Note 2 - Summary of Significant Accounting Policies

Interim Financial Information and Principles of Consolidation

The accompanying unaudited condensed consolidated interim financial statements include the accounts of Direct Insite and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of September 30, 2012, the condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 and cash flows for the nine months ended September 30, 2012 and 2011, have not been audited. These unaudited, condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The December 31, 2011 consolidated balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. These interim condensed consolidated financial statements include all adjustments which management considers necessary for a fair presentation of the financial statements and consist of normal recurring items. The results of operations for the three and nine months ended September 30, 2012, are not necessarily indicative of results that may be expected for any other interim period or for the full year.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 30, 2012. The accounting policies used in preparing these unaudited condensed consolidated financial statements are consistent with those described in the audited December 31, 2011 consolidated financial statements.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Management bases its estimates on historical experience and on various 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 most significant estimates are used in the accounting related to stock based compensation and the valuation allowance on deferred tax assets. Actual results could differ from those estimates.

Revenue Recognition

The Company records revenue in accordance with Accounting Standards Codification ("ASC") 605, Revenue Recognition ("ASC 605") and SEC Staff Accounting Bulletin Topic 13 Revenue Recognition in Financial Statements. Revenue is recognized when it is both earned and realizable, that is, when the following criteria are met:

·	Persuasive evidence of arrangements exist;

·	Delivery has occurred or services have been rendered;

·	The seller's price is fixed and determinable; and

·	Collectability is reasonably assured.

The following are the specific revenue recognition policies for each major category of revenue.

Recurring

The Company provides transactional data processing services through its SaaS software solutions to its customers. The customer is charged a monthly fixed rate on a per-transaction basis or a fixed fee based on monthly transaction volumes. Revenue is recognized as the services are performed.

Professional Services

The Company provides nonrecurring engineering services to its customers, which may include initial or additional development, modification, and customization services to the Company's existing software platform. Such services are billed based on hourly rates or upon acceptance by the customer on a completed contract basis. The Company does not sell software licenses, upgrades or enhancements, or post-contract customer services. For hourly billed services, revenue is recognized as the services are performed. For project-based services, revenue is recognized when the project has been accepted by the customer.

Income Taxes

The Company accounts for income taxes using the asset and liability method. This method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax basis of assets and liabilities, using enacted tax rates. Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The Company currently has significant deferred tax assets. The Company reviewed previous positive and negative evidence and also reviewed its expected taxable income for future periods and concluded that it is more likely than not that as of September 30, 2012 approximately $1,027,000 of tax benefits related to net operating loss carry-forwards will be utilized in future tax years. As a result, the Company's effective tax rate for the three and nine months ended September 30, 2012 and 2011 differs from the current statutory rates. The Company utilizes the expected annual effective tax rate in determining its income tax provision for the interim period's income or loss. The Company provides a valuation allowance on the remaining future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the remaining assets, or other significant positive evidence arises that suggests its ability to utilize the remaining assets. The future realization of a portion of its reserved deferred tax assets related to excess tax benefits associated with the exercise of stock options that, if and when realized, will not result in a tax benefit in the consolidated statement of operations, but rather will result in an increase in additional paid-in capital. The Company will continue to reassess its reserves on deferred income tax assets in future periods on a quarterly basis.

Earnings Per Share

The Company displays earnings per share in accordance with ASC 260, Earnings Per Share ("ASC 260"). ASC 260 requires dual presentation of basic and diluted earnings per share ("EPS"). Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three and nine months ended September 30, 2012, potentially dilutive securities consisting of options to acquire 926,000 shares of common stock and 3,000 shares of unvested restricted stock are not included in the calculation of diluted earnings per share because their impact was anti-dilutive.

For the three and nine months ended September 30, 2011, potentially dilutive securities consisting of options to acquire 153,000 shares of common stock and 24,000 and 47,000 shares of unvested restricted stock, respectively, are not included in the calculation of diluted loss per share because their impact was anti-dilutive.

The computation of diluted weighted average common shares outstanding used in the calculation of diluted earnings per share for the three and nine months ended September 30, 2012 and 2011 is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Weighted Average Common shares outstanding		12,398		11,914		12,286		11,776
Options to purchase common stock		-		71		-		-
Restricted stock grants		12		8		6		-
Total diluted shares		12,410		11,993		12,292		11,776

Fair Value of Financial Instruments

The carrying value of the Company's accounts receivable and accounts payable approximates their fair value due to the short-term maturity of such instruments. The carrying value of notes payable and capital lease obligations approximate their fair value because the terms of these instruments approximate prevailing market rates.

Recently Issued and Adopted Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial statements.