Note 2 - Basis of Presentation and Restatement

Basis of Presentation

In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of its financial position as of June 30, 2014 (as restated), its results of operations for the three- and nine-month periods ended June 30, 2014 (as restated) and 2013 and its cash flows for the nine-month periods ended June 30, 2014 (as restated) and 2013. The results of operations for the three and nine months ended June 30, 2014 (as restated) are not necessarily indicative of the results to be expected for the full year.

The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial

statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2013.

Certain reclassifications of previously reported amounts have been made to conform to the current year’s presentation.

Restatement

The Company’s consolidated balance sheet at June 30, 2014, its consolidated statements of comprehensive income (loss) for the three months and nine months ended June 30, 2014 and its consolidated statement of cash flows for the nine months ended June 30, 2014 have been restated to correct a misstatement in the accounting for income taxes in connection with one of its acquisitions. This resulted in the recording of an uncertain tax position liability in connection with the income tax treatment of deferred revenue from one of the Company's acquisitions in fiscal 2013, thus primarily offsetting the previous income tax benefit recorded in the third quarter of fiscal 2014.

The subject acquisition was treated as an asset purchase pursuant to Section 338(h)(10) of the Internal Revenue Code. At the time of the purchase, no deferred tax assets or deferred tax benefits were established.

The Company has now accrued a liability for its uncertain tax position of approximately $3,018,000 which should be recorded in the third quarter of fiscal 2014 when the tax return was prepared, to primarily offset the previously recorded substantial tax benefit.

If recognized, it is expected these unrecognized tax benefits would not have a significant impact to the Company’s effective tax rate. The Company evaluated a tax position taken on its prior year tax return and determined that the position does not meet the more likely than not criteria. The prior year’s income tax return which was filed in July 2014 reflected an income tax position contrary to the one accounted for in purchase accounting in December 2012.

The recording of this liability results in an increase in the income tax provision of $2,285,000. Interest and penalties of $518,000 were also recorded as “interest and penalty expenses accrued for uncertain and unrecognized tax benefits”.

The Company does not anticipate a significant increase or decrease in this liability in the next twelve months.

A reconciliation showing the effects of the restatement on the financial statements included in the original Form 10-Q is provided below:

DAILY JOURNAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

The effects of the restatement on our consolidated balance sheet as of June 30, 2014 are as follows:

	As of June 30, 2014
	Previously
	Reported			Adjustments			Restated
ASSETS
Current assets
Cash and cash equivalents	$	14,750,000		$	---		$	14,750,000
Marketable securities, including common stocks of $158,630,000 and bonds of $8,193,000 at June 30, 2014 and common stocks of $129,699,000 and bonds of $7,295,000 at September 30, 2013		166,823,000			---			166,823,000
Accounts receivable, less allowance for doubtful accounts of $250,000 at June 30, 2014 and September 30, 2013, respectively		6,850,000			---			6,850,000
Inventories		48,000			---			48,000
Prepaid expenses and other assets		1,336,000			---			1,336,000
Income tax receivable		1,757,000			(339,000	)		1,418,000
Total current assets		191,564,000			(339,000	)		191,225,000

Property, plant and equipment, at cost
Land, buildings and improvements		12,861,000			---			12,861,000
Furniture, office equipment and computer software		2,958,000			---			2,958,000
Machinery and equipment		2,039,000			---			2,039,000
		17,858,000			---			17,858,000
Less accumulated depreciation		(8,716,000	)		---			(8,716,000	)
		9,142,000			---			9,142,000
Intangibles, net		18,967,000			---			18,967,000
Goodwill		13,400,000			---			13,400,000
Deferred income taxes		1,877,000			1,072,000			2,949,000
	$	234,950,000		$	733,000		$	235,683,000

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$	4,406,000		$	---		$	4,406,000
Accrued liabilities		3,067,000			---			3,067,000
Deferred subscriptions		3,145,000			---			3,145,000
Deferred installation contracts		8,412,000			---			8,412,000
Deferred maintenance agreements and others		7,321,000			---			7,321,000
Deferred income taxes, net		43,917,000			---			43,917,000
Total current liabilities		70,268,000			---			70,268,000

Long term liabilities
Investment margin account borrowings		29,493,000			---			29,493,000
Deferred maintenance agreements		211,000			---			211,000
Income tax payable		---			3,018,000			3,018,000
Accrued interest and penalty for uncertain and unrecognized tax benefits		---			518,000			518,000
Accrued liabilities		1,200,000			---			1,200,000
Total long term liabilities		30,904,000			3,536,000			34,440,000

Commitments and contingencies (Note 11)		---			---

Shareholders' equity
Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued		---			---			---
Common stock, $.01 par value, 5,000,000 shares authorized; 1,805,053 shares issued, including 424,307 treasury shares, at June 30, 2014 and September 30, 2013		14,000			---			14,000
Additional paid-in capital		1,755,000			---			1,755,000
Retained earnings		59,924,000			(2,803,000	)		57,121,000
Accumulated other comprehensive income		72,085,000			---			72,085,000
Total shareholders' equity		133,778,000			(2,803,000	)		130,975,000
	$	234,950,000		$	733,000		$	235,683,000

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

The effects of the restatement on our consolidated statement of comprehensive income (loss) for the three months ended June 30, 2014 are as follows:

	Three months ended June 30, 2014
	Previously Reported			Adjustments			Restated
Revenues
Advertising	$	2,976,000		$	---		$	2,976,000
Circulation		1,502,000			---			1,502,000
Advertising service fees and other		771,000			---			771,000
Information systems and services		5,898,000			---			5,898,000
		11,147,000			---			11,147,000

Costs and expenses
Salaries and employee benefits		6,175,000			---			6,175,000
Other outside services		822,000			---			822,000
Postage and delivery expenses		335,000			---			335,000
Newsprint and printing expenses		368,000			---			368,000
Depreciation and amortization		1,385,000			---			1,385,000
Other general and administrative expenses		2,325,000			---			2,325,000
		11,410,000			---			11,410,000
Loss from operations		(263,000	)		---			(263,000	)
Other income (expense)
Dividends and interest income		824,000			---			824,000
Other income		26,000			---			26,000
Interest and penalty expenses accrued for uncertain and unrecognized tax benefits		---			(518,000	)		(518,000	)
Interest expense		(56,000	)		---			(56,000	)
Income before taxes		531,000			(518,000	)		13,000
Benefit from income taxes		(2,310,000	)		2,285,000			(25,000	)
Net income	$	2,841,000		$	(2,803,000	)	$	38,000

Weighted average number of common shares outstanding - basic and diluted		1,380,746			---			1,380,746
Basic and diluted net income per share	$	2.06		$	(2.03	)	$	0.03


Comprehensive (loss) income
Net income	$	2,841,000		$	(2,803,000	)	$	38,000
Net decrease in unrealized appreciation of investments (net of taxes)		(689,000	)		---			(689,000	)
	$	2,152,000		$	(2,803,000	)	$	(651,000	)

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

The effects of the restatement on our consolidated statement of comprehensive income (loss) for the nine months ended June 30, 2014 are as follows:

	Nine months ended June 30, 2014
	Previously Reported			Adjustments			Restated
Revenues
Advertising	$	8,620,000		$	---		$	8,620,000
Circulation		4,518,000			---			4,518,000
Advertising service fees and other		2,108,000			---			2,108,000
Information systems and services		16,680,000			---			16,680,000
		31,926,000			---			31,926,000

Costs and expenses
Salaries and employee benefits		19,032,000			---			19,032,000
Other outside services		2,409,000			---			2,409,000
Postage and delivery expenses		961,000			---			961,000
Newsprint and printing expenses		948,000			---			948,000
Depreciation and amortization		4,134,000			---			4,134,000
Other general and administrative expenses		6,492,000			---			6,492,000
		33,976,000			---			33,976,000
Loss from operations		(2,050,000	)		---			(2,050,000	)
Other income (expense)
Dividends and interest income		2,100,000			---			2,100,000
Other income		77,000			---			77,000
Interest and penalty expenses accrued for uncertain and unrecognized tax benefits		---			(518,000	)		(518,000	)
Interest expense		(173,000	)		---			(173,000	)
Loss before taxes		(46,000	)		(518,000	)		(564,000	)
Provision for (benefit from) income taxes		(2,300,000	)		2,285,000			(15,000	)
Net (loss) income	$	2,254,000		$	(2,803,000	)	$	(549,000	)

Weighted average number of common shares outstanding - basic and diluted		1,380,746			---			1,380,746
Basic and diluted net income (loss) per share	$	1.63		$	(2.03	)	$	(0.40	)


Comprehensive income
Net (loss) income	$	2,254,000		$	(2,803,000	)	$	(549,000	)
Net increase in unrealized appreciation of investments (net of taxes)		18,177,000			---			18,177,000
	$	20,431,000		$	(2,803,000	)	$	17,628,000

DAILY JOURNAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The effects of the restatement on our consolidated statement of cash flows for the nine months ended June 30, 2014 are as follows:

	Nine months ended June 30
	Previously Reported			Adjustments			Restated
Cash flows from operating activities
Net (loss) income	$	2,254,000		$	(2,803,000	)	$	(549,000	)
Adjustments to reconcile net income to net cash provided by operations
Depreciation and amortization		4,134,000			---			4,134,000
Deferred income taxes		(884,000	)		(1,072,000	)		(1,956,000	)
Discounts earned on bonds		(2,000	)		---			(2,000	)
Changes in assets and liabilities
Decrease (increase) in current assets (net of acquisition)
Accounts receivable, net		(536,000	)		---			(536,000	)
Inventories		8,000			---			8,000
Prepaid expenses and other assets		622,000			---			622,000
Income tax receivable		(1,452,000	)		339,000			(1,113,000	)
Increase (decrease) in liabilities (net of acquisition)
Accounts payable		147,000			---			147,000
Accrued liabilities		(2,019,000	)		518,000			(1,501,000	)
Income taxes		---			3,018,000			3,018,000
Deferred subscriptions		(389,000	)		---			(389,000	)
Deferred maintenance agreements and others		399,000			---			399,000
Deferred installation contracts		1,533,000			---			1,533,000
Net cash provided by operating activities		3,815,000			---			3,815,000

Cash flows from investing activities
Maturities and sales of U.S. Treasury Bills		---			---			---
Acquisition of New Dawn Technologies, Inc. (net of cash acquired)		---			---			---
Purchases of property, plant and equipment		(403,000	)		---			(403,000	)
Net cash used in investing activities		(403,000	)		---			(403,000	)

Cash flows from financing activities
Investment margin account borrowing		---			---			---
Cash provided by financing activities		---			---			---

Increase in cash and cash equivalents		3,412,000			---			3,412,000

Cash and cash equivalents
Beginning of period		11,338,000			---			11,338,000
End of period	$	14,750,000		$	---		$	14,750,000