NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL INFORMATION AND PRINCIPLES OF CONSOLIDATION

The accompanying unaudited condensed interim financial statements include the accounts of Direct Insite. All intercompany balances and transactions would be eliminated in consolidation. The condensed balance sheet as of June 30, 2013, the condensed statements of operations for the three and six months ended June 30, 2013 and 2012 and the condensed statements of cash flows for the six months ended June 30, 2013 and 2012 have not been audited. These unaudited, condensed 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 quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The December 31, 2012 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. These interim condensed 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 six months ended June 30, 2013, are not necessarily indicative of results that may be expected for any other interim period or for the full year.

These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2012 included in the Company's annual report on Form 10-K filed with the SEC on March 26, 2013.

USE OF ESTIMATES

In preparing financial statements in conformity with GAAP, 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 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 (Ongoing Services)

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 provided.

Non-Recurring (Professional Services)

The Company provides non-recurring engineering services to its customers, which may include initial or additional development, modification, and customization services to the Company's software platform. Such services are billed based on: (i) hourly rates; or (ii) milestone billings. For hourly billed services, revenue is recognized when work is performed. For milestone billed services, revenue is recognized when the project milestone has been accepted by the customer. We do not sell software licenses, upgrades or enhancements, or post-contract customer services.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company has cash deposits in excess of the maximum amounts insured by the Federal Depository Insurance Corporation at June 30, 2013 and December 31, 2012.

The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Concentrations of credit risk with respect to accounts receivable and revenue are disclosed in Note 9.

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. In addition, the Company expects to provide 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 tax benefits associated with the exercise of stock options, if and when realized, will not result in a tax benefit in the statement of operations, but rather will result in an increase in additional paid-in capital. The Company will continue to re-assess 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) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The computation of diluted weighted average common shares outstanding used in the calculation of diluted earnings per share for the three and six months ended June 30, 2013 and 2012 is as follows (in thousands):

	For the three months ended				For the six months ended
	2013		2012		2013		2012
Weighted average shares outstanding - basic		12,476		12,366		12,462		12,230
Stock options		6		–		3		–
Restricted stock grants		38		2		25		2
Weighted average shares outstanding - diluted		12,520		12,368		12,490		12,232

Securities that could potentially dilute basic EPS in the future, that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the three and six months ended June 30, 2013 and 2012, consists of the following (in thousands):

	For the three months ended				For the six months ended
	2013		2012		2013		2012
Options to purchase common stock		109		949		109		949
Unvested stock grants		–		6		–		6
Potential anti-dilutive common shares		109		955		109		955

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 its financial statements.