UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report under Section 13 or 15(d) of the

Securities Exchange Act of 1934

For Quarter Ended September 30, 2009March 31, 2010

Commission File Number 1-9828

GAINSCO, INC.

(Exact name of registrant as specified in its charter)

(972) 629-4301

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 9, 2009May 7, 2010 there were 4,785,3984,781,592 shares of the registrant’s Common Stock ($.10 par value) outstanding.

GAINSCO, INC. AND SUBSIDIARIES

INDEX

(i)

PART I. FINANCIAL INFORMATION

Item 1.       Financial Statements

GAINSCO, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share data)

(continued)

GAINSCO, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

GAINSCO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share data)

See notes to unaudited condensed consolidated financial statements.

GAINSCO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)

(Amounts in thousands)

(continued)

GAINSCO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)

(Amounts in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

GAINSCO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands, except per share data)

(continued)

GAINSCO, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands, except per share data)

Supplemental disclosure of cash flow information:

5,133 shares of common stock were issued during the nine months ended September 30, 2008 relating to the performance share agreement, retroactively adjusted for a one-for-five reverse stock split (see note 12).

$1,684459 and $2,481$619 in interest was paid during the ninefirst three months ended September 30,of 2010 and 2009, and 2008, respectively (notes 65 and 7)6).

$60 inNo Federal income tax payments were made during the ninefirst three months ended September 30,of 2010 and 2009 (note 1).

See accompanying notes to unaudited condensed consolidated financial statements.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The accompanying unaudited condensed consolidated financial statements include the accounts of GAINSCO, INC. (“GAN”) and its wholly-owned subsidiaries (collectively, the “Company” or “we”), MGA Insurance Company, Inc. (“MGA”), GAINSCO Service Corp. (“GSC”), Lalande Financial Group, Inc., National Specialty Lines, Inc. and DLT Insurance Adjusters, Inc. MGA has one wholly owned subsidiary, MGA Agency, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.

See note 10 Shareholders’ Equity regarding a one-for-five reverse stock split that became effective in June of 2009.

The condensed consolidated financial statements included herein have been prepared by GAINSCO, INC. and are unaudited, except for the balance sheet at December 31, 2008,2009, which has been derived from audited consolidated financial statements at that date on the basis of accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the unaudited condensed consolidated interim financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position as of September 30, 2009,March 31, 2010, the results of operations for each of the three and nine months periods ended September 30,March 31, 2010 and 2009, and 2008, and the cash flows for the ninethree months ended September 30, 2009March 31, 2010 and 2008.2009. In addition, operating results for the three and nine months ended September 30, 2009 isMarch 31, 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2009.2010.

Although management believes the unaudited interim related disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP have been condensed or omitted from pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated audited financial statements and notes thereto included in the Company’s 20082009 Annual Report on Form 10-K.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company’s nonstandard personal auto products are primarily aligned with customers seeking to purchase basic coverage and limits of liability required by statutory requirements, or slightly higher. Our products include coverage for third party liability, for bodily injury and physical damage, as well as collision and comprehensive coverage for theft, physical damage and other perils for an insured’s vehicle. Within this context, we offer our product to a wide range of customers who present varying degrees of potential risk to the Company, and we strive to price our product to reflect this range of risk accordingly, in order to earn an underwriting profit. Simultaneously, when actuarially prudent, we attempt to position our product price to be competitive with other companies offering similar products to optimize our likelihood of securing our targeted customers. We offer flexible premium down payment, installment payment, late payment, and policy reinstatement plans that we believe help us secure new customers and retain exiting customers, while generating an additional source of income from fees that we charge for those services. We primarily write six-month policies in Arizona, Florida, Georgia, Nevada and New Mexico and both one month and six month policies in Texas, with one year policies in California and both six month and one year policies in South Carolina. The terms of policies we are permitted to offer varies in the states in which we operate.

GAN expects to use cash during the next twelve months primarily for: (1) interest and principal on the Note payable, and(2) interest on the Subordinated debentures, (2) principal repayment of the Note payable, (3) administrative expenses, and (4) investments. The primary sources of cash to meet these obligations are assets held by GAN and dividends from its subsidiaries.

An insurance company generally makes claim payments as a result of accidents involving the risks insured under the insurance policies it issues. Months and sometimes years may elapse between the occurrence of an accident, reporting of the accident to the insurer and payment of the claim. Insurers record a liability for estimates of claims that will be paid for accidents reported to them, which are referred to as “case reserves.” In addition, since accidents are not always reported promptly upon occurrence and because the assessment of existing known claims may change over time with the development of new facts, circumstances and conditions, insurers estimate liabilities for such items, which are referred to as incurred but not reported (“IBNR”) reserves.

We maintain reserves for the payment of claims and claim adjustment expenses for both case and IBNR under policies written by the insurance company subsidiary. These claims reserves are estimates, at a given point in time, of amounts that we expect to pay on incurred claims based on facts and circumstances then known. The amount of case claims reserves is primarily based upon a case-by-case evaluation of the type of claim involved, the circumstances surrounding the claim, and the policy provisions relating to the type of claim. The amount of IBNR claims reserves is estimated on the basis of historical information and anticipated future conditions by lines of insurance and actuarial review. Reserves for claim adjustment expenses are intended to cover the ultimate costs of settling claims, including investigation and defense of lawsuits resulting from such claims. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The process of establishing claims reserves is imprecise and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured claim and the settlement of the claim. The actual emergence of claims and claim adjustment expenses may vary, perhaps materially, from the Company’s estimates thereof, because (a) estimates of liabilities are subject to large potential revisions, as the ultimate disposition of claims incurred prior to the financial statement date, whether reported or not, is subject to the outcome of events that have not yet occurred (e.g., jury decisions, court interpretations, legislative changes (even after coverage is written and reserves are initially set) that broaden liability and policy definitions and increase the severity of claims obligations, changes in the medical condition of claimants, public attitudes and social/economic conditions such as inflation), (b) estimates of claims do not make provision for extraordinary future emergence of new classes of claims or types of claims not sufficiently represented in the Company’s historical data base or which are not yet quantifiable, and (c) estimates of future costs are subject to the inherent limitation on the ability to predict the aggregate course of future events.

In determining our reserve estimates for nonstandard personal automobile insurance, for each financial reporting date we record our best estimate, which is a point estimate, of our overall unpaid claims and CAEclaim adjustment expenses (“C & CAE) for both current and prior accident years. Because the underlying processes require the use of estimates and professional actuarial judgment, establishing claims reserves is an inherently uncertain process. As our experience develops and we learn new information, our quarterly reserving process may produce revisions to our previously reported claims reserves, which we refer to as “development” and such changes may be material. We recognize favorable development when we decrease our previous estimate of ultimate losses, which results in an increase in net income in the period recognized. We recognize unfavorable development when we increase our previous estimate of ultimate losses, which results in a decrease in net income in the period recognized. Accordingly, while we record our best estimate, our claims reserves are subject to potential variability.

As of September 30, 2009,March 31, 2010, the Company had $74,992,000$68,785,000 in net unpaid claims and claim adjustment expenses (“C & CAE”)CAE (Unpaid C & CAE of $77,976,000$72,100,000 less Ceded unpaid C & CAE of $2,984,000)$3,315,000). This amount represents management’s best estimate of the ultimate liabilities. Significant changes in claims trends resulting from adverse economic conditions increase the uncertainties which exist in the estimation process and could lead to inaccurate estimates of claim and claim adjustment expense.

The Company and its subsidiaries file a consolidated Federal income tax return. Deferred income tax items are accounted for under the “asset and liability” method which provides for temporary differences between the reported earnings for financial statement purposes and for tax purposes, primarily deferred policy acquisition costs, the discount on unpaid claims and claim adjustment expenses, net operating loss carryforwards and the nondeductible portion of the change in unearned premiums. The Company made $60,000 inno Federal income tax payments for the ninefirst three months ended September 30,of 2010 and 2009. The Company did not make any Federal income tax payments for the nine months ended September 30, 2008.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of September 30, 2009,March 31, 2010, the Company has net operating loss carryforwards for tax purposes aggregating $67,755,000.$67,185,000. These net operating loss carryforwards of $6,584,000,$6,014,000, $33,950,000, $13,687,000, $633,000 and $12,901,000, if not utilized, will expire in 2020, 2021, 2022, 2023 and 2027, respectively. As of September 30, 2009,March 31, 2010, the tax benefit of the net operating loss carryforwards was $23,037,000,$22,843,000, which is calculated by applying the Federal statutory income tax rate of 34% against the net operating loss carryforwards of $67,755,000.$67,185,000.

The Company currently has a full valuation allowance for the tax benefit from its net operating loss carryforwards. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740-10-25ASC 740-10,Income Taxes – Overall (“ASC 740-10”) requires positive evidence, such as taxable income over the most recent three-year period and other available objective and subjective evidence, for management to conclude that it is “more likely than not” that a portion or all of the deferred tax assets will be realized. While both objective and subjective evidence are considered, it is the Company’s understanding that objective evidence should generally be given more weight in the analysis under ASC 740-10-05.740-10. In making the determination, the Company considered all available evidence, including the fact that the Company incurred a cumulative taxable loss for the three years ended September 30, 2009.March 31, 2010. The Company does not record a tax valuation allowance relating to the net unrealized losses on investments, excluding stocks,equity securities, because it is more likely than not that these losses would be recouped or be utilized in future periods. The Company has the ability and it is the Company’s intent to fully recover the principal, which could require the Company to hold these securities until their maturity; therefore, the Company considers the impairment to be temporary.

The Company adopted the provisions of ASC 740-10-65,Income Taxes – Overall – Transition and Open Effective Date Information (“ASC 740-10-65”) on January 1, 2007. As a result, of ASC 740-10-25-16, the Company recognized no additional liability or reduction in deferred tax asset for uncertain tax benefits. TheAs of March 31, 2010, the Company has evaluated thenot identified any uncertain tax contingenciespositions in accordance with ASC 740-10-25-16. At September 30, 2009, the Company did not have any uncertain tax positions.740-10-65. The Company is subject to U.S. federal state, local or non-U.S. income tax examinations by tax authorities for 20052006 and subsequent years.

The Company’s financial instruments consist primarily of cash, receivables, payables and debt instruments. The carrying values of these financial instruments approximate their respective fair values as they are either short-term in nature or carry interest rates which approximate market rates.

Earnings per share (“EPS”) for the three and nine months ended September 30,March 31, 2010 and 2009 and 2008 is based on a weighted average of the number of common shares outstanding during each year, retroactively adjusted for a one-for-five reverse stock split in June 2009 (see note 10).year. Basic and diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Common stock equivalents related to stock options are excluded from the diluted EPS calculation if their effect would be anti-dilutive to EPS.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company records treasury stock in accordance with the “cost method” described in ASC 505-30-25.505-30,Equity – Treasury Stock (“ASC 505-30”). The Company held 254,034257,840 and 252,729256,534 shares of common stockCommon Stock as treasury stock at September 30, 2009March 31, 2010 and December 31, 2008,2009, respectively. See note 10 of the Condensed Consolidated Financial Statements for more information on shareholders’ equity.

The Company accounts for stock-based employee compensation plans under the provisions of ASC 718-10-25718-10-65, Stock Compensation – Overall – Transition and Open Effective Date Information (“ASC 718-10-65”) that focuses primarily on accounting for transactions in which an entity exchanges its equity instruments for employee services and carries forward prior guidance for share-based payments for transactions with non-employees. Under the modified prospective transition method, the Company is required to recognize compensation cost, after the effective date, January 1, 2006, for the portion of all previously granted awards that were not vested and the vested portion of all new stock option grants and restricted stock. The compensation cost is based on whether the related service period and performance period achievements are considered probable at the time of measurement using the closing price of GAN’s Common Stock on the grant date, or if the grant has been subsequently modified, on the modification date. The Company recognizes expense relating to stock-based employee compensation on a straight-line basis over the requisite service period which is generally the vesting period. Forfeitures of unvested stock grants are estimated and recognized as reduction of expense. See note 12 of the Condensed Consolidated Financial Statements for more information on share-based compensation.

ASC 105-10 establishesIn January 2010, the FASB issued Accounting Standards Codification asUpdate Number 2010-06. This updated revised accounting guidance that clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The guidance requires separate disclosures for the single sourceamounts of authoritative accounting principlessignificant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the preparationtransfers. Additionally, a separate disclosure is required for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements. The guidance also provides additional clarification for both the level of financial statements in conformity with GAAP. ASC 105-10-5 explicitly recognizes rules and interpretive releasesdisaggregation reported for each class of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. ASC 105-10 is effective for financial statements issued for periods ending after September 15, 2009 and we do not expect the adoption to have a material impact, if any, on our condensed consolidated financial position, results of operationsassets or cash flows.

ASC 855-10-25 sets forth general standards of accounting forliabilities and disclosures of events that occurinputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3.

The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the balance sheet date but before financial statementsdisclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are issued or are availableeffective for fiscal years beginning after December 15, 2010. Refer to note 3 for the information required to be issued. Thedisclosed upon our adoption of ASC 855-10the guidance effective January 1, 2010. We are currently evaluating the impact the adoption of the guidance effective January 1, 2011 will have on the disclosures made in our consolidated financial statements.

All other codified accounting standards and interpretations of those standards issued during 2010 did not have a material impact on our condensed consolidated financial condition or results of operations. We evaluated subsequent events untilrelate to accounting policies and procedures pertinent to the issuance of the condensed consolidated financial statements which occurred on November 13, 2009.Company at this time

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company early adopted the guidance of ASC 820-10-65-4 in the first quarter of 2009. ASC 820-10-65-4 provides additional guidance on: 1) estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to the normal market activity for the asset or liability, and 2) identifying transactions that are not orderly. ASC 820-10-65-4 must be applied prospectively and retrospective application is not permitted. ASC 820-10-65-4 is effective for interim and annual periods after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 subject to also early adoption of ASC 320-10-65. See note 3 for the application of ASC 820-10-65-4 and further details regarding fair value measurement of the Company’s financial assets as of September 30, 2009.

The Company early adopted the guidance of ASC 320-10-65-1 in the first quarter of 2009. ASC 320-10-65-1 provides new guidance on the recognition and presentation of an other-than-temporary impairment (“OTTI”) for available for sale and held to maturity debt securities (equities are excluded). An impaired security is not recognized as an OTTI impairment if management does not intend to sell the impaired security and it is more likely than not it will not be required to sell the security before the recovery of its amortized costs basis. If management concludes a security is other-than-temporarily impaired, the FSP requires that the difference between the fair value and the amortized cost of the security to be presented as an OTTI charge in the Condensed Consolidated Statements of Operations, with an offset for any noncredit-related loss component of the OTTI charge to be recognized in other comprehensive loss. Accordingly, only the credit loss component of the OTTI amount will have an impact on the Company’s results of operations. For all debt securities in unrealized loss positions that do not meet either of the two requirements, ASC 320-10-65 requires the that the Company analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment.

Under ASC 320-10-65, when an OTTI of a debt security has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, the OTTI recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the impairment measurement date. For OTTI of debt securities that do not meet either of the two criteria, the net amount recognized in earnings is equal to the difference between the amortized cost of the debt security and its net present value calculated as described above. Any difference between the fair value and the net present value of the debt security at the impairment measurement date is recorded in “Other comprehensive loss.” Unrealized gains or losses on securities for which an OTTI has been recognized in earnings is tracked as a separate component of “Accumulated other comprehensive loss.” Prior to the adoption, an OTTI recognized in earnings for debt securities was equal to the total difference between amortized cost and fair value at the time of impairment. ASC 320-10-65 also requires extensive new interim and annual disclosure for both fixed maturities and equities to provide further disaggregating information as well as information about how the credit loss component of the OTTI charge was determined and requiring a roll forward of such amount for each reporting period. See notes 2, 4 and 5 for the application of ASC 320-10-65 and further details regarding fair value measurement of the Company’s financial assets as of September 30, 2009.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company early adopted the guidance of ASC 825-10-65-1 in the first quarter of 2009. ASC 825-10-65 extends the disclosure requirements to interim financial statements and requires those disclosures in summarized financial information at interim periods subject to also early adoption of ASC 820-10-65 and 320-10-65; see above.

ASC 325-40-65-1 eliminates the requirement that the holder’s best estimate of cash flows be based upon those that a “market participant” would use. ASC 325-40-65-1 was amended to require recognition of an OTTI when it is “probable” that there has been an adverse change in the holder’s best estimate of cash flows from the cash flows previously projected. This amendment aligns the impairment guidance under ASC 320-10-35-34. ASC 325-40-65-1 retains and re-emphasizes the OTTI guidance and disclosures in pre-existing GAAP and SEC requirements. ASC 325-40-65-1 is effective for interim and annual reporting periods ending after December 15, 2008. The Company does not expect the adoption will have an impact on its consolidated financial statements.

ASC 260-10-65-2 is effective for fiscal years beginning after December 15, 2008 and addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in ASC 260-10-45. As the dividends on all outstanding unvested restricted stock units are restricted and have no dividend or dividend equivalent rights, the adoption of ASC 260-10-65-2 did not have an impact on the determination of earnings per share.

ASC 805-10-65-1 changes the accounting for acquisitions specifically eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallowing the capitalization of transaction costs and changes when restructurings related to acquisitions can be recognized. ASC 805-10-65 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will adopt ASC 805-10-65 for acquisitions consummated after its effective date and for deferred tax adjustments for acquisitions, if any, completed before its effective date.

ASC 825-10-15 permits a company to choose, at specified election dates, to measure at fair value certain eligible financial assets and liabilities that are not currently required to be measured at fair value. The specified election dates include, but are not limited to, the date when an entity first recognizes the item, when an entity enters into a firm commitment or when changes in the financial instrument causes it to no longer qualify for fair value accounting under a different accounting standard. An entity may elect the fair value option for eligible items that exist at the effective date. At that date, the difference between the carrying amounts and the fair values of eligible items for which the fair value option is elected should be recognized as a cumulative effect adjustment to the opening balance of retained earnings. The fair value option may be elected for each entire financial instrument, but need not be applied to all similar instruments. Once the fair value option has been elected, it is irrevocable. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. Upon our adoption and subsequent to that date of ASC 825-10-15, we elected not to fair value financial instruments and certain other items. Therefore, ASC 825-10-15 had no impact on our consolidated financial position, results of operations or financial condition.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company adopted the guidance of ASC 820-10-15 as they relate to non-financial assets and liabilities in the first quarter of 2009. ASC 820-10-15 establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements, for all of its financial assets and liabilities. The statement does not require new fair value measurements, but emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability and provides guidance on how to measure fair value by providing a fair value hierarchy for classification of financial assets or liabilities based upon measurement inputs. The adoption of ASC 820-10-15 did not have a material impact on the Company’s results of operations or financial position. See note 3 for the application of ASC 820-10-15 and further details regarding fair value measurement of the Company’s financial assets as of September 30, 2009.

All other accounting standards and interpretations of those standards issued during the first nine months of 2009 did not relate to accounting policies and procedures pertinent to the Company at this time.

Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current period presentation. Previously, $4,562,000$696,000 was presented in Preferred stocksCommissions payable as of December 31, 2009 and $391,000 has been reclassified to Reinsurance balances payable and $305,000 has been reclassified to Other liabilities as of March 31, 2010. Previously, $307,000 was presented in Premiums payable at December 31, 20082009 and has been reclassified to Bonds available for saleReinsurance balances payable as of September 30, 2009. This reclassificationMarch 31, 2010. These reclassifications had no effect on total assets, total liabilities, total shareholders’ equity, net lossincome or net cash used for operating activities as previously reported.

The following schedules summarize the components of net unrealized losses on investments at September 30, 2009 and December 31, 2008 are set forth in the following table:investment income:

Our available for sale investment securities consist of fixed-income securities, which are classified at fair value with unrealized gains and losses reported in our financial statements as a separate component of shareholders’ equity on an after-tax basis. Our trading securities consist of hybrid redeemable preferred securities, which are carried at fair value with realized gains and losses reported in the current period’s earnings.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following schedules summarize the amortized cost and estimated fair values of investments in our investment portfolio:

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following schedules summarize the gross unrealized losses showing the length of time that investments have been continuously in an unrealized loss position:

At March 31, 2010 and December 31, 2009, approximately 75% and 72%, respectively, of the unrealized gross losses were with issuers rated as investment grade by Standard and Poor’s (S&P). The decline in the market value is primarily related to the disruption and lack of liquidity in the markets in which these securities trade, along with credit risk aversion by investors. Other important factors include (i) the slowing of prepayments in mortgage and asset backed securities and (ii) the significant decline in the 3 month London Interbank Offered Rate for U.S. dollar deposits (“LIBOR”) for securities with floating rate coupons since the purchase of these assets. At this time based upon information currently available, the Company has the ability and it is the Company’s intent to fully recover the principal, which could require the Company to hold these securities until their maturity; therefore, the Company considers the impairment to be temporary.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Investment securities are exposed to a number of factors, including general economic and business environment, changes in the credit quality of the issuer of the fixed income securities, changes in market conditions or disruptions in particular markets, changes in interest rates, or regulatory changes. Fair values of securities fluctuate based on the magnitude of changing market conditions. Our securities are issued by domestic entities and are backed either by collateral or the credit of the underlying issuer. Factors such as an economic downturn, disruptions in the credit markets, a regulatory change pertaining to the issuer’s industry, deterioration in the cash flows or the quality of assets of the issuer, or a change in the issuer’s marketplace may adversely affect our ability to collect principal and interest from the issuer. Both equity and fixed income securities have been affected over the past several years, and may be affected in the future, by significant external events. Credit rating downgrades, defaults, and impairments may result in write-downs in the value of the investment securities held by the Company. The Company regularly monitors its portfolio for pricing changes, which might indicate potential impairments, and performs reviews of securities with unrealized losses. In such cases, changes in fair value are evaluated to determine the extent to which such changes are attributable to (i) fundamental factors specific to the issuer, such as financial conditions, business prospects or other factors, or (ii) market-related factors, such as interest rates. When a security in the Company’s investment portfolio has an unrealized loss in fair value that is deemed to be other than temporary, the Company reduces the book value of such security to its current market value, recognizing the decline as a realized loss in the Consolidated Statements of Operations and a revised GAAP cost basis for the security is established. These determinations primarily reflect the market-related issues associated with the disruption in the mortgage and other credit markets, which created a significant deterioration in both the valuation of the securities as well as our view of future recoverability of the valuation decline. For debt securities, the split between the amount of an OTTI recognized in other comprehensive income and the net amount recognized in earnings is driven principally by assumptions regarding the amount and timing of projected cash flows. For mortgage-backed and asset-backed securities, cash flow estimates including prepayment assumptions, are based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value.

At September 30, 2009, the Company had gross unrealized losses of $5,046,000 on investment securities. In addition, included in the gross unrealized losses are securities that the Company determined had other-than-temporary impairments in accordance with ASC 320-10-65-1. Accordingly, the Company bifurcated these impairments between credit and non-credit impairments. As identified in the Condensed Consolidated Statements of Operations, the Company had non-credit impairments of $2,361,000 on securities considered to be impaired as of September 30, 2009. As of December 31, 2008, the Company had gross unrealized losses of $8,534,000 on investment securities. The decrease in unrealized losses was primarily attributable to improvements in the credit markets. The Company reviewed all previously-recorded other-than-temporary impairments of securities to develop an estimate of the portion of such impairments that were not due to credit. The cumulative effect of adopting ASC 320-10-65-1 was to credit Accumulated deficit as of January 1, 2009 by $11,000 with a corresponding charge to Accumulated other comprehensive loss; see note 5 Cumulated Impact of Adoption of ASC 320-10-65-1.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following schedules summarize the gross unrealized losses showing the length of time that investments have been continuously in an unrealized loss position:

At September 30, 2009 and December 31, 2008, approximately 80% and 91%, respectively, of the unrealized gross losses were with issuers rated as investment grade by Standard and Poor’s (S&P). The decline in the market value is primarily related to the disruption and lack of liquidity in the markets in which these securities trade, along with credit risk aversion by investors. Other important factors include (i) the slowing of prepayments in mortgage and asset backed securities and (ii) the significant decline in the 3 month London Interbank Offered Rate for U.S. dollar deposits (“LIBOR”) for securities with floating rate coupons since the purchase of these assets. At this time based upon information currently available, the Company has the ability and it is the Company’s intent to fully recover the principal, which could require the Company to hold these securities until their maturity; therefore, the Company considers the impairment to be temporary.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In order to determine whether it is appropriate in an accounting period to recognize OTTIother-than-temporary impairment (“OTTI”) with respect to a portfolio security which has experienced a decline in fair value and as to which the Company has the ability and intent to fully recover principal, the Company considers all available evidence and applies judgment. With corporate debt issues, firm specific performance, industry trends, legislative and regulatory changes, government initiatives, and the macroeconomic environment all play a role in the evaluation process. With respect to asset backed securities (including mortgage backed securities), the Company uses individual cash flow modeling in addition to other available information. In the case of securities as to which the Company has the ability and intent to fully recover principal, if all scheduled principal and interest is expected to be received on a timely basis using the current best estimates of material inputs, such as default frequencies, severities, and prepayment speeds, generally no OTTI would be recognized unless other factors suggest that it would be appropriate to do so. The principal factors that the Company considers in this analysis are the extent to which the fair value of the security has declined, the ratings given to the security by recognized rating agencies, trends in those ratings, and information available to the Company from securities analysts and other commentators, public reports and other credible information.

At September 30, 2009,March 31, 2010, the Company had $7,595,000 in Alt-A securities with S&P ratings of 22% AAA, 7% AA+ and 71% CCC. At December 31, 2008, the Company had $8,385,000$7,042,000 in nonprime collateralized mortgage obligations (Alt-A securities) with S&P ratings of 20%7% AA+, 23% A- and 70% CC. At December 31, 2009, the Company had $7,278,000 in Alt-A securities with S&P ratings of 21% AAA, 7%8% AA+ and 73% B.71% CCC. The costcarrying value and fair value of these investments were $7,234,000$6,570,000 and $4,853,000,$5,097,000, respectively, at September 30, 2009March 31, 2010 compared to $8,342,000$6,840,000 and $5,366,000,$4,894,000, respectively, at December 31, 2008.2009.

As of March 31, 2010, included in the Company’s fixed income portfolio are hybrid securities with a carrying value of $6,958,000 and fair value of $7,720,000 as compared to $5,683,000 and $6,693,000 as of December 31, 2009, respectively. A hybrid security as used here is one where the issuer of the debt instrument can choose to defer payment of the regularly scheduled interest due for a contractually set maximum period of time, usually five to ten years, without being in default on the issue.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

One security, with bookcarrying value of $1,559,000$1,381,000 and $1,919,000,$1,466,000, and a marketfair value $1,041,000of $897,000 and $995,000,$1,008,000, at September 30, 2009March 31, 2010 and December 31, 2008,2009, respectively, is dependent on the continued claims paying ability of its financial guarantor (MBIA) in order for the Company not to sustain any loss of principal or interest. MBIA is rated BB+ (S&P). We, we believe that the probable outcome is that principal and interest will be paid in full and, accordingly, the impairment on that security is considered temporary.

DuringThe Preferred stocks predominately consist of auction preferred instruments considered to be available for sale and reported at estimated fair value with the third quarternet unrealized gains or losses reported after-tax as a component of 2009,other comprehensive income. The auction rate securities which the general partnersCompany owns are each issued by a trust which holds as an asset the preferred stock of a corporation, which are exchange traded. The Company has the option at stated intervals to redeem the auction preferred shares for a pro rata share of the underlying collateral. As of March 31, 2010, we have not chosen this option as the structure of the trust provides a higher coupon on the auction preferred shares than on the underlying collateral shares; and therefore, are of greater economic value. As of March 31, 2010, we do not believe that these underlying shares are other-than-temporarily impaired based on our credit review of the issuers.

During 2009, a limited partnership investment of the Company invested in elected to commence dissolution and wind up the partnership’s affairs allowing for liquidation of the partnership’s assets. The Company has classified this investment as Other long-term investmentsinvestment and accounts for it under the equity method.

Proceeds from the sale of bonds available for sale totaled $41,232,000$14,268,000 and $23,903,000,$13,315,000, including $25,756,000$3,684,000 and $18,650,000$7,983,000 in principal pay downs, for the ninethree months ended September 30,March 31, 2010 and 2009, and 2008, respectively. Proceeds from the sale of bonds trading totaled $171,000$437,000 for the ninethree months ended September 30, 2009. Proceeds from the sale of certificate of deposits totaled $255,000 for the nine months ended September 30, 2008. There were no sales of certificate of deposits for the nine months ended September 30, 2009.March 31, 2010. Proceeds from the sale of preferred stocks totaled $17,000 and $162,000 for the ninethree months ended September 30, 2009. There were no sales of preferred stocks for the nine months ended September 30, 2008. Proceeds from the sale of common stocks available for sale totaled $68,000 for the nine months ended September 30, 2008. There were no sales of common stocks for the nine months ended September 30,March 31, 2010 and 2009. Proceeds from the sale of common stocks trading totaled $170,000$121,000 for the ninethree months ended September 30, 2009.March 31, 2010.

GAINSCO, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Realized gains and losses on investments for the three months ended March 31, 2010 and nine months ended September 30, 2009 and 2008 are presented in the following table: