discussion of the business background of each director and executive officer.

DIRECTORS:

      RANDALL D. MILES has been a director of the Company since September 2002
and became Chairman and CEO in December 2003. Mr. Miles has over 20 years of
experience in investment banking and financial services. He served as Managing
Director of Investment Banking at D.A. Davidson & Co. from September 2001 to
October 2003. During the period from June 1996 to September 2001, Mr. Miles was
President and CEO of Advantage Funding Group, Inc, President of NAFCO Funding
LLC, President of Quadrant Investment Bankers, Inc., and Managing Director of
CBA Partners LLC and The Stone Pine Companies. Mr. Miles has served in a senior
executive capacity at both large and mid-sized investment and merchant banks
during the course of his career with particular focus on providing strategic and
financial advisory counsel to public and private companies in many industry
sectors that include software and technology. His transactional experience
includes mergers and acquisitions, public and private capital raising as well as
structured finance expertise. Mr. Miles graduated from the University of
Washington in 1979 with a degree in


                                       51
<PAGE>

finance and sits on the board of directors of privately held companies as well
as non-profit charitable organizations.

      JOHN A. MCMILLAN has been a director of the Company since January 1999,
and served as Chief Executive Officer from October 1999 through August 2002. Mr.
McMillan retired as Director of the Board of Directors for Nordstrom, Inc. in
May 2004. Mr. McMillan has been associated with Nordstrom for 40 years and
served as a member of the Office of Chief Executive Officer from 1971 to 1996.
Mr. McMillan's business and civic affiliations include sitting on the Board of
Directors for the McMillan Family Foundation and Coalition Community Development
of Resources and was a former member of the Board of Directors for Vision Youth
(Chairman), ZION Preparatory Academy Capitol Campaign (Chairman), Urban
Enterprise Council, Bob Walsh Enterprises, Global Partnerships, and Seattle
Pacific University.

      GRIFFITH J. STRAW has been a director of the Company since September 2002.
Since May 2002, Mr. Straw has served as Regional Vice President of United
Guaranty Residential Insurance Company. Mr. Straw has more than 20 years
experience in the mortgage banking industry. His previous positions include
Director of Business Development at Freddie Mac, McLean, Virginia from October
1994 to March 2002. He served as Senior Vice President, Director of Marketing at
Frontline Mortgage from May 1993 to October 1994 and Senior Vice President at
National Pacific Mortgage from 1987 to 1992. Mr. Straw received his designation
as a CMB (Certified Mortgage Banker) from the Mortgage Bankers Association of
America ("MBA") in 2000. He is also a Faculty Fellow for the MBA's School of
Mortgage Banking and was designated as a member of the Master Faculty in 2001.
In November 1998, MORTGAGE TECHNOLOGY magazine named Mr. Straw as one of the
year's top seven mortgage "technologists" in recognition of his role in creating
online business opportunities for Freddie Mac.

      JAMES RUSSO has been a director since August 2004. Since 2001, Mr. Russo
has served as the Executive Director Finance of Advancis Pharmaceutical
Corporation. He has over 25 years of executive financial and operational
management experience with US and international based businesses in the
pharmaceutical, engineering, environmental consulting and banking industries.
Mr. Russo has been CFO of public and privately held companies and is a founding
director of Cardinal Financial Corporation since 1997. Mr. Russo also serves as
a trustee of TESST College of Technology and is a graduate of the University of
Maryland.

      DAVID STEDMAN has been a director since August 2002 and has served as
President since June 2005. Previously, Mr. Stedman served as President of LION
from January 2001 to December 2003, as Chief Executive Officer from August 2002
to December 2003, and as Co-President from December 2003 to May 2005. Mr.
Stedman joined LionInc.com, the former subsidiary of LION, in May 1999 as Vice
President of Marketing & Sales. He served as its COO from January 2000 and as
its President from October 2000 until its merger with the Company. Mr. Stedman
has over 20 years of marketing experience that includes expertise in market
analysis, systems development, strategic and market planning, identity creation,
advertising and public relations. From 1989 to 1999 Mr. Stedman was a Vice
President/Director of Marketing for Safeco Properties, a real estate development
subsidiary of Safeco Insurance. Prior to Safeco Properties, Mr. Stedman held a
number of positions with advertising agencies in the Northwest. Along with
winning a variety of national and local advertising awards, Mr. Stedman has been
a guest speaker for a design class at the University of Washington and has
presented to a variety of business organizations. Mr. Stedman serves on the
Board of Directors of a non-profit charitable organization.


                                       52
<PAGE>

      J.C. (TUCK) MARSHALL has been a director since July 1999. Mr. Marshall
formerly served as President of the National Association of Mortgage Brokers
(NAMB) and is currently the president of J.C. Marshall Financial Services Inc.,
a licensed brokerage of mortgages, real estate, and insurance in Tinley Park,
Illinois. He is a former president of Margo Financial Services LLC, a national
provider of wholesale residential mortgages and a division of Argo FSB. He is a
former president of the Illinois Association of Mortgage Brokers Education
Foundation and a member of the UG/UIG Advisory Board. He was formerly Advisory
Association Member for Chase Mortgage. His past accomplishments also include
president of the Illinois Association of Mortgage Brokers, NAMB Regional broker
of the Year in 1995, NAMB Volunteer of the Year in 1996/1997, NAMB Legislative
Chairman in 1998, and the receipt of the NAMB 2002 Distinguished Service
Industry Award. As President of NAMB, Mr. Marshall developed contacts at all
levels of congress and state governments through his lobbying efforts. He also
developed strong working relationships with the leadership of the national and
state mortgage broker associations along with the nation's leading mortgage
industry companies. Mr. Marshall served as interim President of LionInc.com from
March 2000 to October 2000.

      SAM RINGER has been a director of the Company since 1989. From March 2000
to January 2001, he served as Chief Technology Officer of LionInc.com. He served
as Chief Executive Officer of LionInc.com from February 1999 to March 2000, and
as its President from 1997 to March 2000, and during the period from 1991
through 1995. Mr. Ringer was co-founder, co-architect and author of the LION
software. He received his training as a computer engineer and programmer in
Spokane, WA at Spokane Falls Community College and Gonzaga University. Prior to
his tenure with the Company, Mr. Ringer served for two years as a mortgage
broker at MorNet Mortgage, a Seattle mortgage brokerage firm. Since October
2004, Mr. Ringer has not been an employee of the Company.

OFFICERS:

      RANDALL MILES has served as the Chief Executive Officer of the Company
since December 2003. See background information above for Mr. Miles under the
heading "DIRECTORS."

      DAVID STEDMAN has served as President of the Company since June 2005. See
background information above for Mr. Stedman under the heading "DIRECTORS."

      STEVE THOMSON, CFO of LION as of January 2001, joined LionInc.com in March
1998 as its Controller. From 1995 to 1998, Mr. Thomson worked as a consultant
with a number of high tech and Internet related companies including Sierra
Online, Inc. and N2H2, Inc. From 1988 to 1995, Mr. Thomson served as Controller
and Division Manager with Vanier, a $130 million subsidiary of American Business
Products. From 1979 to 1986, Mr. Thomson was in public accounting with Price
Waterhouse. Mr. Thomson received a B.A. degree in Business Administration from
the University of Washington in 1976 and has been a CPA since 1981.


                                       53
<PAGE>

INFORMATION REGARDING THE BOARD AND ITS COMMITTEES

      The Board of Directors represents the interests of our stockholders as a
whole and is responsible for directing the management of the business and
affairs of LION. Our board of directors is composed of seven members. Each
director currently serves until the next annual meeting of stockholders or until
his successor is duly elected and qualified. Our bylaws provide that the
authorized number of directors will be between three and nine, with the exact
number to be determined by a majority of our board of directors or stockholders.

COMMITTEES OF THE BOARD OF DIRECTORS

      The standing committees of the Board of Directors of the Company are the
Audit Committee, Compensation Committee and Nominating Committee. Our board of
directors may establish other committees to facilitate the management of our
business. Below is a description of each committee of the Board of Directors.

      AUDIT COMMITTEE. The Audit Committee assists our Board of Directors in its
oversight of the quality and integrity of our accounting, auditing, and
reporting practices. The Audit Committee's role includes discussing with
management the Company's processes to manage business and financial risk, and
for compliance with applicable legal and regulatory requirements. The Audit
Committee is responsible for the appointment, replacement, compensation, and
oversight of the independent registered public accounting firm engaged to
prepare or issue audit reports on our financial statements. The Audit Committee
relies on the expertise and knowledge of management, any internal auditors, and
the independent auditor in carrying out its oversight responsibilities. The
specific responsibilities in carrying out the Audit Committee's oversight role
are set forth in the LION Audit Committee Charter. The Audit Committee Charter
is reviewed annually and as may be required due to changes in industry
accounting practices or the promulgation of new rules or guidance documents.

      The Audit Committee consists of Messrs. Russo and Marshall. Both members
of the Audit Committee are "independent" as defined by Rule 4200(a)(15) of the
NASD's listing standards. Our Board believes each Audit Committee member has
sufficient experience and knowledge in financial and auditing matters to
effectively serve and carry out the duties and responsibilities of the
Committee. In addition, the Board has determined that Mr. Russo is an "audit
committee financial expert," as that term is defined by Securities and Exchange
Commission rules, which is basically limited to those who have prepared,
audited, or directly supervised the audit of comparable public company financial
statements.

      COMPENSATION COMMITTEE. The Compensation Committee reviews retirement and
benefit plans and salaries and incentive compensation to be provided to our
executive personnel, employees, and consultants, and recommends appropriate
compensation and benefit levels. The Compensation Committee also administers our
current stock option and equity incentive plans, including the approval of
grants and options under the plans to our employees, consultants and directors
and, in general, oversees general policy matters relating to our various
compensation plans, including payroll, option, stock, medical and bonus plans.

      NOMINATING COMMITTEE. The Nominating Committee is responsible for
identifying and recommending to the Board of Directors qualified nominees to
become board members and considers shareholder recommendations for nominees to
fill Board positions if such recommendations are received. The Nominating
Committee also recommends to the Board of Directors regarding the size


                                       54
<PAGE>

and composition of the Board as well as carrying out the duties set forth in the
LION Nominating Committee Charter. The Nominating Committee consists of Messrs.
Miles and McMillan. Only Mr. McMillan is considered independent as defined by
Rule 4200(a)(15) of the NASD's listing standards.

CODE OF ETHICS

      We have adopted a Code of Ethics that applies to our executive officers,
including financial officers and other finance organization employees. The Code
of Ethics is publicly available on the investors relations portion of our
website at www.lionmts.com. Our Board did not grant any waivers of any ethics
policies in fiscal 2005 to our directors or executive officers. If we make any
substantive amendments to the Code of Ethics or grant any waiver, including any
implicit waiver, from a provision of the code to our Chief Executive Officer,
Chief Financial Officer or Corporate Controller, we will disclose the nature of
such amendment or waiver on that website or in a report on Form 8-K. The
charters of the Audit, Compensation and Nominating Committees are also available
at the same website address.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that our directors and executive officers, and persons who own more than ten
percent of the our common stock, file with the SEC initial reports of ownership
and reports of changes in ownership of our common stock and other equity
securities. Officers, directors and greater-than-ten percent shareholders are
required by the SEC regulation to furnish us with copies of all Section 16(a)
forms they file. Specific due dates have been established by the SEC, and we are
required to disclose in this report any failure to file by those dates.

      We believe that there has been compliance with all Section 16(a) filing
requirements applicable to our officers, directors and ten-percent beneficial
owners.


                                       55
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

      The following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal years ended December 31, 2005, 2004 and
2003 by our Chief Executive Officer and the other most highly compensated
executive officers serving during the year ended December 31, 2005.

                           SUMMARY COMPENSATION TABLE*

                                                                     Long-Term
                                          Annual Compensation       Compensation
                                          -------------------       ------------
                                                                     Securities
                                                                     Underlying
                                                                      Options/
NAME AND PRINCIPAL POSITION     Year      Salary        Bonus         Warrants
---------------------------     ----      ------        -----         --------

Randall D. Miles, CEO (1)       2005    $ 235,780             -               -
                                2004    $ 200,000     $  55,000
                                2003    $  12,200             -       1,000,000

David Stedman, President        2005    $ 157,565             -               -
                                2004    $ 157,400     $ 101,000               -
                                2003    $ 130,200(2)          -         300,000

Steve Thomson, CFO              2005    $ 158,519             -               -
                                2004    $ 145,400     $  75,000               -
                                2003    $ 113,400(3)          -               -

----------
(*)   Columns in the Summary  Compensation  Table that were not  relevant to the
      compensation paid to the Named Executive Officers were omitted.

(1)   Mr. Miles has served as CEO since December 8, 2003.

(2)   During 2003, includes 143,000 shares of common stock totaling $10,200
      issued in lieu of cash compensation at fair market value with prices
      ranging from $.055 to $.128.

(3)   During 2003, includes 133,000 shares of common stock totaling $9,400
      issued in lieu of cash compensation at fair market value with prices
      ranging from $.055 to $.128.

OPTION GRANTS LAST FISCAL YEAR.

      During the year ended December 31, 2005, we granted employees 320,000
options to purchase shares of our common stock and 43,000 shares of restricted
stock. No options or restricted shares were granted to our executive officers.
The options have ten years terms but are subject to earlier forfeiture or
cancellation in connection with termination of employment or upon the optionee's
death or disability. The restricted shares are also subject to earlier
forfeiture or cancellation in connection with termination of employment or upon
the participant's death or disability. Options totaling 300,000 shares vest
quarterly over a one year period and options totaling 20,000 shares vest at 6
1/4 % each quarter over sixteen quarters. The restricted shares vest at 6 1/4%
each quarter over sixteen quarters.


                                       56
<PAGE>

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE.

      The following table provides information with respect to stock options
exercised by our named executive officers during the fiscal year ended December
31, 2005 and unexercised options held as of December 31, 2005. No stock
appreciation rights were exercised during 2005 or were outstanding at December
31, 2005.

<TABLE>
<CAPTION>
                                                                                             Value of Unexercised
                                                     Number of Securities Underlying             In-the-Money
                             Shares                    Unexercised Options/Warrants             Options/Warrants
                            Acquired        Value         at Fiscal Year-End (#)             at Fiscal Year-End ($)
                           on Exercise    Realized   -------------------------------     ------------------------------
           Name                (#)           ($)     Exercisable       Unexercisable     Exercisable      Unexercisable
           ----                ---           ---     -----------       -------------     -----------      -------------
<S>                            <C>        <C>           <C>                <C>            <C>              <C>
Randall Miles, CEO
      Options                  68,450     $  4,642      416,650            583,350        $   62,498       $   87,503

David Stedman, President
      Options                      --           --      588,250            131,250        $   78,160       $   18,375

Steve Thomson, CFO
      Options                      --           --      305,000                 --        $   39,650               --
</TABLE>

COMPENSATION OF DIRECTORS

      During 2004 and through January 2005, non-employee directors received
$1,000 cash compensation for each face-to-face board meeting and no compensation
for committee meetings. Beginning February 2005, non-employee directors receive
$2,000 cash compensation for each board meeting and $500 cash compensation for
each committee meeting. Effective June 23, 2005, non-employee directors receive
$500 cash compensation for each telephonic board meeting and only the face to
face meetings paid at the $2,000 per meeting rate. Non-employee directors are
reimbursed for reasonable travel and other out-of-pocket expenses incurred in
connection with attendance at meetings of the board of directors and committees
of the board of directors. Employee directors are eligible to receive option
grants and direct stock issuances under our 1998 Stock Option Plan. Non-employee
directors receive as an initial grant options to purchase 50,000 shares of
common stock, exercisable at not less than the fair market value of the
Company's common stock on the day of grant. Thereafter, non-employee directors
receive automatic option grants each year to purchase 50,000 shares of common
stock upon their reelection at the annual meeting of shareholders. Non-employee
chairs of the audit and compensation committees will receive an automatic option
grant each year to purchase an additional 25,000 shares of common stock.

EMPLOYMENT AGREEMENTS

      In December 2003, the Company entered into a three-year employment
agreement with Randall D. Miles, its CEO. The employment agreement provides for
an initial annual salary of $200,000 and may include a bonus. In the event
employment is terminated by the Company without cause, Mr. Miles will be
entitled to a severance payment of 50% of his annual compensation. Mr. Miles is
also entitled to receive, at the Company's expense, continuation of medical,
dental and disability benefits for 6 months following termination without cause.


                                       57
<PAGE>

      In June 2004, the Company entered into new employment agreements with
David Stedman, its President, and Steve Thomson, its CFO. The employment
agreements for Mr. Stedman and Mr. Thomson provided for initial annual salaries
of $150,000 and $135,000, respectively. Each agreement has a term of three years
and provides that the compensation will include a base and may include a bonus.
In the event that employment is terminated by the Company without cause, they
will be entitled to a severance payment of 50% of their annual compensation.
They are also entitled to receive, at the Company's expense, continuation of
medical, dental and disability benefits for 6 months following termination
without cause.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

      The following table sets forth certain information that has been provided
to the Company regarding the beneficial ownership as of December 31, 2005 of the
Company's common stock by (a) each person who is known by the Company to be a
beneficial owner of more than five percent of the outstanding common stock of
the Company, (b) each director of the Company, (c) each of the executive
officers named in the Summary Compensation Table on this Form 10 - KSB, and (d)
all directors and executive officers of the Company as a group.

                                                    Shares (2)       Percent (3)
Name and Address (1)                               Beneficially       of Voting
Of Beneficial Owner                                   Owned           of Shares
-------------------                                   -----           ---------

DIRECTORS AND EXECUTIVE OFFICERS:

John A. McMillan                                  1,908,050 (4)          4.95%
J.C. (Tuck) Marshall                                625,417 (5)          1.61%
Sam Ringer                                        1,898,920 ((6)         4.93%
David Stedman                                     1,219,500 ((7)         3.11%
Steve Thomson                                     1,101,500 (8)          2.84%
Randall D. Miles                                    540,117 (9))         1.39%
Griffith J. Straw                                   209,250 (10)            *
James Russo                                         196,250 (11)            *

All directors and executive officers as
  a group (8 persons)                             7,699,454             18.89%

OTHER BENEFICIAL OWNERS:

Continental Advisors LLC                          2,159,150 (12)         5.61%

* Less than one percent.

(1) Except as noted below, the business address of the directors and executive
officers is 4700-42nd Avenue SW, Suite 430, Seattle, WA 98116.

(2) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
or warrants held by that person that are exercisable within 60 days of December
31, 2005 are deemed outstanding. These shares, however, are not deemed


                                       58
<PAGE>

outstanding for purposes of computing the ownership of any other person. To our
knowledge, except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the stockholders named in the table have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.

(3) Percentage of beneficial ownership is based upon 38,463,823 voting shares of
common stock outstanding as of December 31, 2005.

(4) Includes 62,500 underlying shares of vested stock options.

(5) Includes 395,417 underlying shares of vested stock options.

(6) Includes 25,000 underlying shares of vested stock options.

(7) Includes 719,500 underlying shares of vested stock options.

(8) Includes 305,000 underlying shares of vested stock options.

(9) Includes 416,667 underlying shares of vested stock options.

(10) Includes 209,700 underlying shares of vested stock options.

(11) Includes 156,250 underlying shares of vested stock options.

(12) Continental Advisors LLC and David P. Purcell are deemed the beneficial
owner of the 2,159,150 voting shares because of their shared power to vote and
dispose of those shares. Their address is One North Wacker Drive, Suite 4140,
Chicago, IL 60606.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The following table gives information about equity awards under the
Company's 1998 Plan and the individual equity arrangements as of December 31,
2005.

<TABLE>
<CAPTION>
                                                  (a)                      (b)                       (c)

                                               Number of
                                            securities to be                                 Number of securities
                                              issued upon            Weighted-average        available for future
                                              exercise of           exercise price of       issuance under equity
                                              outstanding              outstanding            compensation plans
                                           options, warrants        options, warrants       [excluding securities
            Plan category                      and rights               and rights         reflected in column (a)]
----------------------------------         -----------------        -----------------      ------------------------
<S>                                               <C>                        <C>                    <C>
Equity compensation plans approved
by security holders (1)                           3,789,867                  $.22                   7,746,311

Equity compensation plans not
approved by security holders                             --                    --                          --
                                           -----------------        -----------------      ------------------------

Total                                             3,789,867                  $.22                   7,746,311
                                           =================        =================      ========================
</TABLE>

(1) The Company maintains the 1998 Stock Option Plan pursuant to which it may
grant options to eligible persons and the 2005 Stock Incentive Plan pursuant to
which it may grant incentive stock options, non-qualified stock options,
restricted stock awards, restricted stock units and stock appreciation rights to
eligible persons.


                                       59
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      On August 15, 2005, we entered into indemnification agreements with each
of our directors and certain of our officers containing provisions that may
require us, among other things, to indemnify our directors and officers against
liabilities that may arise by reason of their status or service as directors and
such officers, and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. The
indemnification agreements provide that LION is not obligated to indemnify the
officers and directors for expenses, liabilities or losses of any type
whatsoever in certain circumstances, including: (i) on account of any suit in
which judgment is rendered against them for an accounting of profits made from
their purchase or sale of securities of LION pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 or similar provisions of
any federal, state or local statutory law; (ii) on account of conduct which is
determined to have been intentional misconduct, a knowing violation of law, or a
transaction from which the illegal benefit was derived; (iii) with respect to
remuneration paid if it shall be determined by a final judgment or other final
adjudication that such remuneration was in violation of law; and (iv) with
respect to proceedings or claims initiated or brought voluntarily by the
director or officer and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under the
indemnification agreement. In addition, LION is not obligated to make indemnity
payments under any of the indemnity agreements if indemnification would not be
lawful, or if a payment is actually made to the director or officer under a D&O
insurance policy.


                                       60
<PAGE>

ITEM 13. EXHIBITS

(a)   EXHIBITS:

      Exhibits are incorporated as part of this Annual Report by reference or
      are filed with this report as indicated below (numbered in accordance with
      Item 601 of Regulation S-B):

2.1   Agreement of Merger, dated October 12, 2004, by and among LION, Inc., LION
      Acq. LLC, Tuttle Risk Management Services Inc., Anthony Berris
      (individually and as the Stockholders' Representative), and Sern
      Clementson, incorporated by reference to the same exhibit number to the
      Company's Form 8-K dated October 18, 2004.

3.3   Articles of Incorporation of LION, Inc., incorporated by reference to
      Exhibit B to the Company's Definitive Proxy Statement dated October 20,
      2000.

3.4   Bylaws of LION, Inc., a Washington corporation, incorporated by reference
      to Exhibit C to the Company's Definitive Proxy Statement dated October 20,
      2000.

4.1   Form of 8% Promissory Note due October 2007, issuable by LION, Inc.,
      incorporated by reference to the same exhibit number to the Company's Form
      8-K dated October 18, 2004.

10.1  1998 Stock Option Plan with Form of Option Agreement, incorporated by
      reference to Registration Statement on Form S-8 filed July 28, 2003 (File
      No. 333-107402).

10.2  2005 Stock Incentive Plan with Form of Stock Option Agreement and Form of
      Restricted Stock Agreement, incorporated by reference to Registration
      Statement on Form S-8 filed August 11, 2005 (File No. 333-127434).

10.6  Office Suite Lease Agreement (Denver Property) dated as of September 19,
      2000, incorporated by reference to the same exhibit number to the
      Company's Form 10 - QSB for the quarter ended September 30, 2000.

10.8  Premises Lease Agreement (Seattle Property) - effective date August 1,
      2001, incorporated by reference to the same exhibit number to the
      Company's Form 10 - QSB for the quarter ended June 30, 2001.

10.9  Employment Agreement - S. Thomson, incorporated by reference to the same
      exhibit number to the Company's Form 10-KSB for the year ended December
      31, 2004.

10.10 Employment Agreement - D. Stedman, incorporated by reference to the same
      exhibit number to the Company's Form 10-KSB for the year ended December
      31, 2004.

10.12 Lease Amendment # 2 (Denver Property) dated as of October 21, 2002,
      incorporated by reference to the same exhibit number to the Company's Form
      10-KSB for the year ended December 31, 2002.

10.13 Asset Purchase Agreement dated December 8, 2003, by and among LION, Inc.,
      Freddie Mac, and Ignition Mortgage Technology Solutions, Inc.,
      incorporated by reference to the Report on Form 8-K filed December 23,
      2003.

10.14 Employment Agreement - Randall D. Miles, incorporated by reference to the
      same exhibit number to the Company's Form 10 - KSB for the year ended
      December 31, 2003.

10.16 Put Agreement, dated October 12, 2004, between LION, Inc. and certain
      stockholders of Tuttle Risk Management Services Inc., incorporated by
      reference as Exhibit 10.1 to the Company's Form 8-K October 18, 2004.

10.17 Secured Notes Agreement, dated October 13, 2004, between Tuttle Risk
      Management Services Inc., the stockholders of Tuttle Risk Management
      Services Inc., LION, Inc., and Anthony Berris, as Stockholders'
      Representative, incorporated by reference as Exhibit 10.2 to the Company's
      Form 8-K dated October 18, 2004.


                                       61
<PAGE>

10.18 Unconditional Guaranty, dated October 13, 2004, by LION, Inc.,
      incorporated by reference as Exhibit 10.3 to the Company's Form 8-K dated
      October 18, 2004.

10.19 Form of Indemnification Agreement, incorporated by reference to the Report
      on Form 8-K filed August 25, 2005.

14.1  Code of Ethics for CEO and Senior Financial Officers, incorporated by
      reference to the same exhibit number to the Company's Form 10 - KSB for
      the year ended December 31, 2003.

21.1  Subsidiaries of LION, Inc.

23.1  Consent of Grant Thornton LLP.

31.1  Certification of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.

31.2  Certification of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.

32.1  Certification by Chief Executive Officer and Chief Financial Officer
      pursuant to Section 906 of the Sarbanes - Oxley Act of 2002


                                       62
<PAGE>

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees paid to Grant Thornton (audit and non-audit)

      The following table presents fees for professional audit services rendered
by Grant Thornton LLP for the audit of our annual financial statements for the
years ended December 31, 2005 and 2004, and the reviews of the financial
statements included in each of our quarterly reports on Form 10-QSB during the
fiscal years ended December 31, 2005 and 2004, and fees billed for other
services rendered by Grant Thornton LLP during those periods.

               Fee Category                            2005              2004
---------------------------------------------      -----------       -----------

Audit fees                                         $   114,457       $    80,260
Audit - related fees                                         -                 -
Tax fees                                                24,769            42,782
All other fees                                          32,407           162,171
                                                   ------------      -----------

                                                   $   171,633       $   285,213
                                                   ============      ===========

AUDIT FEES. Consist of assurance and related services that are reasonably
related to the performance of the audit or review of LION's financial
statements. This category includes fees related to the performance of audits and
attest services not required by statute or regulations, audits of the Company's
stock option plans, additional revenue compliance procedures related to
performance of the review or audit of our financial statements, and accounting
consultations regarding the application of GAAP to proposed transactions.

TAX FEES. Consist of the aggregate fees billed for professional services
rendered by Grant Thornton LLP for tax compliance, tax advice, and tax planning.
These services include preparation of federal and state income tax returns.

ALL OTHER FEES. Fees in 2005 relate to Sarbanes-Oxley Section 404 compliance
work and reviews of various SEC correspondence. Fees in 2004 relate to the
acquisition of the assets of Ignition Mortgage Technology Solutions, Inc.
totaling $53,291 and the acquisition of TRMS totaling $108,880.


                                       63
<PAGE>

                                   SIGNATURES

      In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, Washington, on April 10, 2006.

                                   LION, Inc.
                                   ----------
                                  (Registrant)


                            By: /s/ Randall D. Miles
                                --------------------
                                Randall D. Miles
                                CEO

      In accordance with the requirements of the Exchange Act, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:

       SIGNATURE                          TITLE                        DATE
       ---------                          -----                        ----

/s/ Randall D. Miles         Chairman of the Board and CEO        April 10, 2006
/s/ John A. McMillan         Director                             April 10, 2006
/s/ David Stedman            Director and President               April 10, 2006
/s/ J.C. (Tuck) Marshall     Director                             April 10, 2006
/s/ Griffith J. Straw        Director                             April 10, 2006
/s/ Sam Ringer               Director                             April 10, 2006
/s/ James D. Russo           Director                             April 10, 2006
/s/ Steve Thomson            CFO                                  April 10, 2006
/s/ Chris Johnson            Controller                           April 10, 2006


                                       64
<PAGE>

                                  EXHIBIT INDEX

2.1     Agreement of Merger, dated October 12, 2004, by and among LION, Inc.,
        LION Acq. LLC, Tuttle Risk Management Services Inc., Anthony Berris
        (individually and as the Stockholders' Representative), and Sern
        Clementson, incorporated by reference to the same exhibit number to the
        Company's Form 8-K dated October 18, 2004.

3.3     Articles of Incorporation of LION, Inc., incorporated by reference to
        Exhibit B to the Company's Definitive Proxy Statement dated October 20,
        2000.

3.4     Bylaws of LION, Inc., a Washington corporation, incorporated by
        reference to Exhibit C to the Company's Definitive Proxy Statement dated
        October 20, 2000.

4.1     Form of 8% Promissory Note due October 2007, issuable by LION, Inc.,
        incorporated by reference to the same exhibit number to the Company's
        Form 8-K dated October 18, 2004.

10.1    1998 Stock Option Plan with Form of Option Agreement, incorporated by
        reference to Registration Statement on Form S-8 filed July 28, 2003
        (File No. 333-107402).

10.2    2005 Stock Incentive Plan with Form of Stock Option Agreement and Form
        of Restricted Stock Agreement, incorporated by reference to Registration
        Statement on Form S-8 filed August 11, 2005 (File No. 333-127434).

10.6    Office Suite Lease Agreement (Denver Property) dated as of September 19,
        2000, incorporated by reference to the same exhibit number to the
        Company's Form 10 - QSB for the quarter ended September 30, 2000.

10.8    Premises Lease Agreement (Seattle Property) - effective date August 1,
        2001, incorporated by reference to the same exhibit number to the
        Company's Form 10 - QSB for the quarter ended June 30, 2001.

10.9    Employment Agreement - S. Thomson, incorporated by reference to the same
        exhibit number to the Company's Form 10-KSB for the year ended December
        31, 2004.

10.10   Employment Agreement - D. Stedman, incorporated by reference to the same
        exhibit number to the Company's Form 10-KSB for the year ended December
        31, 2004.

10.12   Lease Amendment # 2 (Denver Property) dated as of October 21, 2002,
        incorporated by reference to the same exhibit number to the Company's
        Form 10-KSB for the year ended December 31, 2002.

10.13   Asset Purchase Agreement dated December 8, 2003, by and among LION,
        Inc., Freddie Mac, and Ignition Mortgage Technology Solutions, Inc.,
        incorporated by reference to the Report on Form 8-K filed December 23,
        2003.

10.14   Employment Agreement - Randall D. Miles, incorporated by reference to
        the same exhibit number to the Company's Form 10 - KSB for the year
        ended December 31, 2003.

10.16   Put Agreement, dated October 12, 2004, between LION, Inc. and certain
        stockholders of Tuttle Risk Management Services Inc., incorporated by
        reference as Exhibit 10.1 to the Company's Form 8-K October 18, 2004.

10.17   Secured Notes Agreement, dated October 13, 2004, between Tuttle Risk
        Management Services Inc., the stockholders of Tuttle Risk Management
        Services Inc., LION, Inc., and Anthony Berris, as Stockholders'
        Representative, incorporated by reference as Exhibit 10.2 to the
        Company's Form 8-K dated October 18, 2004.

10.18   Unconditional Guaranty, dated October 13, 2004, by LION, Inc.,
        incorporated by reference as Exhibit 10.3 to the Company's Form 8-K
        dated October 18, 2004.

10.19   Form of Indemnification Agreement, incorporated by reference to the
        Report on Form 8-K filed August 25, 2005.


                                       65
<PAGE>

14.1    Code of Ethics for CEO and Senior Financial Officers, incorporated by
        reference to the same exhibit number to the Company's Form 10 - KSB for
        the year ended December 31, 2003.

21.1    Subsidiaries of LION, Inc.

23.1    Consent of Grant Thornton LLP.

31.1    Certification of Chief Executive Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.

31.2    Certification of Chief Financial Officer pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002.

32.1    Certification by Chief Executive Officer and Chief Financial Officer
        pursuant to Section 906 of the Sarbanes - Oxley Act of 2002


                                       66