**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-QSB**


**(Mark
      One)**


[X]
              Quarterly
                  report under Section 13 or 15(d) of the Securities Exchange Act
                  of
                  1934For
                  the quarterly period ended March 31, 2006[  
                  ]
              Transition
                  report under Section 13 or 15(d) of the Exchange ActFor
                  the transition period fromtoCommission
                  File Number: 0-1665




**DCAP
      GROUP, INC.**


(Exact
      Name of Small Business Issuer as Specified in its Charter)


**Delaware**
                (State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              **36-2476480**
                (I.R.S
                  Employer
                Identification
                  No.)


**1158
      Broadway, Hewlett, NY 11557**


(Address
      of Principal Executive Offices)





**(516)
      374-7600**


(Issuer’s
      Telephone Number, Including Area Code)


**________________________________________________**


(Former
      Name, Former Address and Former Fiscal Year, if Changed


Since
      Last Report)





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





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





**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN**


**BANKRUPTCY
      PROCEEDINGS DURING THE**


**PRECEDING
      FIVE YEARS**





Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court.  
Yes No




**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: 2,896,024 shares as of April 30,
      2006.





Transitional
      Small Business Disclosure Format (check one):  
Yes   No  X











**INDEX**




**DCAP
      GROUP, INC. AND SUBSIDIARIES**





**PART
                I****.**
            **FINANCIAL
                INFORMATION****Item
                1.**
            **Financial
                Statements**Condensed
                Consolidated Balance Sheet - March 31, 2006 (Unaudited)Condensed
                Consolidated Statements of Income - Three months ended March 31,
                2006 and
                2005 (Unaudited)Condensed
                Consolidated Statements of Cash Flows - Three months ended March
                31, 2006
                and 2005 (Unaudited)Notes
                to Condensed Consolidated Financial Statements - Three months ended
                March
                31, 2006 and 2005 (Unaudited)**Item
                2.**
            **Management's
                Discussion and Analysis or Plan of Operation****Item
                3.**
            **Controls
                and Procedures****PART
                II****.**
            **OTHER
                INFORMATION****Item
                1.**
            **Legal
                Proceedings****Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of Proceeds****Item
                3.**
            **Defaults
                Upon Senior Securities****Item
                4.**
            **Submission
                of Matters to a Vote of Security Holders****Item
                5.**
            **Other
                Information****Item
                6.**
            **Exhibits****SIGNATURES**







2


Forward-Looking
      Statements




This
      Quarterly Report contains forward-looking statements as that term is defined
      in
      the federal securities laws. The events described in forward-looking statements
      contained in this Quarterly Report may not occur. Generally these statements
      relate to business plans or strategies, projected or anticipated benefits or
      other consequences of our plans or strategies, projected or anticipated benefits
      from acquisitions made or to be made by us, or projections involving anticipated
      revenues, earnings or other aspects of our operating results. The words "may,"
      "will," "expect," "believe," "anticipate," "project," "plan," "intend,"
      "estimate," and "continue," and their opposites and similar expressions are
      intended to identify forward-looking statements. We caution you that these
      statements are not guarantees of future performance or events and are subject
      to
      a number of uncertainties, risks and other influences, many of which are beyond
      our control, that may influence the accuracy of the statements and the
      projections upon which the statements are based. Factors which may affect our
      results include, but are not limited to, the risks and uncertainties discussed
      in Item 6 of our Annual Report on Form 10-KSB for the year ended December 31,
      2005 under “Factors That May Affect Future Results and Financial
      Condition”.




Any
      one
      or more of these uncertainties, risks and other influences could materially
      affect our results of operations and whether forward-looking statements made
      by
      us ultimately prove to be accurate. Our actual results, performance and
      achievements could differ materially from those expressed or implied in these
      forward-looking statements. We undertake no obligation to publically update
      or
      revise any forward-looking statements, whether from new information, future
      events or otherwise.













3


**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Balance Sheet (Unaudited)***March
              31, 2006***Assets**Current
                AssetsCash
                and cash equivalents
            
            
            
            
            $
            1,362,448Accounts
                receivable, net of allowance for
              doubtful
                accounts of $47,500
            
            
            
            
            
            1,378,924Finance
                contracts receivable
            
            $
            20,117,680Less:
                Deferred interest
            
            
            (1,642,381
            )Less:
                Allowance for finance receivable losses
            
            
            (257,506
            )
            
            18,217,793Prepaid
                expenses and other current assets
            
            
            
            
            
            158,846Deferred
                income taxes
            
            
            
            
            
            77,000Total
                Current Assets
            
            
            
            
            
            21,195,011Property
                and Equipment, net
            
            
            
            
            
            283,538Goodwill
            
            
            
            
            
            2,481,695Other
                Intangibles, net
            
            
            
            
            
            446,112Notes
                Receivable, net
            
            
            
            
            
            3,239,777Deposits
                and Other Assets
            
            
            
            
            
            490,912Total
                Assets
            
            
            
            
            $
            28,137,045**Liabilities
                and Stockholders’ Equity**Current
                Liabilities:Revolving
                credit line
            
            
            
            
            $
            12,254,814Accounts
                payable and accrued expenses
            
            
            
            
            
            968,011Premiums
                payable
            
            
            
            
            
            4,836,012Current
                portion of long-term debt
            
            
            
            
            
            235,000Note
                payable - related party
            
            
            
            
            
            1,303,434Other
                current liabilities
            
            
            
            
            
            172,181Total
                Current Liabilities
            
            
            
            
            
            19,769,452Long-Term
                Debt
            
            
            
            
            
            1,934,604Deferred
                Income Tax
            
            
            
            
            
            37,000Other
                Liabilities
            
            
            
            
            
            22,962Mandatorily
                Redeemable Preferred Stock
            
            
            
            
            
            780,000CommitmentsStockholders’
                Equity:Common
                stock, $.01 par value; authorized 10,000,000 shares;
              issued
                3,672,947
            
            
            
            
            
            36,730Preferred
                stock; $.01 par value; authorized
              1,000,000
                shares; 0 shares issued and outstanding
            
            
            
            
            
            -Capital
                in excess of par
            
            
            
            
            
            11,614,254Deficit
            
            
            
            
            
            (4,879,402
            )6,771,582Treasury
                stock, at cost, 776,923 shares
            
            
            
            
            
            (1,178,555
            )Total
                Stockholders’ Equity
            
            5,593,027Total
                Liabilities and Stockholders’ Equity
            $
            28,137,045








*See
      notes to condensed consolidated financial statements* .




4


**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Statements of Income (Unaudited)***Three
                Months Ended March 31,*
            
            *2006*
            
            *2005*Revenues:Commissions
                and fees
            
            $
            1,893,177
            
            $
            1,788,067Premium
                finance revenue
            
            
            974,513
            
            
            1,420,006Total
                Revenues
            
            
            2,867,690
            
            
            3,208,073Operating
                Expenses:General
                and administrative expenses
            
            
            2,289,509
            
            
            2,182,208Provision
                for finance receivable losses
            
            
            169,625
            
            
            151,416Depreciation
                and amortization
            
            
            111,304
            
            
            111,908Premium
                finance interest expense
            
            
            209,379
            
            
            158,432Total
                Operating Expenses
            
            
            2,779,817
            
            
            2,603,964Operating
                Income
            
            
            87,873
            
            
            604,109Other
                (Expense) Income:Interest
                income
            
            
            1,358
            
            
            4,223Interest
                income - notes receivable
            
            
            212,293
            
            
            -Interest
                expense
            
            
            (80,590
            )
            
            (100,764
            )Interest
                expense - mandatorily redeemable preferred stock
            
            
            (9,750
            )
            
            (9,871
            )Total
                Other Expense
            
            
            123,311
            
            
            (106,412
            )Income
                Before Provision for Income Taxes
            
            
            211,184
            
            
            497,697Provision
                for Income Taxes
            
            
            84,404
            
            
            199,078Net
                Income
            
            $
            126,780
            
            $
            298,619Net
                Income Per Common Share:Basic
            
            $
            0.04
            
            $
            0.11Diluted
            
            $
            0.04
            
            $
            0.09Weighted
                Average Number of Shares OutstandingBasic
            
            
            2,866,746
            
            
            2,715,043Diluted
            
            
            3,238,861
            
            
            3,300,022





*See
      notes to condensed consolidated financial statements.*


5





**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Statements of Cash Flows (Unaudited)***Three
                months ended March 31,*
            
            
            *2006*
            
            
            *2005*Cash
                Flows From Operating Activities:Net
                income
            
            $
            126,780
            
            $
            298,619Adjustments
                to reconcile net income to net cash
              provided
                by operating activities:Depreciation
                and amortization
            
            
            111,304
            
            
            111,908Accretion
                of discount on notes receivable
            
            
            (164,637
            )
            
            -Amortization
                of warrants
            
            
            19,611
            
            
            14,700Changes
                in operating assets and liabilities:Decrease
                (increase) in assets:Accounts
                receivable
            
            
            286,483
            
            
            1,532,660Prepaid
                expenses and other current assets
            
            
            (10,318
            )
            
            40,394Deposits
                and other assets
            
            
            (97,694
            )
            
            (67,274
            )Increase
                (decrease) in liabilities:Premiums
                payable
            
            
            675,051
            
            
            2,381,179Accounts
                payable and accrued expenses
            
            
            302,433
            
            
            (811,553
            )Taxes
                payable
            
            
            (201,399
            )
            
            (361,093
            )Other
                current liabilities
            
            
            (3,801
            )
            
            (8,866
            )Net
                Cash Provided by Operating Activities
            
            
            1,043,813
            
            
            3,130,674Cash
                Flows from Investing Activities:Increase
                in finance contracts receivable - net
            
            
            (1,702,770
            )
            
            (842,454
            )Decrease
                in notes and other receivables - net
            
            
            4,870
            
            
            4,453Purchase
                of notes
            
            
            (1,771,707
            )
            
            -Purchase
                of agencies
            
            
            (832,654
            )
            
            -Purchase
                of property and equipment
            
            
            (10,135
            )
            
            (2,854
            )Net
                Cash Used In Investing Activities
            
            
            (4,312,394
            )
            
            (840,855
            )Cash
                Flows from Financing Activities:Principal
                payments on long-term debt
            
            
            -
            
            
            (1,001,330
            )Proceeds
                from revolving credit line
            
            
            15,457,856
            
            
            16,098,509Payments
                on revolving credit line
            
            
            (12,979,566
            )
            
            (15,323,879
            )Proceeds
                from exercise of stock options
            
            
            191,250
            
            
            7,312Net
                Cash Provided by (Used in) Financing Activities
            
            
            2,669,540
            
            
            (219,388
            )Net
                (Decrease) Increase in Cash and Cash Equivalents
            
            
            (599,041
            )
            
            2,070,431Cash
                and Cash Equivalents, beginning of period
            
            
            1,961,489
            
            
            515,899Cash
                and Cash Equivalents, end of period
            
            $
            1,362,448
            
            $
            2,586,330Supplemental
                Schedule of Non-Cash Investing
              and
                Financing Activities:Note
                payable issued for purchase of notes receivable
            
            $
            1,303,434
            
            $
            -Note
                payable issued for purchase of agencies
            
            $
            550,371
            
            $
            -











*See
      notes to condensed consolidated financial statements.*





6


**DCAP
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**THREE
      MONTHS ENDED MARCH 31, 2006 AND 2005 (UNAUDITED)**





1.
            The
                Condensed Consolidated Balance Sheet as of March 31, 2006, the Condensed
                Consolidated Statements of Income for the three months ended March
                31,
                2006 and 2005 and the Condensed Consolidated Statements of Cash Flows
                for
                the three months ended March 31, 2006 and 2005 have been prepared
                by us
                without audit. In our opinion, the accompanying unaudited condensed
                consolidated financial statements contain all adjustments necessary
                to
                present fairly in all material respects our financial position as
                of March
                31, 2006, results of operations for the three months ended March
                31, 2006
                and 2005 and cash flows for the three months ended March 31, 2006
                and
                2005.




This
      report should be read in conjunction with our Annual Report on Form 10-KSB
      for
      the year ended December 31, 2005.




The
      results of operations and cash flows for the three months ended March 31, 2006
      are not necessarily indicative of the results to be expected for the full
      year.




2.
            Summary
                of Significant Accounting
                Policies




a. 
      Principles of consolidation




The
      accompanying consolidated financial statements include the accounts of all
      subsidiaries and joint ventures in which we have a majority voting interest
      or
      voting control. All significant intercompany accounts and transactions have
      been
      eliminated.




b.
       Revenue recognition




We
      recognize commission revenue from insurance policies at the beginning of the
      contract period. Refunds of commissions on the cancellation of insurance
      policies are reflected at the time of cancellation.




Franchise
      fee revenue on initial franchisee fees is recognized when substantially all
      of
      our contractual requirements under the franchise agreement are completed.
      Franchisees also pay a monthly franchise fee plus an applicable percentage
      of
      co-op advertising expense. We are obligated to provide marketing and training
      support to each franchisee.




Automobile
      club dues are recognized equally over the contract period.




For
      our
      premium finance operations, we are using the interest method to recognize
      interest income over the life of each loan in accordance with Statement of
      Financial Accounting Standard No. 91, “Accounting for Nonrefundable Fees and
      Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
      of
      Leases.”




Upon
      the
      establishment of a premium finance contract, we record the gross loan payments
      as a receivable with a corresponding reduction for deferred interest. The
      deferred interest is amortized to interest income using the interest method
      over
      the life of each loan. The weighted average interest rate charged with respect
      to financed insurance policies was approximately 26.6% and 26.6% **** per
      annum
      for the three months ended March 31, 2006 and 2005, respectively.






7




Delinquency
      fees are earned when collected. Upon completion of collection efforts, after
      cancellation of the underlying insurance policies, any uncollected earned
      interest or fees are charged off.




c. 
      Allowance for finance receivable losses




Customers
      who purchase insurance policies are often unable to pay the premium in a lump
      sum and, therefore, require extended payment terms. Premium finance involves
      making a loan to the customer that is backed by the unearned portion of the
      insurance premiums being financed. No credit checks are made prior to the
      decision to extend credit to a customer. Losses on finance receivables include
      an estimate of future credit losses on premium finance accounts. Credit losses
      on premium finance accounts occur when the unearned premiums received from
      the
      insurer upon cancellation of a financed policy are inadequate to pay the balance
      of the premium finance account. After collection attempts are exhausted, the
      remaining principal balance is written off against the allowance for finance
      receivable losses and the unrealized actual interest and late fees are charged
      against the premium finance revenue. We review historical trends of such losses
      relative to finance receivable balances to develop estimates of future losses.
      However, actual write-offs may differ materially from the write-off estimates
      that we used. For the three months ended March 31, 2006 and 2005, the provision
      for finance receivable losses was $169,625 and $216,919 (before estimated
      recoveries of $65,503 for the 2005 period which reduced the provision for
      finance receivable losses), respectively, and actual principal write-offs for
      such periods (net of recoveries of previous write-offs) were $150,519 and
      $216,919, respectively.




d.
      Reclassifications




Certain
      reclassifications (including reclassification of interest expense on long-term
      debt from “Premium finance interest expense” to “Other (Expense) Income-Interest
      expense” and the reclassification of the premium finance revenue (interest and
      late fees) write-offs from the “Provision for finance receivable losses” to
“Premium finance revenue” (see below)) have been made to the consolidated
      financial statements for the three months ended March 31, 2005 to conform to
      the
      classifications used for the three months ended March 31, 2006. Beginning in
      2005, we were able to obtain a complete detail of the interest and fee
      write-offs for the premium finance receivables.  Effective January 1, 2006,
      we will be recording the premium finance revenue, net of the interest and fee
      write-offs as illustrated below.




Three
      Months Ended March 31, 2005




Statement
                of Income Accounts
            
            
            Originally
                Reported
            
            
            Reclassifications
            
            
            As
                ChangedPremium
                finance revenue
            
            $
            1,789,536
            
            $
            369,530
            
            $
            1,420,006Provision
                for finance receivable losses
            
            
            520,946
            
            
            (369,530
            )
            
            151,416Net
            
            $
            1,268,590
            
            
            0
            
            $
            1,268,590






8




3.
            Business
                Segments




We
      currently have two reportable business segments: Insurance and Premium Finance.
      The Insurance segment sells retail auto, motorcycle, boat, life, business,
      and
      homeowner's insurance and franchises. In addition, this segment offers tax
      preparation services and automobile club services for roadside emergencies.
      Insurance revenues are derived from activities within the United States, and
      all
      long-lived assets are located within the United States. The Premium Finance
      segment offers property and casualty policyholders loans to finance the policy
      premiums.




Summarized
                financial information concerning our reportable segments is shown
                in the
                following tables:




Three
                Months EndedMarch
                31, 2006
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            1,893,177
            
            $
            974,513
            
            $
            -
            
            $
            2,867,690Interest
                income
            
            
            1,273
            
            
            -
            
            
            85
            
            
            1,358Interest
                income - notes receivable
            
            
            -
            
            
            -
            
            
            212,293
            
            
            212,293Interest
                expense
            
            
            23,111
            
            
            209,379
            
            
            67,229
            
            
            299,719Depreciation
                and
              amortization
            
            
            54,027
            
            
            46,985
            
            
            10,292
            
            
            111,304Segment
                profit (loss)
              before
                income taxes
            
            
            340,354
            
            
            114,649
            
            
            (243,819
            )
            
            211,184Segment
                profit (loss)
            
            
            204,282
            
            
            68,790
            
            
            (146,291
            )
            
            126,780Segment
                assets
            
            
            4,674,796
            
            
            19,563,487
            
            
            3,898,762
            
            
            28,137,045


______________




(1)
            Column
                represents corporate-related items and, as it relates to segment
                profit
                (loss), income, expense and assets not allocated to reportable
                segments.




Three
                Months EndedMarch
                31, 2005
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            1,788,067
            
            $
            1,420,006
            
            $
            -
            
            $
            3,208,073Interest
                income
            
            
            981
            
            
            -
            
            
            3,242
            
            
            4,223Interest
                expense
            
            
            14,650
            
            
            158,432
            
            
            95,985
            
            
            269,067Depreciation
                and
              amortization
            
            
            41,043
            
            
            57,744
            
            
            13,121
            
            
            111,908Segment
                profit (loss)
              before
                income taxes
            
            
            464,824
            
            
            537,201
            
            
            (504,328
            )
            
            497,697Segment
                profit (loss)
            
            
            278,896
            
            
            322,320
            
            
            (302,597
            )
            
            298,619Segment
                assets
            
            
            5,209,509
            
            
            24,110,758
            
            
            (634,747
            )
            
            28,685,518


________________




(1)
            Column
                represents corporate-related items and, as it relates to segment
                profit
                (loss), income, expense and assets not allocated to reportable
                segments.






9




4.
            Employee
                Stock Compensation




In
      November 1998, we adopted the 1998 Stock Option Plan, which provides for the
      issuance of incentive stock options and non-statutory stock options. Under
      this
      plan, options to purchase not more than 400,000 shares of our Common Stock
      were
      permitted to be granted, at a price to be determined by our Board of Directors
      or the Stock Option Committee at the time of grant. During 2002, we increased
      the number of shares of Common Stock authorized to be issued pursuant to the
      1998 Stock Option Plan to 750,000. Incentive stock options granted under this
      plan expire no later than ten years from date of grant (except no later than
      five years for a grant to a 10% stockholder). Our Board of Directors or the
      Stock Option Committee will determine the expiration date with respect to
      non-statutory options granted under this plan.




In
      December 2005, our shareholders ratified the adoption of the 2005 Equity
      Participation Plan, which provides for the issuance of incentive stock options,
      non-statutory stock options and restricted stock. Under this plan, a maximum
      of
      300,000 shares of Common Stock may be issued pursuant to options granted and
      restricted stock issued. Incentive stock options granted under this plan expire
      no later than ten years from date of grant (except no later than five years
      for
      a grant to a 10% stockholder). Our Board of Directors or the Stock Option
      Committee will determine the expiration date with respect to non-statutory
      options, and the vesting provisions for restricted stock, granted under this
      plan.




Effective
      January 1, 2006, our plans are accounted for in accordance with the recognition
      and measurement provisions of Statement of Financial Accounting Standards
      (“FAS”) No. 123 (revised 2004), Share-Based Payment (“FAS 123(R)”), which
      replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes
      Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued
      to Employees, and related interpretations. FAS 123(R) requires compensation
      costs related to share-based payment transactions, including employee stock
      options, to be recognized in the financial statements. In addition, we adhere
      to
      the guidance set forth within Securities and Exchange Commission (“SEC”) Staff
      Accounting Bulletin (“SAB”) No. 107, which provides the Staff's views regarding
      the interaction between SFAS No. 123(R) and certain SEC rules and regulations
      and provides interpretations with respect to the valuation of share-based
      payments for public companies.




Prior
      to
      January 1, 2006, we accounted for similar transactions in accordance with APB
      No. 25 which employed the intrinsic value method of measuring compensation
      cost.
      Accordingly, compensation expense was not recognized for fixed stock options
      if
      the exercise price of the option equaled or exceeded the fair value of the
      underlying stock at the grant date.




While
      FAS
      No. 123 encouraged recognition of the fair value of all stock-based awards
      on
      the date of grant as expense over the vesting period, companies were permitted
      to continue to apply the intrinsic value-based method of accounting prescribed
      by APB No. 25 and disclose certain pro forma amounts as if the fair value
      approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148,
      Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
      of SFAS No. 123, was issued, which, in addition to providing alternative methods
      of transition for a voluntary change to the fair value method of accounting
      for
      stock-based employee compensation, required more prominent pro forma disclosures
      in both the annual and interim financial statements. We complied with these
      disclosure requirements for all applicable periods prior to January 1,
      2006.






10




In
      adopting FAS 123(R), we applied the modified prospective approach to transition.
      Under the modified prospective approach, the provisions of FAS 123 (R) are
      to be
      applied to new awards and to awards modified, repurchased, or cancelled after
      the required effective date. Additionally, compensation cost for the portion
      of
      awards for which the requisite service has not been rendered that are
      outstanding as of the required effective date shall be recognized as the
      requisite service is rendered on or after the required effective date. The
      compensation cost for that portion of awards shall be based on the grant-date
      fair value of those awards as calculated for either recognition or pro-forma
      disclosures under FAS 123.




As
      a
      result of the adoption of FAS 123 (R), our results for the three month period
      ended March 31, 2006 include share-based compensation expense totaling
      approximately $10,000. Such amounts have been included in the Condensed
      Consolidated Statements of Income within general and administrative expenses.
      Stock compensation expense recorded under APB No. 25 in the Consolidated
      Statements of Operations for the three months ended March 31, 2005 totaled
      $0.




Stock
      option compensation expense in 2006 is the estimated fair value of options
      granted amortized on a straight-line basis over the requisite service period
      for
      entire portion of the award.




The
      following table addresses the additional disclosure requirements of FAS 123(R)
      in the period of adoption. The table illustrates the effect on net income and
      earnings per share as if the fair value recognition provisions of FAS No. 123
      had been applied to all outstanding and unvested awards in the prior year
      comparable period.




Three
                Months Ended
              March
                31, 2005Net
                income, as reported
            
            $
            298,619Add:
                Stock-based compensation included in reported net income
            
            
            -Deduct:
                Total stock based compensation expense determined under the fair
                value
                based method for all awards, net of related tax effects
            
            
            (41,000
            )Pro
              forma net income
            
            $
            257,619








11




Net
                income per share:Basic
                - as reported
            
            
            .11Basic
                - pro forma
            
            
            .09Diluted
                - as reported
            
            
            .09Diluted
                - pro forma
            
            
            .08




We
      did
      not grant any options under either plan during the three months ended March
      31,
      2006 or 2005.




The
      following table represents our stock options granted, exercised, and forfeited
      during the first quarter of 2006.




Stock
                Options
            
            Number
                of Shares
            
            Weighted
                Average Exercise Price per Share
            
            Weighted
                Average Remaining Contractual Term
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at
              January
                1, 2006
            
            
            328,025
            
            $
            2.09
            
            
            -
            
            
            -Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (127,500
            )
            $
            1.50
            
            
            -
            
            
            -Forfeited/expired
            
            
            (225
            )
            $
            7.39
            
            
            -
            
            
            -Outstanding
                at
              March
                31, 2006
            
            
            200,300
            
            $
            2.46
            
            
            2.27
            
            $
            152,125Vested
                and Exercisable
              at
                March 31, 2006
            
            
            173,075
            
            $
            2.22
            
            
            2.20
            
            $
            150,486





The
      aggregate intrinsic value of the options exercised for the quarter ended March
      31, 2006 and 2005 was $135,150 and $23,399, respectively.




As
      of
      March 31, 2006, there was approximately $70,000 of total unrecognized
      compensation costs related to unvested stock option awards. The $70,000 is
      expected to vest over the weighted average of 1.58 years.




12


The
      following table represents the change in non-vested stock options during the
      first quarter of 2006.




Options
            
            
            Weighted
                Average GrantDate
                Fair ValueNonvested
                at December 31, 2005
            
            
            30,788
            
            $
            1.11Granted
            
            
            -
            
            
            -Vested
            
            
            3,563
            
            $
            .94Forfeited
            
            
            -
            
            
            -Nonvested
                at March 31, 2006
            
            
            27,225
            
            $
            1.13





The
      total
      fair value of shares vested during the three month period ended March 31, 2006
      was $3,360.




5.
            Net
                Income Per Share




Basic
                net income per share is computed by dividing income available to
                common
                shareholders by the weighted-average number of common shares outstanding.
                Diluted earnings per share reflect, in periods in which they have
                a
                dilutive effect, the impact of common shares issuable upon exercise
                of
                stock options and conversion of mandatorily redeemable preferred
                stock.




The
      reconciliation for the three months ended March 31, 2006 and 2005 is as
      follows:




Three
                Months Ended March 31,
            
            
            2006
            
            
            2005Weighted
                Average Number of Shares Outstanding
            
            
            2,866,746
            
            
            2,715,043Effect
                of Dilutive Securities, common stock equivalents
            
            
            372,115
            
            
            584,979Weighted
                Average Number of Shares Outstanding,
              used
                for computing diluted earnings per share
            
            
            3,238,861
            
            
            3,300,022





Net
      income available to common shareholders for the computation of diluted earnings
      per share is computed as follows:





Three
                Months Ended March 31,
            
            
            2006
            
            
            2005Net
                Income
            
            $
            126,780
            
            $
            298,619Interest
                Expense on Dilutive Convertible Preferred Stock
            
            
            9,750
            
            
            9,871Net
                Income Available to Common Shareholders for
              Diluted
                Earnings Per Share
            
            $
            136,530
            
            $
            308,490




6.
            Business
                Acquisitions




Effective
      January 1, 2006, we acquired substantially all of the assets of Accurate Agency
      of Western New York, Inc., Louisons Associates Limited and Accurate Agency,
      Inc.
      (collectively, “Accurate”), insurance brokerage firms with a total of four
      offices located in and around Rochester, New York. The results of Accurate’s
      operations have been included in the consolidated financial statements since
      that date. The acquisition allows for the expansion of our geographical
      footprint.




13


The
      aggregate purchase price was $1,600,000, including $800,000 of cash with the
      balance through the issuance of an $800,000 non-interest bearing note payable
      over 72 months commencing on January 10, 2007. The note has been recorded at
      its
      estimated present value of $612,481. Our initial allocation of the purchase
      price is subject to adjustment.




Our
      condensed consolidated statements of income include the revenue and expenses
      of
      Accurate from January 1, 2006. Had the transaction taken place on January 1,
      2005, on a pro forma basis, the effect on the reported amounts for the three
      months ended March 31, 2005 is considered to be insignificant.




7.
            Purchase
                of Notes Receivable




On
      January 31, 2006, we purchased from Eagle Insurance Company (“Eagle”) two
      surplus notes issued by Commercial Mutual Insurance Company (“CMIC”) in the
      aggregate principal amount of $3,750,000 (the “Surplus Notes”), plus accrued
      interest of $1,794,688. The aggregate purchase price for the Surplus Notes
      was
      $3,075,141, of which $1,303,434 was paid to Eagle by delivery of a six month
      promissory note which provides for interest at the rate of 7.5% per annum.
      CMIC
      is a New York property and casualty insurer. Eagle is a New Jersey property
      and
      casualty insurer under the administrative supervision of the New Jersey
      Department of Banking and Insurance and owns approximately 10% of our
      outstanding common stock. The Surplus Notes acquired by us are past due and
      provide for interest at the prime rate or 8.5% per annum, whichever is less.
      Payments of principal and interest on the Surplus Notes may only be made out
      of
      the surplus of CMIC and require the approval of the New York State Department
      of
      Insurance. The discount on the Surplus Notes and the accrued interest at the
      time of acquisition are being accreted over a 30 month period, the estimated
      period to collect such amounts. Such accretion amount, together with interest
      on
      the Surplus Notes for the period ended March 31, 2006, is included in our
      Statement of Income as “Interest income-notes receivable.”




**Item
      2.** **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION** **.**




***Overview***




There
      are
      75 store locations owned or franchised by us of which 69 are located in New
      York
      State. In the New York metropolitan area, there are 46 DCAP franchises, one
      joint venture DCAP store and one wholly-owned location. There are also 18 Barry
      Scott locations and four Accurate locations outside the New York metropolitan
      area (all located in central and western New York State). There are five
      Atlantic Insurance locations in eastern Pennsylvania. All of the Barry Scott,
      Atlantic Insurance and Accurate locations are wholly-owned by us.




Our
      insurance storefronts serve as insurance agents or brokers and place various
      types of insurance on behalf of customers. We focus on automobile, motorcycle
      and homeowner’s insurance and our customer base is primarily individuals rather
      than businesses.




The
      stores receive commissions from insurance companies for their services. We
      receive fees from the franchised locations in connection with their use of
      the
      DCAP name. Neither we nor the stores currently serve as an insurance company
      and
      therefore do not assume underwriting risks. The stores also offer automobile
      club services for roadside assistance and income tax preparation services.




14


Payments
      Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
      offers premium financing to clients of DCAP, Barry Scott, Atlantic Insurance
      and
      Accurate offices, as well as non-affiliated insurance agencies. We currently
      operate within the states of New York, Pennsylvania and New Jersey.




***Critical
      Accounting Policies***




Our
      consolidated financial statements include accounts of DCAP Group, Inc. and
      all
      majority-owned and controlled subsidiaries. The preparation of financial
      statements in conformity with accounting principles generally accepted in the
      United States requires our management to make estimates and assumptions in
      certain circumstances that affect amounts reported in our consolidated financial
      statements and related notes. In preparing these financial statements, our
      management has utilized information available including our past history,
      industry standards and the current economic environment, among other factors,
      in
      forming its estimates and judgments of certain amounts included in the
      consolidated financial statements, giving due consideration to materiality.
      It
      is possible that the ultimate outcome as anticipated by our management in
      formulating its estimates inherent in these financial statements might not
      materialize. In addition, application of the critical accounting policies below
      involves the exercise of judgment and use of assumptions as to future
      uncertainties and, as a result, actual results could differ from these
      estimates. Further, other companies may utilize different estimates, which
      may
      impact comparability of our results of operations to those of companies in
      similar businesses.




***Commission
      and fee income***




We
      recognize commission revenue from insurance policies at the beginning of the
      contract period, except for commissions that are receivable annually, for which
      we recognize the commission revenue ratably. Refunds of commissions on the
      cancellation of insurance policies are reflected at the time of
      cancellation.




Franchise
      fee revenue from initial franchise fees is recognized when substantially all
      of
      our contractual requirements under the franchise agreement are completed.
      Franchisees also pay a monthly franchise fee plus an applicable percentage
      of
      advertising expense. We are obligated to provide marketing and training support
      to each franchisee.




Automobile
      club dues are recognized equally over the contract period.




***Finance
      income, fees and receivables***




For
      our
      premium finance operations, we are using the interest method to recognize
      interest income over the life of each loan in accordance with Statement of
      Financial Accounting Standard No. 91, “Accounting for Nonrefundable Fees and
      Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
      of
      Leases.”




Upon
      the
      establishment of a premium finance contract, we record the gross loan payments
      as a receivable with a corresponding reduction for deferred interest. The
      deferred interest is amortized to interest income using the interest method
      over
      the life of each loan. The weighted average interest rate charged with respect
      to financed insurance policies was approximately 26.6% and 26.6% per annum
      for
      the three months ended March 31, 2006 and 2005, respectively. Delinquency fees
      are earned when collected. Upon completion of collection efforts, after
      cancellation of the underlying insurance policies, any uncollected earned
      interest or fees are charged off.




15


***Allowance
      for finance receivable losses***




Losses
      on
      finance receivables include an estimate of future credit losses on premium
      finance accounts. Credit losses on premium finance accounts occur when the
      unearned premiums received from the insurer upon cancellation of a financed
      policy are inadequate to pay the balance of the premium finance loan amount,
      which includes accrued interest and late fees. The majority of these shortfalls
      result in the write-off of the remaining principal balance against the allowance
      for finance receivable losses and the unrealized actual interest and late fees
      are charged against the premium finance revenue. We review historical trends
      of
      such losses relative to finance receivable balances to develop estimates of
      future losses. However, actual write-offs may differ materially from the
      write-off estimates that we used. For the three months ended March 31, 2006
      and
      2005, the provision for finance receivables losses was approximately $169,625
      and $216,919 (before estimated recoveries of $65,503 for the 2005 period which
      reduced the provision for finance receivable losses), respectively, and actual
      principal write-offs for such periods (net recoveries of previous write-offs)
      were approximately $150,519 and $216,919, respectively. If our provision for
      finance receivable losses was understated by 15% because our actual write-offs
      were greater than anticipated, the effect would have been a reduction in our
      earnings per share by approximately $0.01 (basic) for the three months ended
      March 31, 2006 and 2005.




***Goodwill
      and intangible assets***




The
      carrying value of goodwill was initially reviewed for impairment as of
      January 1, 2002, and is reviewed annually or whenever events or changes in
      circumstances indicate that the carrying amount might not be recoverable. If
      the
      fair value of the operations to which goodwill relates is less than the carrying
      amount of those operations, including unamortized goodwill, the carrying amount
      of goodwill is reduced accordingly with a charge to expense. Based on our most
      recent analysis, we believe that no impairment of goodwill exists at March
      31,
      2006.




***Stock-based
      compensation***




Prior
      to
      January 1, 2006, we applied the intrinsic value-based method of accounting
      prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
      Issued to Employees, and related interpretations, to account for stock-based
      employee compensation plans and reported pro forma disclosures in our Form
      10-QSB filings by estimating the fair value of options issued and the related
      expense in accordance with SFAS No. 123. Under this method, compensation cost
      is
      recognized for awards of common shares or stock options to our directors,
      officers and employees only if the quoted market price of the stock at the
      grant
      date (or other measurement date, if later) is greater than the amount the
      grantee must pay to acquire the stock. Effective January 1, 2006, we have begun
      to comply with the recent accounting pronouncements from the Financial
      Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
      Standard (“SFAS”) No. 123 (revised 2004) “Share-Based Payment” (SFAS No. 123R)
      which requires us to include the compensation cost using the same method
      discussed above in our Statement of Income.




16


***Results
      of Operations***




Our
      operating income for the three months ended March 31, 2006 was $87,873 as
      compared to $604,109 for the three months ended March 31, 2005.




During
      the three months ended March 31, 2006, revenues from our insurance-related
      operations were $1,893,177 as compared to $1,788,067 for the three months ended
      March 31, 2005. The revenue increase of $105,110 was primarily attributable
      to
      revenues of Accurate whose assets were acquired effective January 1, 2006.




Premium
      finance revenues decreased $445,493 during the three months ended March 31,
      2006
      as compared to the three months ended March 31, 2005. The total number of
      premium loans that we financed during the first quarter of 2006 decreased
      slightly from the first quarter of 2005 and the growth that did occur was
      outside the New York City metropolitan area. This non-New York City market
      generates lower premium levels and therefore lower loan sizes. As a result,
      there was a decline in premium finance revenue.




Our
      general and administrative expenses for the three months ended March 31, 2006
      were $107,301 more than for the three months ended March 31, 2005. The increase
      in general and administrative expenses was primarily due to the expenses related
      to Accurate whose assets were acquired effective January 1, 2006, offset by
      a
      decrease in executive salaries due to the resignation in October 2005 of John
      Willis, our former Chief Operating Officer, and a decrease in fees paid to
      service our premium finance operations.




Our
      provision for finance receivable losses for the first quarter of 2006 was
      $18,209 more than for the first quarter of 2005. This was caused by one-time
      actual and anticipated recoveries recorded in the first quarter of 2005 of
      amounts previously charged-off (no similar items were recorded in the first
      quarter of 2006), offset by a lower provision for finance receivable losses
      in
      the first quarter of 2006 caused by a decrease in volume.




Our
      premium finance interest expense during the three months ended March 31, 2006
      was $50,947 more than for the three months ended March 31, 2005. This increase
      was the result of an increase in LIBOR, offset by a decrease in the average
      outstanding balance of our revolving credit line for the three months ended
      March 31, 2006 compared to the three months ended March 31, 2005.




During
      the three months ended March 31, 2006, we purchased surplus notes of Commercial
      Mutual Insurance Company in the principal amount of $3,750,000, plus accrued
      interest of $1,794,688, for a purchase price of $3,075,141. This transaction
      resulted in interest income-notes receivable of $212,293 during the three months
      ended March 31, 2006. No such notes were purchased during the three months
      ended
      March 31, 2005.




Our
      interest expense for the three months ended March 31, 2006 was $20,174 less
      than
      for the three months ended March 31, 2005. This decrease was the result of
      our
      repaying a portion of our subordinated loan in 2005.




During
      the three months ended March 31, 2006, our provision for income taxes was
      $84,404 as opposed to $199,078 for the three months ended March 31, 2005. This
      was due to the lower income before income taxes in 2006.




17


Our
      insurance-related operations, on a stand-alone basis, generated a net profit
      before income taxes of $340,354 during the three months ended March 31, 2006
      as
      compared to a net profit before income taxes of $464,824 during the three months
      ended March 31, 2005. This decrease was primarily due to decreased revenues
      (exclusive of the revenues of the Accurate stores that were acquired effective
      January 1, 2006). Our premium finance operations, on a stand-alone basis,
      generated a net profit before income taxes of $114,649 during the three months
      ended March 31, 2006 as compared to a net profit before income taxes of $537,201
      during the three months ended March 31, 2005. The decrease was primarily due
      to
      reduced premium finance revenue in 2006 as discussed above. Loss before income
      taxes from corporate-related items not allocable to reportable segments was
      $243,819 during the three months ended March 31, 2006 as compared to $504,328
      during the three months ended March 31, 2005. This decrease was primarily due
      to
      an increase in interest income-notes receivable related to the recent purchase
      of the surplus notes issued
      by Commercial Mutual Insurance Company and a decrease
      in executive compensation.




***Liquidity
      and Capital Resources***




As
      of
      March 31, 2006, we had $1,362,448 in cash and cash equivalents and working
      capital of $1,425,559. As of December 31, 2005, we had $1,961,489 in cash and
      cash equivalents and working capital of $5,321,837.




During
      the three months ended March 31, 2006, our cash and cash equivalents decreased
      by $599,041. This was due to the following:




·
            Net
                cash provided by operating activities during the three months ended
                March
                31, 2006 was $1,043,813 primarily due to the following: (i) our net
                income
                for the period of $126,780, our depreciation and amortization of
                $111,304,
                a decrease in accounts receivable of $286,483, an increase in premiums
                payable of $675,051, and an increase in accounts payable and accrued
                expenses of $302,433 offset by (ii) the discount on notes receivable
                of
                $164,637 and a decrease in taxes payable of $201,399. The decrease
                in
                accounts receivable is the result of a January 2006 payment of a
                revenue
                accrual from an insurance company, which did not continue in 2006.
                The
                increase in premiums payable is the result of our providing premium
                finance services for the Accurate stores whose assets were acquired
                in the
                first quarter of 2006. The increase in accounts payable and accrued
                expenses was attributable to Accurate as well as our ability to increase
                payment terms of certain vendors. The decrease in taxes payable resulted
                from payments of our 2005 tax liability and estimated taxes for
                2006.




·
            Though
                fluctuations in our premium finance business impact our cash position
                and
                daily operations, our cash flows from operating activities do not
                reflect
                changes in the premium finance contract receivables or borrowing
                under our
                revolving credit facility associated with that business. Changes
                in the
                premium finance contract receivables are considered investing activities
                as they include the making and collection of loans and borrowings
                under
                our revolving line of credit are considered financing
                activities.




·
            Net
                cash of $4,312,394 was used in investing activities during the three
                months ended March 31, 2006 primarily due to an increase in our net
                finance contracts receivable of $1,702,770, the purchase of the surplus
                notes issued by Commercial Mutual Insurance Company and the purchase
                of
                the Accurate and Mid-Hudson agencies in the first quarter of 2006.




18


·
            Net
                cash provided by financing activities during the three months ended
                March
                31, 2006 was $2,669,540 primarily due to the following: (i) proceeds
                of
                $15,457,856 from our revolving credit line from Manufacturers and
                Traders
                Trust Co. (“M&T”) for premium finance purposes and for the purchase of
                the surplus notes issued by Commercial Mutual Insurance Company,
                offset by
                (ii) payments of $12,979,566 on the revolving credit line and proceeds
                from the exercise of stock options of
                $191,250.




Our
      premium finance operations are financed pursuant to a $25,000,000 revolving
      line
      of credit from M&T. Subject to certain conditions, M&T has agreed to
      arrange an additional $10,000,000 credit facility with other lenders on a “best
      efforts” basis. The line of credit bears interest at either (i) M&T’s prime
      rate or (ii) LIBOR plus 2.5%, matures on June 30, 2007 and is secured by
      substantially all of our assets. We can borrow against the line to the extent
      of
      85% of eligible premium finance receivables. As of March 31, 2006, $12,254,814
      was outstanding under the loan. As of March 31, 2006, of the $20,117,680
      reflected on the Balance Sheet as “Finance contracts receivable,” approximately
      $15,184,602 represents eligible receivables for purposes of our finance credit
      agreement.




We
      have
      no current commitments for capital expenditures. However, we may, from time
      to
      time, consider acquisitions of complementary businesses, products or
      technologies.




In
      connection with our initial acquisition of the line of credit from M&T, we
      obtained a $3,500,000 secured subordinated loan to support our premium finance
      operations. In January 2005, we utilized the M&T line of credit to repay
      $1,000,000 of the subordinated debt. In May 2005, we utilized the line of credit
      to repay an additional $1,000,000 of the subordinated debt. The remaining
      balance of the loan was due in January 2006 and carries interest at the rate
      of
      12-5/8% per annum. Effective May 25, 2005, we obtained an extension of the
      maturity date of the remaining subordinated debt to September 30, 2007. We
      have
      the right to prepay the subordinated debt (subject to M&T’s consent) without
      penalty.




On
      January 31, 2006, we purchased two surplus notes issued by Commercial Mutual
      Insurance Company in the aggregate principal amount of $3,750,000, plus accrued
      interest of $1,794,688. The aggregate purchase price for the surplus notes
      was
      $3,075,141, of which $1,303,434 was paid by delivery of a six month promissory
      note which provides for interest at the rate of 7.5% per annum.




***Off-Balance
      Sheet Arrangements***




We
      have
      no off-balance sheet arrangements that have or are reasonably likely to have
      a
      current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that is material to investors.




19


**Item
      3.**   **CONTROLS
      AND PROCEDURES**




Our
      Chief
      Executive Officer and Chief Financial Officer conducted an evaluation of the
      effectiveness of our disclosure controls and procedures. Based on this
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were effective as of March 31,
      2006
      in alerting him in a timely manner to material information required to be
      included in our SEC reports. In addition, no change in our internal control
      over
      financial reporting occurred during the fiscal quarter ended March 31, 2006
      that
      has materially affected, or is reasonably likely to materially affect, our
      internal control over financial reporting.




20




**PART
                  II.**
              **OTHER
                  INFORMATION****Item
                  1.**
              **LEGAL
                  PROCEEDINGS**None**Item
                  2.**
              **UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS**None**Item
                  3.**
              **DEFAULTS
                  UPON SENIOR SECURITIES**None**Item
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS**None**Item
                  5.**
              **OTHER
                  INFORMATION**None**Item
                  6.**
              **EXHIBITS**3(a)
              Restated
                  Certificate of Incorporation13(b)
              Certificate
                  of Designation of Series A Preferred Stock23(c)
              By-laws,
                  as amended331
              Rule
                  13a-14(a)/15d-14(a) Certification as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 200232
              Certification
                  of Chief Executive Officer and Chief Financial Officer Pursuant
                  to 18
                  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002
 1
            Denotes document filed as an exhibit to our Quarterly Report on Form
            10-QSB for
            the period ended September 30, 2004 and incorporated herein by
            reference.
 2Denotes document filed as an exhibit to our Current Report on
              Form 8-K for
              an event dated May 28, 2003 and incorporated herein by
              reference.
 3  Denotes
          document filed as an exhibit to our Quarterly Report on Form 10-QSB for
          the
          period ended June 30, 2005 and incorporated herein by
          reference.









21


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


**DCAP
                  GROUP, INC.**Dated:
                  May 14, 2006
              By: 
                  /s/ Barry B. Goldstein
                Barry
                  B. Goldstein
                President
                (Principal
                  Executive, Financial
                and
                  Accounting Officer)