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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10 - QSB


               QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002


                         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)

     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 [ ]

     As of August 6, 2002, approximately 31,336,978 shares of the Company's
common stock were outstanding.
================================================================================
<PAGE>

                                   LION, Inc.
                                  Form 10 - QSB
                       For the Quarter Ended June 30, 2002


                                                                           PAGE
                                                                          NUMBER
                                      INDEX

PART I    FINANCIAL INFORMATION

Item 1    Financial Statements

          Balance Sheets at June 30, 2002 (unaudited) and
            December 31, 2001                                                3

          Statements of Operations for the three and six month periods
            ended June 30, 2002 and 2001 (unaudited)                         4

          Statements of Cash Flows for the six months ended June 30,
            2002 and 2001 (unaudited)                                        5

          Notes to Financial Statements                                      6

Item 2    Management's Discussion and Analysis of Financial
            Condition and Results of Operations                              7

PART II   OTHER INFORMATION

Item 2    Changes in Securities and Use of Proceeds                         20

Item 4    Other Information                                                 21

Item 6    Exhibits and Reports on Form 8 - K                                21

          Signatures                                                        21

                                        2
<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                   LION, Inc.
                                 BALANCE SHEETS

                                     ASSETS
<TABLE><CAPTION>
                                                               June 30,       December 31,
                                                                 2002            2001
                                                             ------------    ------------
                                                              (Unaudited)
CURRENT ASSETS
<S>                                                          <C>             <C>
    Cash and cash equivalents                                $    528,473    $    480,910
    Accounts receivable, less allowance for doubtful
      accounts of $58,000 in 2002 and 2001                        372,687         363,168
    Prepaid expenses and other                                    113,354          72,579
                                                             ------------    ------------

           Total current assets                                 1,014,514         916,657

PROPERTY AND EQUIPMENT - net                                      900,884         875,807

OTHER ASSETS
    Goodwill - net                                                273,955         273,955
    Other assets                                                   33,022          33,022
                                                             ------------    ------------
                                                             $  2,222,375    $  2,099,441
                                                             ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable                                         $    195,293    $    129,240
    Accrued liabilities                                           729,458         327,616
    Deferred revenue                                              283,563         277,449
                                                             ------------    ------------
           Total current liabilities                            1,208,314         734,305

LONG-TERM OBLIGATIONS, less current maturities                     39,441          51,325

COMMITMENTS AND CONTINGENCIES                                        --              --

STOCKHOLDERS' EQUITY
    Preferred stock - authorized, 5,000,000 shares of
      $.001 par value, liquidation value $900,000                   1,500           1,500
    Common stock - authorized, 50,000,000 shares of
      $.001 par value                                              31,301          31,027
    Additional contributed capital                             11,742,887      11,716,622
    Notes receivable from stockholders                            (21,250)        (21,250)
    Accumulated deficit                                       (10,779,818)    (10,414,088)
                                                             ------------    ------------
                                                                  974,620       1,313,811
                                                             ------------    ------------
                                                             $  2,222,375    $  2,099,441
                                                             ============    ============
</TABLE>
        The accompanying notes are an integral part of these statements.

                                        3
<PAGE>

                                   LION, Inc.

                            STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE><CAPTION>
                                       Three months ended June 30,      Six months ended June 30,
                                      ----------------------------    ----------------------------
                                          2002            2001            2002            2001
                                      ------------    ------------    ------------    ------------
                                                       (Restated)                      (Restated)
<S>                                   <C>             <C>             <C>             <C>
Revenues                              $  1,606,313    $  1,563,196    $  3,117,276    $  3,054,331

Expenses
    Direct costs                           236,620         260,887         455,970         521,065
    Selling and marketing                  435,045         450,340         917,069         920,665
    General and administrative             703,345         619,317       1,341,982       1,229,773
    Research and development                81,394          45,737         171,199         103,863
    Depreciation and amortization          123,002         121,803         242,684         246,533
                                      ------------    ------------    ------------    ------------
                                         1,579,406       1,498,084       3,128,904       3,021,899
                                      ------------    ------------    ------------    ------------

           Operating income (loss)          26,907          65,112         (11,628)         32,432

Other income (expense)
    Interest expense                        (2,876)           (669)         (6,078)         (1,315)
    Interest income                            895           1,223           1,736           1,367
    Other income                               240            --               240           5,740
    Other expense                         (350,000)         (1,823)       (350,000)         (2,541)
                                      ------------    ------------    ------------    ------------
           NET INCOME (LOSS)          $   (324,834)   $     63,843    $   (365,730)   $     35,683
                                      ============    ============    ============    ============

Net income (loss) per common share,
      basic and diluted               $       (.01)   $       --      $       (.01)   $       --
                                      ============    ============    ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        4
<PAGE>

                                   LION, Inc.

                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE><CAPTION>
                                                               Six months ended June 30,
                                                             ----------------------------
                                                                 2002            2001
                                                             ------------    ------------
Cash flows from operating activities                                          (Restated)
<S>                                                          <C>             <C>
  Net income (loss)                                          $   (365,730)   $     35,683
  Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities
      Depreciation and amortization                               242,684         246,533
      Write off of capitalized software development costs          10,469             --
      Stock options issued for services received                    5,265          11,970
      Common stock issued in lieu of cash compensation             20,374          13,500
      Changes in assets and liabilities
        Accounts receivable                                        (9,519)         37,557
        Prepaid expenses and other                                (40,775)        (69,848)
        Accounts payable                                           66,053         (82,451)
        Accrued liabilities                                       431,146         (12,429)
        Deferred revenue                                            6,114         (33,580)
                                                             ------------    ------------
          Net cash provided by operating activities               366,081         146,935

Cash flows from investing activities
  Capitalized software development costs                         (189,218)       (122,481)
  Purchase of property and equipment                              (89,012)        (17,241)
                                                             ------------    ------------

          Net cash used in investing activities                  (278,230)       (139,722)

Cash flows from financing activities
  Payments on notes payable and long-term obligations             (41,188)            --
  Proceeds from issuance of common stock and exercise of
    stock options                                                     900         177,550
                                                             ------------    ------------

          Net cash (used in) provided by financing activities     (40,288)        177,550
                                                             ------------    ------------

Net increase in cash and cash equivalents                          47,563         184,763

Cash and cash equivalents at beginning of period                  480,910         117,254
                                                             ------------    ------------

Cash and cash equivalents at end of period                   $    528,473    $    302,017
                                                             ============    ============

Supplemental non-cash investing and financing activities:

  Common stock returned for cancellation of
    notes receivable                                         $        --     $    728,750
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        5
<PAGE>

                                   LION, Inc.

                                  Form 10 - QSB

                          NOTES TO FINANCIAL STATEMENTS

NOTE 1. FINANCIAL STATEMENTS

     The unaudited financial statements and related notes are presented as
permitted by Form 10 - QSB, and do not contain certain information included in
the Company's audited financial statements and notes for the fiscal year ended
December 31, 2001. The information furnished reflects, in the opinion of
management, all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the results of the interim periods presented. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the entire fiscal year ending December 31, 2002.
The accompanying unaudited financial statements and related notes should be read
in conjunction with the audited financial statements and the Form 10 - KSB of
LION, Inc. and notes thereto, for its fiscal year ended December 31, 2001.


NOTE 2. LOSS PER SHARE

     Basic net income (loss) per common share is based on the income available
to common stockholders compared to the average number of shares outstanding
during each period. The weighted average number of common shares outstanding
were 31,090,807 and 30,458,654 for the six months ended June 30, 2002 and 2001,
respectively, and 31,125,374 and 31,021,978 for the three months ended June 30,
2002 and 2001, respectively. The computation for net income (loss) per common
share assuming dilution for the six and three months ended June 30, 2002 and
2001 was anti-dilutive, and therefore, is not included.


NOTE 3. CONTINGENCIES

     A jury trial was completed on May 31, 2002, in a matter initiated by Billy
Anders, a former director of LION (BILLY R. ANDERS V. PLENUM COMMUNICATIONS,
INC, A MINNESOTA CORPORATION, ALLEN RINGER, AND THE MARITAL COMMUNITY OF ALLEN
RINGER AND JANE DOE RINGER filed in the Spokane County Superior Court, Case No.
00-207342-3). Prior to the conclusion of the trial, Mr. Anders' claims of
negligent misrepresentation and racial discrimination on the basis of disparate
treatment and retaliation were dismissed. In addition, the Company's
counterclaims against Mr. Anders were also dismissed. The jury found there was a
breach of an oral contract and an intentional misrepresentation made to Mr.
Anders by Allen Ringer, the former President acting on behalf of the Company,
and awarded plaintiff $357,000 in damages. The judgment, which was recorded in
Other Expense in the second quarter of 2002, was settled in lieu of an appeal
for a payment totaling $340,000 in early July 2002. The Company is currently
pursuing reimbursement from its insurance carriers for coverage on the judgment
and its defense costs as incurred. If negotiations fail, the Company is
reviewing a separate action seeking coverage by its insurance carriers.

     The Company has received notification from an organization representing
certain members of the software industry regarding the presence of unlicensed
software products at the Company. The Company conducted a voluntary audit and
corrective actions were taken. This organization has made

                                        6
<PAGE>

a demand from the Company for compensation of past infringements and penalties
in the amount of $165,000. The Company is currently in negotiation with this
organization and believes that the liability, if any, will be substantially less
than the amount claimed by them. Accordingly, a counter-offer totaling $10,000
was made by the Company in June 2002 covering statutory damages for non-willful
infringement and reasonable attorneys' fees. The counter-offer has been accrued
in Other Expense in the second quarter of 2002.

     In addition to these matters, 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.


NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."

     This Statement improves financial reporting by requiring that a liability
for a cost associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is incurred. The
accounting for similar events and circumstances will be the same, thereby
improving the comparability and representational faithfulness of reported
financial information. The Company believes the adoption of SFAS 146 will have
no impact on its financial statements.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION.

     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes included elsewhere in this document.

     IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION AND
ANALYSIS OF MANAGEMENT CONTAINS FORWARD-LOOKING STATEMENTS. ALL STATEMENTS THAT
LOOK FORWARD IN TIME OR INCLUDE ANYTHING OTHER THAN STATEMENTS OF HISTORICAL
FACT ARE FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS, INCLUDING BUT NOT LIMITED TO: SUBSTANTIAL DEPENDENCE ON MORTGAGE
BROKERS AND THE MORTGAGE BROKER INDUSTRY; MORTGAGE MARKET TRENDS; INTEREST RATE
CHANGES; HOUSING AND CONSUMER TRENDS EFFECTING HOME PURCHASES; THE EFFECTIVENESS
OF OUR JOINT-MARKETING AND SALES AGREEMENTS; OUR NEED FOR ADDITIONAL FINANCING;
OUR ABILITY TO ATTRACT AND RETAIN HIGH QUALITY EMPLOYEES; CHANGES IN THE OVERALL
ECONOMY AND IN INTERNET TECHNOLOGY; THE NUMBER AND SIZE OF OUR INTERNET
COMPETITORS, AND OTHER RISKS FACED BY US DESCRIBED BELOW IN THE SECTION ENTITLED
"RISK FACTORS" AND ELSEWHERE IN THIS REPORT, AND IN OTHER DOCUMENTS WE FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION. YOU SHOULD NOT PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH ARE BASED ON INFORMATION AVAILABLE TO
THE COMPANY AS OF THE DATE OF THIS REPORT AND WHICH REFLECT MANAGEMENT'S
OPINIONS ONLY. LION UNDERTAKES NO OBLIGATION TO REVISE OR PUBLICLY RELEASE THE
RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS.

                                        7
<PAGE>

OVERVIEW

     LION is a leader in online services for connecting mortgage brokers with
consumers, wholesale lenders, and industry vendors. The Company delivers tools
that attract, capture, and service business for the originator. These tools help
them serve their customers through an efficient and powerful online system that
includes web marketing, wholesale lender connectivity, automated underwriting
systems, and industry vendor links.

     With one of the largest interest rate pricing databases, strong mortgage
broker penetration, and extensive consumer reach, LION is positioned to become a
key player in an integrated mortgage network that connects mortgage brokers,
wholesale lenders, and consumers.


LION PRODUCTS AND SERVICES AND RELATED REVENUES

     LION currently generates revenues through primarily three distinct
categories with a majority of the underlying customer base being comprised of
mortgage brokers/originators, lenders or a combination of both. The categories
are membership, marketing, and technology and are described below.

     MEMBERSHIP FEES. Membership fees come from LION's subscription-based
products and services. They are LION Pro, Mortgage 101 and Free Dot Com.

     First, LION Pro consists of LION Loan Search, LoanLink, News Now and
Ratesheets on Demand. Through this product, we provide wholesale mortgage rate,
fee, and program information through our LION Pro information service to over
4,400 mortgage brokers nationwide. LION Loan Search provides the key feature to
this password-protected service by allowing easy access to our extensive lender
database. This database is updated daily in 77 regions in the country for 86
participating lenders. The database is comprised of nearly 25,000 loan programs
and 17,000,000 pricing variations. During the last half of 2002, the Company
will be enhancing this core online service for brokers. This will be done
through the use of productivity tools offering multi-user agreements combined
with a private database that incorporates the brokers' lenders, new loan program
search parameters and other management tools. Four large companies have signed
multi-user agreements so far in 2002, which could bring over 1,000 new broker
members and over 60 new wholesale lenders into the LION marketplace. Nearly
13,000 new loan programs have already been added to the private databases. To
enable brokers to receive loan decisions from their private databases, the
Company is also in the process of interfacing with various online decision
engines connected to the lending source.

     The second product in the membership category is Mortgage 101, consisting
of hundreds of mortgage information pages, interactive calculators, live
interest rates displayed from LION's Multi-Lender Rate Feed, prequalification
and application tools, and back-end rate and lead management tools. This service
is provided to over 2,800 mortgage brokers nationwide.

                                        8
<PAGE>

     Finally, Free Mortgage Dot Com is a template web site using Mortgage101
technology with the mortgage originators' logo and colors delivered with no set
up fees and free one-year domain name registration. There are approximately
1,100 mortgage brokers using this template web site.

     MARKETING FEES. Marketing fees are generated through LION's marketplace web
sites, LionInc.com and Mortgage101.com. Consumers visiting the Mortgage101.com
web site check live interest rates, use pre-qualification tools, and submit
"1003" loan applications to LION's network of advertisers. Originator
advertisers pay marketing fees for ad banners, web site promotion, and lead
generation. Originators visit the LionInc.com web site to check daily wholesale
rates, submit loans, and access mortgage specific news and content. Wholesale
lenders and industry vendors pay marketing fees for ad banners, web site
promotion, and lead generation. Traffic approximating 750,000 unique visitors a
month and at times reaching 900,000 to 1,000,000 unique visitors is fed by (i)
over 13,000 co-branded electronic mortgage centers that have been established
for realtors, real estate offices, relocation sites, associations, and city
portals, and (ii) over 6,600 brokers that have various LION membership services,
have their web sites hosted by LION, or both. The Company continues to work on a
new lead generation system based on advanced filtering and routing logic. The
Company is also considering collaboration with a potential alliance partner
which could bring this more refined lead generation service to market sooner.

     Effective May 6, 2002, LION announced the signing of a strategic alliance
with IMX, Inc. that incorporates IMX Exchange(R) technology and its
participating lenders and brokers into the LION marketplace. IMX Exchange(R) is
a robust loan program and price discovery engine that provides online rate lock
and file submission between mortgage brokers and wholesale lenders. This
addition to LION's large loan database and search engine provides greater
information, access and functionality to LION's member brokers. IMX employs
LION's established distribution channels, client service and online marketplace
to support and market to the approximately 2,800 broker companies that currently
use IMX Exchange(R). LION offers the IMX broker approval, online loan program
and product discovery, real-time pricing engine and lock process to LION's
member brokers, as well as introduces the IMX technology to its network of
active wholesale lenders.

     TECHNOLOGY FEES. Technology fees are related to (i) mortgage originator and
(ii) wholesale and/or retail lender web site development and hosting. For the
mortgage originator, we provide web site technology, content and design that
include news, articles, and calculators to deliver valuable information to the
user. These web sites are both template-driven and customer design solutions
that deliver a combination of standard and custom content. For the wholesale
and/or retail lender, LION has developed technology under the LoanCAT brand.
This technology allows lenders to electronically submit rate pricing and receive
rate lock requests and "1003" loan application files.


RESULTS OF OPERATIONS

     The net loss for the six-month period in 2002, which included a one-time
settlement charge of $340,000 related to the judgment from the Billy Anders
trial, was $366,000 compared to net income of $36,000 for the same period in the
prior year. Excluding the judgment and related legal expenses, LION would have
reported net income of approximately $268,000 for the six-month period ended
June 30, 2002 compared to net income of $51,000 for the same period in the prior
year.

                                        9
<PAGE>

     The net loss for the quarter was $325,000 as compared to net income of
$64,000 for the same quarter in the prior year. Excluding the judgment and
related legal expenses, LION would have reported net income of approximately
$182,000 for the second quarter of 2002 compared to net income of $73,000 for
the second quarter of 2001.

     The Company implemented SFAS No. 142 during the first quarter of 2002 which
eliminates the amortization of goodwill. Amortization expense totaling $56,680
and $28,340 was included in the operating results for the six and three month
periods ended June 30, 2001. No amortization expense of goodwill has been
recorded in 2002.

     We continue to focus on improving our core business. We are encouraged by
our progress in the first half of 2002 and the positive reaction from both
brokers and lenders to our new service offerings. In coming periods, we
anticipate increased adoption of our services by mortgage brokers, lenders and
consumers and improvement in our operating performance.


REVENUES

SIX MONTHS ENDED JUNE 30, 2002:

     Revenues increased to $3,117,276 from $3,054,331 for the six months ended
June 30, 2002 and 2001, respectively. This represents an increase of $62,945 or
2%. Total revenues of $3,117,276 for the six months ended June 30, 2002 were
comprised of mortgage broker fees of $2,622,389 or 84% and lender fees of
$494,887 or 16%. Total revenues of $3,054,331 for the six months ended June 30,
2001 were comprised of mortgage broker fees of $2,369,679 or 78% and lender fees
of $684,652 or 22%.

     Fees from mortgage brokers increased to $2,622,389 from $2,369,679 for the
six months ended June 30, 2002 and 2001, respectively. This represents an
increase of $252,710 or 11%. The increase was due to growth in membership fees
(LION Pro, Mortgage 101 and Free Dot Com) totaling $22,285, marketing fees (lead
generation and advertising) totaling $140,143, and technology fees (website
development and hosting) totaling $92,598 which were offset by a reduction in
transaction fee income totaling $2,316.

     Fees from lenders decreased to $494,887 from $684,652 for 2002 and 2001,
respectively. This represents a decrease of $189,765 or 28%. The decrease was
primarily due to decreases in marketing fees (lead generation and advertising)
totaling $57,322, technology fees (website development and hosting) totaling
$123,188 and transaction fees (automated underwriting and other) totaling
$9,255.

THREE MONTHS ENDED JUNE 30, 2002:

     Revenues increased to $1,606,313 from $1,563,196 for the three months ended
June 30, 2002 and 2001, respectively. This represents an increase of $43,117 or
3%. Total revenues of $1,606,313 for the three months ended June 30, 2002 were
comprised of mortgage broker fees of $1,347,661 or 84% and lender fees of
$258,652 or 16%. Total revenues of $1,563,196 for the three months ended June
30, 2001 were comprised of mortgage broker fees of $1,229,694 or 79% and lender
fees of $333,502 or 21%.

     Fees from mortgage brokers increased to $1,347,661 from $1,229,694 for the
three months ended June 30, 2002 and 2001, respectively. This represents an
increase of $117,967 or 10%. The increase was primarily due to growth in
membership fees (LION Pro, Mortgage 101 and Free Dot

                                       10
<PAGE>

Com) totaling $20,746, marketing fees (lead generation and advertising) totaling
$69,604, and technology fees (website development and hosting) totaling $27,415.
The amount of and change in broker transactions fees totaling $202 was
insignificant.

     Fees from lenders decreased to $258,652 from $333,502 for the three months
ended June 30, 2002 and 2001, respectively. This represents a decrease of
$74,850 or 22%. The decrease was primarily due to decreases in marketing fees
(lead generation and advertising) totaling $11,879 technology fees (website
development and hosting) totaling $60,446 and transaction fees (automated
underwriting and other) totaling $2,525.


DIRECT COSTS

     Direct costs are comprised primarily of web site development, technology
infrastructure support, project management, quality control, and salaries
related to the daily updates to rates, fees, and other loan program information
in the mortgage lender database. Direct costs decreased to $455,970 from
$521,065 for the six months ended June 30, 2002 and 2001, respectively. This
represents a decrease of $65,095 or 13%. Direct costs as a percentage of
revenues decreased to 15% from 17% for 2002 and 2001, respectively. The decrease
is due to (i) LoanCat projects not requiring the same level of fulfillment
resources in the first six months of 2002 as compared to the same period in the
prior year and (ii) the redeployment of infrastructure resources beginning in
the fourth quarter of 2001 to research and development efforts on new product
initiatives. This decrease was offset by an increase in project management and
quality control functions throughout the Company.

     Direct costs decreased to $236,620 from $260,887 for the three months ended
June 30, 2002 and 2001, respectively. This represents a decrease of $24,267 or
9%. Direct costs as a percentage of revenues decreased to 15% from 17% for 2002
and 2001, respectively. The decrease is due to (i) LoanCat projects not
requiring the same level of fulfillment resources for the three months ended
June 30, 2002 as compared to the same period in the prior year and (ii) the
redeployment of infrastructure resources beginning in the fourth quarter of 2001
to research and development efforts on new product initiatives.


SELLING AND MARKETING

     Marketing and selling expenses are comprised of marketing and advertising
costs, sales salaries and related support costs. Marketing and selling expenses
decreased to $917,069 from $920,665 for the six months ended June 30, 2002 and
2001, respectively. This represents a decrease of $3,596 or less than 1%. These
expenses as a percentage of revenues were 29% and 30% for the six months ended
June 30, 2002 and 2001, respectively. The slight decrease is due to a reduction
in marketing salaries and occupancy costs which were offset by increases in
incentive programs for the Company's sales team and customer support efforts and
the purchase of advertising for lead generation, both of which are directly
related to the increase in revenues noted above.

     Marketing and selling expenses decreased to $435,045 from $450,340 for the
three months ended June 30, 2002 and 2001, respectively. This represents a
decrease of $15,295 or 3%. These expenses as a percentage of revenues were 27%
and 29% for the three months ended June 30, 2002 and 2001, respectively. The
decrease is due to the same reason as noted in the paragraph above for the six
month period.

                                       11
<PAGE>

GENERAL AND ADMINISTRATIVE

     General and administrative expenses are comprised of management and
administrative salaries and related costs, legal and audit fees, outside
consulting services, telecommunications expenses, occupancy costs, and other
administrative related expenses. General and administrative expenses increased
to $1,341,982 from $1,229,773 for the six months ended June 30, 2002 and 2001,
respectively. This represents an increase of $112,209 or 9%. General and
administrative expenses as a percentage of revenues were 43% and 40% for the six
months ended June 30, 2002 and 2001, respectively. The increase in costs was due
primarily to legal fees related to the Billy Anders lawsuit which were offset by
a reduction in rent expense due to the move to the new corporate headquarters in
Seattle from Renton, telephone costs due to beneficial contract changes and bad
debt expense due to improved customer service and sales processes.

     General and administrative expenses increased to $703,345 from $619,317 for
the three months ended June 30, 2002 and 2001, respectively. This represents an
increase of $84,028 or 14%. General and administrative expenses as a percentage
of revenues were 44% and 40% for the three months ended June 30, 2002 and 2001,
respectively. The increase in costs was due primarily to legal fees related to
the Billy Anders lawsuit which were offset by a reduction in rent expense due to
the move to the new corporate headquarters in Seattle from Renton and telephone
costs due to beneficial contract changes.


RESEARCH AND DEVELOPMENT

     Research and development expenses are comprised primarily of engineering
salaries and related costs. Research and development expenses increased to
$171,199 from $103,863 for the six months ended June 30, 2002 and 2001,
respectively. This represents an increase of $67,336 or 65%. Research and
development expenses as a percentage of revenues increased to 5% from 3% for the
six months ended June 30, 2002 and 2001, respectively. The increase is primarily
due to the reallocation of fulfillment and infrastructure personnel to the
research and development function to work on three major initiatives for 2002;
enhancement of core online services for brokers, the conversion of consumer
traffic into high-value business generation, and new online management tools for
lenders.

     Research and development expenses increased to $81,394 from $45,737 for the
three months ended June 30, 2002 and 2001, respectively. This represents an
increase of $35,657 or 78%. Research and development expenses as a percentage of
revenues increased to 5% from 3% for the three months ended June 30, 2002 and
2001, respectively. The increase is primarily due to the same reasons as noted
in the paragraph above for the six month period.


DEPRECIATION AND AMORTIZATION

     Depreciation and amortization expense decreased to $242,684 from $246,533
for the six months ended June 30, 2002 and 2001, respectively. This represents a
decrease of $3,849 or 2%. The decrease was due to the implementation of SFAS No.
142 during the first quarter of 2002 which eliminates the amortization of
goodwill beginning the first quarter of 2002. Amortization during the six months
ended June 30, 2001 that did not recur in the same period in 2002 amounted to
$56,680. This reduction was offset by additional depreciation on new fixed asset
additions and amortization of internally developed software.

                                       12
<PAGE>

     Depreciation and amortization expense increased to $123,002 from $121,803
for the three months ended June 30, 2002 and 2001, respectively. This represents
an increase of $1,199 or 1%. The increase was due to the addition of new fixed
assets and internally developed software. This increase was offset by the
implementation of SFAS No. 142 which eliminates the amortization of goodwill.
Amortization during the second quarter of 2001 that did not recur in the same
period in 2002 amounted to $28,340.


OTHER EXPENSE

     Other expense increased to $350,000 from $2,541 and $1,823 for both the six
and three month periods ended June 30, 2002 and 2001, respectively. The increase
is primarily due to the $340,000 settlement related to the judgment awarded in
the Billy Anders jury trial.


LIQUIDITY AND CAPITAL RESOURCES

RESULTS FOR SIX MONTHS ENDED JUNE 30, 2002:

     During the first six months of 2002, the Company primarily funded its
activities through operations. Improving sales allowed the Company to grow its
cash reserves compared to the end of 2001. At June 30, 2002, we had
approximately $528,000 in cash and cash equivalents.

     During the six months ended June 30, 2002, operating activities provided
net cash of $366,081 compared to $146,935 for the same period in the prior year.
The net cash provided in operating activities for the six months ended June 30,
2002 was primarily attributable to (i) revenue growth, primarily from our
mortgage broker customers, (ii) improved bad debt experience, (iii) a reduction
in occupancy costs and other related costs due to moving the company
headquarters to a smaller, more efficient location in Seattle, (iv) a reduction
in telephone costs due to beneficial contract changes and (v) an increase in
other liabilities by $340,0000 related to the judgment on the Billy Anders
trial. The increase was offset by the funding of legal expenses related to the
Billy Anders trial. The net cash provided in operating activities for the six
months ended June 30, 2001, was primarily attributable to efficiencies gained
from (i) the merger of the parent and subsidiary companies, (ii) the closure of
the Spokane sales office (iii) the consolidation of all originator sales
functions in the Denver sales office and (iv) the reorganization of the
engineering department. These cost savings were offset by payments on accounts
payable.

     During the six months ended June 30, 2002, we used net cash of $278,230 for
our investing activities which was primarily for (i) the capitalized portion of
software development costs related to the Company's three initiatives;
enhancement of core online services for brokers, the conversion of consumer
traffic into high-value business generation, and new online management tools for
lenders and (ii) upgrades to hardware and software for the data center that
delivers the Company's products and services. During the six months ended June
30, 2001, we used net cash of $139,722 for our investing activities which was
primarily for the capitalized portion of our software development costs related
to (i) our migration to a new data base platform, (ii) additional solutions to
automated underwriting submissions, and (iii) upgrades to internal reporting
systems.

                                       13
<PAGE>

     During the six months ended June 30, 2002, the net use of cash for
financing activities was $40,288. Cash used was primarily related to notes
payable on the acquisition of application and database software for the
Company's data center. During the six months ended June 30, 2001, net cash
proceeds from financing activities were $177,550. Proceeds received from
financing activities were primarily the result of a private placement of the
Company's common stock totaling $175,000.


2002 PLANS:

     The Company is continuing to implement its business plan which includes
enhancing its existing core products and services to mortgage originators and
lenders and its three major initiatives for revenue growth. The Company is also
continuing to explore partnerships with leading industry players that may
accelerate delivery of these services. Progress on the initiatives is as
follows:

     1.    Launch new online management tools for lenders. LION developed
           technology under the LoanCAT brand in 2001 that allows lenders to
           electronically process rate pricing, rate lock requests, and "1003"
           loan application files. In addition, effective May 6, 2002, the
           Company announced the signing of a strategic alliance with IMX, Inc.
           that incorporates IMX Exchange(R) technology and its participating
           lenders and brokers into the LION marketplace. This alliance should
           begin contributing to LION's marketing revenue beginning the third
           quarter of 2002 with related cash inflow beginning in the fourth
           quarter of 2002.

     2.    Enhance core online services for brokers. The Company has begun to
           offer its broker productivity tools through multi-user agreements
           that incorporate the brokers' lenders, new loan program search
           parameters and other management tools. Four mortgage companies have
           signed multi-user agreements so far in 2002, which could bring over
           1,000 new broker members and over 60 new wholesale lenders into the
           LION marketplace. So far, nearly 13,000 new loan programs have been
           added to the private databases. To enable brokers to receive loan
           decisions from their private databases, the Company is also
           investigating several online decision engines that can be connected
           to the lending source. Revenue is not anticipated from these
           multi-user agreements until sometime during the fourth quarter of
           2002.

     3.    The conversion of consumer traffic into high-value business
           generation. LION saw an increase in consumer leads and originator
           advertising revenue on its consumer portal, Mortgage101.com, in the
           first half of 2002. This is due to lower interest rates and increased
           realtor traffic generated through 13,000 realtor sites. The Company
           continues to work on its lead generation system to improve both the
           quality and quantity of the consumer inquiries generated for its
           advertisers.

     To ensure operational success of these initiatives, the Company expects to
make greater investments in marketing, personnel, and professional services in
coming periods. While it was anticipated that the first half of 2002 would not
be profitable, sustained quarterly profitability is anticipated beginning the
second half of 2002. Management believes that working capital from operations
will be adequate to fund its initiatives.

     If there is improvement in the capital markets and/or there is an increase
in the Company's stock price, the Company will pursue additional equity funding.
The Company believes it has a number of accredited investors who are friends of
the Company who would participate in private placements. This would allow the
Company to complete its initiatives more quickly and be more aggressive in
pursuing potential alliances throughout 2002 and beyond.

                                       14
<PAGE>

RISK FACTORS

     Set forth below and elsewhere in this Quarterly Report and in the other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the
forward-looking statements contained in this Quarterly Report. You should
carefully consider the risks before you decide to buy shares of our common
stock. If any of the following risks actually occur, our business, results of
operations or financial condition would likely suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of the
money you paid to buy our stock.

WE HAVE NO HISTORY OF SUSTAINED 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 sustained profitability and took several
important steps during 2001 by merging our subsidiary with LION, reorganizing
our senior management team, and consolidating our originator sales and service
operations. During the first six months of 2002, we moved forward with our three
major initiatives; enhancement of core online services for brokers, the
conversion of consumer traffic into high-value business generation, and new
online management tools for lenders. Annual revenues have remained flat at
$6,010,604 and $6,115,316 for 2001 and 2000, respectively. Revenues for the six
month period ended June 30, 2002 increased to $3,117,276 compared to $3,054,331
for the same period in the prior year. The growth has come primarily from
improvements to existing core products and services. The potential growth in
revenues related to our three new initiatives will not begin to occur until the
last half of 2002.

     We did achieve profitability for the second and third quarters of 2001, and
net income for the year was $41,568 in 2001 compared to a net loss of $1,243,290
for 2000. The loss for first quarter 2002 totaling $40,896 was anticipated and
the loss for second quarter was $324,834 which included the unanticipated Anders
settlement totaling $340,000. We anticipate profitability in the last half of
2002. Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new and rapidly evolving
markets, including uncertainty of revenues, markets, profitability and the need
to raise capital to fund our ongoing operations. 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, the 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 risk factors set forth below.

WE WILL NEED ADDITIONAL FINANCING; CURRENT FUNDS ARE INSUFFICIENT TO FINANCE OUR
PLANS FOR GROWTH AND OUR OPERATIONS AT THE "DESIRED" RAPID PACE; WE COULD BE
REQUIRED TO CUT BACK OR STOP OPERATIONS IF WE ARE UNABLE TO RAISE OR OBTAIN
NEEDED FUNDING.

     Our existing working capital is not sufficient to allow us to execute our
business plan as fast as we would like. We are planning to fund the development
and implementation of our three initiatives for 2002 (focusing on the originator
office rather than the single broker, qualifying leads for brokers and building
connectivity between the lender and the broker) through funds generated from the
Company operations.

     While the Company did grow its cash reserves during the first and second
quarters of 2002, it had to pay out $340,000 in early July 2002 related to the
judgment on the Anders lawsuit. We will be able to continue growing our cash
reserves and funding the development and implementation of our plans through
operations, but additional resources are needed to grow at the desired pace. If

                                       15
<PAGE>

we are unable to obtain adequate capital financing through equity or other
financings, we may not be able to successfully implement our short-term or
long-term plans for expansion or to meet our working capital requirements.
However, even if we succeed in our business plans, we may experience rapid
growth requiring additional funds to expand our operations and organization.

     We do not have current commitments for financing sufficient to fund our
expansion and marketing plans at our desired pace. In order to provide adequate
working capital, we intend to explore a number of options to secure financing.
We might not succeed, however, in raising equity capital or in negotiating and
obtaining additional and acceptable financing when we need it. Our ability to
obtain additional capital may depend on market conditions (including the market
for Internet stocks), national and global economies and other factors beyond our
control. If adequate capital were not available or were not available on
acceptable terms at a time when we needed it, our ability to execute our
business plans, develop or enhance our services or respond to competitive
pressures would be significantly impaired.

WE ARE SUBSTANTIALLY DEPENDENT ON MORTGAGE BROKERS AND THE MORTGAGE BROKER
INDUSTRY.

     LION's most critical customer continues to be the mortgage broker. Mortgage
broker fees comprised of memberships, website services, lead generation and ad
banners comprised 84% of our total revenues during the first six months of 2002
with this percentage anticipated to grow throughout the remainder of the year.
Customer agreements are short-term and renewable. There can be no assurance that
these subscribers will continue to participate in the LION programs, or that we
will be able to attract new mortgage brokers at rates sufficient to maintain a
stable or growing revenue base. We cannot assure you that the market for our
products and services will continue to develop as expected. If the mortgage
broker market develops more slowly than expected or becomes saturated with
competitors, or if our products and services do not continue to achieve market
acceptance, our business operating results and financial conditions may be
materially adversely affected.

     During the last 15 years, the mortgage brokerage industry has grown from
infancy to capturing a significant portion of the mortgage origination market,
and the current trend shows continued gains. While there are no clear threats
that would cause one to conclude today that the industry will not continue to
thrive, the health of the industry is important to LION's future, and there are
potential risks. These include potential lawsuits over broker and wholesale
lender compensation systems, increased regulation that may add costs or limit
profitability, and possible changes in how consumers obtain mortgages, possibly
driven by technology or by efforts to standardize and automate the mortgage
process. In addition, the overall volume of business is directly related to
interest rates and overall economic conditions. Recessionary economic conditions
or a rise in interest rates may adversely affect the ability of prospective
consumers to obtain financing required for construction and refinance. Any of
these may reduce the overall share of the market handled by mortgage brokers,
which could materially adversely affect our business.

WE WILL DEPEND ON THE CONTINUED UTILITY OF THE INTERNET AND MAY HAVE DIFFICULTY
ACCOMMODATING TECHNOLOGY ADVANCES.

     The performance of our web site will continue to be dependent on the
successful operation of the Internet and on certain third parties and services
(such as Internet service providers, Internet backbone providers and Web
browsers). Our Internet services will be designed around certain technology
standards. Current and future success of our services may become subject to
additional industry standards as Internet commerce rapidly evolves. As a result
our business may incur additional costs of unknown proportions as we are
confronted with new technology standards. In

                                       16
<PAGE>

addition, we may not be successful in our efforts to enhance existing services
and to develop, introduce and market new services. Furthermore, our enhancements
and new services may not adequately meet the requirements of the marketplace and
achieve market acceptance. As the Internet develops, it is possible that
incompatibility or lack of appropriate features could impact our business. In
addition, the widespread adoption of new Internet or telecommunications
technologies or standards could require us to make substantial expenditures to
modify or adapt our services. In this case, the new Internet or
telecommunications services or enhancements that we offer could contain design
flaws or other defects. Although we expect to be responsive to changes in the
Internet and technology, we may not be successful in achieving widespread
acceptance of our services before competitors offer services with speed and
performance equal to or greater than ours.

     Much of the architecture that we employ was designed for our original
business model. In the future, we may be required to make significant changes to
our architecture, including moving to a completely new architecture. If we are
required to switch architectures, we may incur substantial costs and experience
delays or interruptions in our service. If we experience delays or interruptions
in our service due to inadequacies in our current architecture or as a result of
a change in architectures, users may become dissatisfied with our service and
move to competing providers of online services. Further, to the extent that
demand for our services increases, we will need to expand our infrastructure,
including the capacity of our hardware servers and the sophistication of our
software. This expansion is likely to be expensive, complex, and require
additional technical expertise. Any loss of traffic, increased costs,
inefficiencies or failures to adapt to new technologies and the associated
adjustments to our architecture would have a material adverse effect on our
business.


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 and its operations. With respect to our proprietary software, while backup
has been provided by the other full-time company engineers, currently there are
portions of the database management and development that rely solely on Sam
Ringer who is a co-author of the LION Pro software. We are continuing to create
the engineering redundancy that will reduce the reliance on this individual, but
have not completed this task. Furthermore, we have not entered into employment
agreements with these significant employees except for our CEO/President and
Chief Financial Officer. 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, which
currently serve to retain and motivate key employees as they become vested in
their initial stock option grants. While management personnel are typically
granted additional stock options, which will usually vest over a period of four
years, subsequent to their hire date to provide additional incentive to remain
at LION, the initial option grant is typically the largest and an employee may
be more likely to leave our employ upon completion of the vesting period for the
initial option grant. 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.

                                       17
<PAGE>

OUR OPERATIONS MAY BE VULNERABLE TO DISRUPTION PROBLEMS.

     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 PCs. 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. In
addition, the majority of our network infrastructure is located in Seattle,
Washington, an area susceptible to earthquakes. The prospect of such unscheduled
interruptions is quite possible in the foreseeable future, and we are unable to
predict either their occurrence, duration or cessation. We do not have multiple
site capacity for all of our services in the event of any such occurrence.

     Despite the implementation of security measures, 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.

WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR DESIRED GROWTH, WHICH COULD
ULTIMATELY STRAIN OUR FINANCIAL, PERSONNEL AND TECHNICAL RESOURCES.

     We intend to expand our level of operations and will need an effective
planning and management process to implement our business plan successfully.
Depending on the amount and timing of any increase in business, this expansion
could place a strain on our management, operational, software and financial
resources. Some areas that could be put under strain by growth include
marketing, customer support, customer billing and web site support and
maintenance. To accommodate growth, if any, we may be required to implement and
improve our management, operating and financial systems, procedures and controls
on a timely basis and to expand, train, motivate and manage our employees. There
is a risk, however, that our systems may be inadequate to support our existing
and future operations or that hiring, training and managing new employees will
be more difficult than we anticipate.


OUR STOCK TRADES ON THE OTC BULLETIN BOARD. OUR STOCK PRICE HAS BEEN VOLATILE
HISTORICALLY, WHICH MAY MAKE IT MORE DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU
WANT AT PRICES YOU FIND ATTRACTIVE.

     The trading price of our common stock has been and may continue to be
subject to wide fluctuations. During 2001, the closing sale prices of our common
stock on the OTC Bulletin Board ranged from $.17 to $.05 per share and the sale
price of our common stock closed at $.08 per share on August 6, 2002. Our stock
price may fluctuate in response to a number of events and factors, such as
quarterly variations in operating results, announcements of technological
innovations or new products by us or our competitors, changes in financial
estimates and recommendations by securities analysts, the operating and stock
price performance of other companies that investors may deem comparable, and
news reports relating to trends in our markets. In addition, the stock market in
general, and the

                                       18
<PAGE>

market prices for Internet-related companies in particular, have experienced
extreme volatility that often has been unrelated to the operating performance of
these companies. These broad market and industry fluctuations may adversely
affect the price of our stock, regardless of our operating performance.

     The OTC Bulletin Board is an electronic quotation medium used by
subscribing broker dealers to reflect dealer quotations on a real-time basis.
This over-the-counter market provides significantly less liquidity than the
NASDAQ Stock Market. Quotes for stocks included on the OTC Bulletin Board are
not listed in the financial sections of newspapers as are those for The NASDAQ
Stock Market. Shares that are thinly traded on the Bulletin Board often trade
only infrequently and experience a significant spread between the market maker's
bid and asked prices. Therefore, prices for securities traded solely on the OTC
Bulletin Board may be difficult to obtain and holders of common stock may be
unable to resell their securities at or near their original offering price or at
any price. Furthermore, volatility or a lack of positive performance in our
stock price may adversely affect our ability to retain key employees, all of
whom have been granted stock options. In the event our securities are not
included on the OTC Bulletin Board and do not qualify for the NASDAQ, quotes for
the securities may be included in the electronic "pink sheets" for the
over-the-counter market.

VOLUME OF SHARES ELIGIBLE FOR SALE COULD IMPAIR OUR STOCK PRICE AND HINDER
FUTURE FINANCING EFFORTS.

     As of December 31, 2001, a substantial majority of the 31,026,978
outstanding shares of common stock and 1,500,000 shares of convertible preferred
stock held by existing shareholders were issued and sold by the Company in
private transactions in reliance on exemptions from the registration provisions
of the Securities Act and are restricted securities within the meaning of Rule
144 under the Securities Act. Of the outstanding shares, including shares held
by affiliates, 29,400,311 or 95% were issued on or before December 31, 2000, and
may be currently eligible for resale in the open market, if any, subject to the
volume and other conditions of Rule 144. There are no contractual restrictions
on the resale of the outstanding common stock. The sale in the public market of
these shares of restricted common stock, or the perception that these sales may
occur, may depress prevailing market prices of the common stock.

OUTSTANDING OPTIONS AND WARRANTS, WHEN EXERCISED, WILL FURTHER DILUTE COMMON
SHAREHOLDERS.

     As of December 31, 2001, there were outstanding stock options to purchase
an aggregate of 5,822,000 shares of common stock at exercise prices ranging from
$.05 to $2.00 per share, and warrants to purchase 1,521,667 shares of common
stock at exercise prices ranging from $.20 to $1.75 per share. Employee options
are subject to a restriction whereby option holders have agreed to not sell or
otherwise transfer or dispose of shares of the common stock issued upon exercise
of options in an amount which shall exceed 250,000 shares during any three-month
period. The exercise of these outstanding options and warrants will dilute the
percentage ownership of common stockholders, and any sales in the public market
of shares of common stock underlying such securities may adversely affect
prevailing market prices for the common stock. Furthermore, the terms upon which
we will be able to obtain additional equity capital may be adversely affected
since the holders of these outstanding securities can be expected to exercise
their respective rights therein at a time when we would, in all likelihood, be
able to obtain any needed capital on terms more favorable to the Company than
those provided in such securities.

                                       19
<PAGE>

"PENNY STOCK" REGULATIONS IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON
STOCK.

     The SEC has adopted regulations which generally define "penny stock" to be
any equity security that is not traded on a national securities exchange or
NASDAQ and that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. The
definition excludes the securities of an issuer meeting certain minimum
financial requirements. Generally, these minimum thresholds would be met by an
issuer with net tangible assets in excess of $2 million or $5 million,
respectively, depending upon whether the issuer has been continuously operating
for less or more than three years, or by an issuer with "average revenue" of at
least $6 million for the last three years.

     As long as we do not meet the relevant financial requirements and our
common stock is trading at less than $5.00 per share on the OTC Bulletin Board,
our securities are subject to the penny stock rules. These rules impose
additional sales practice requirements on broker-dealers who sell our securities
to persons other than established customers and accredited investors (generally,
investors with a net worth in excess of $1,000,000 or an individual annual
income exceeding $200,000, or, together with the investor's spouse, a joint
income of $300,000). For transactions covered by the penny stock rules, the
broker-dealer must make a special suitability determination for the purchase of
such securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any non-exempt transaction
involving a penny stock, the rules require, among other things, that the
broker-dealer deliver an SEC mandated risk disclosure document relating to the
penny stock market and the risks associated therewith prior to the transaction.
The broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative as well as current quotations
for the securities. If the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, the broker-dealer must send monthly statements
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the penny stock
rules may restrict the ability of broker-dealers to sell our securities and may
affect the ability of our shareholders to sell their securities in the secondary
market.


                           PART II - OTHER INFORMATION


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     During the second quarter of 2002, common stock totaling 207,000 shares at
prices ranging from $.075 to $.083 per share totaling $15,745 were issued to two
employees in lieu of cash for deferred compensation. The recipients were
accredited, had access to all material information concerning the Company, and
acquired the securities for investment. Appropriate legends were affixed to the
certificates issued in the transactions. The issuances were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.

                                       20

<PAGE>

ITEM 4. OTHER

NEW CEO AND DIRECTOR NAMED FOR LION.

     As of August 2, 2002, David Stedman has been named the new Chief Executive
Officer of LION and been added as a member of its Board of Directors. Mr.
Stedman will also retain the title of President, a position that he has held
since October 2000. Mr. Stedman replaces Jack McMillan, who remains Chairman of
the Board.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits to Part II:

     Exhibit 99.4 - Certification by Chief Executive Officer and Chief Financial
                    Officer


(b)  Reports on Form 8-K

     Form 8 - K filed on June 6, 2002 related to the alliance with IMX, Inc. and
     results of the jury trial initiated by Billy Anders, a former director of
     LION (BILLY R. ANDERS V. PLENUM COMMUNICATIONS, INC, A MINNESOTA
     CORPORATION, ALLEN RINGER, AND THE MARITAL COMMUNITY OF ALLEN RINGER AND
     JANE DOE RINGER).


                                   SIGNATURES

     In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                   LION, INC.
                                   (Registrant)

Date: August 14, 2002         By:  /s/ David Stedman
                                   -------------------------
                                   David Stedman
                                   Chief Executive Officer

                                       21
<PAGE>

EXHIBIT INDEX


Exhibit No.      Description
-----------      -----------
   99.4          Certification by Chief Executive Officer and Chief Financial
                 Officer




















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