**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 endedJune
      30, 2005[
      ]
    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____





**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: 2,726,899 shares as of July 31,
2005.





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 - June 30, 2005 (Unaudited)Condensed
      Consolidated Statements of Income - Six months ended June 30, 2005 and
      2004 (Unaudited)Condensed
      Consolidated Statements of Income - Three months ended June 30, 2005 and
      2004 (Unaudited)Condensed
      Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and
      2004 (Unaudited)Notes
      to Condensed Consolidated Financial Statements - Six months ended June 30,
      2005 and 2004 (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





Explanatory
Note





All
references in this Quarterly Report to numbers of common shares and per share
information give retroactive effect to the one-for-five reverse split of our
common shares effected as of August 26, 2004.




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 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,
2004 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)***June
      30, 2005***Assets**Current
      AssetsCash
      and cash equivalents
    
    
    
    
    $
    4,100,492Accounts
      receivable, net of allowance for
      doubtful
      accounts of $62,000
    
    
    
    
    
    1,599,559Finance
      contracts receivable
    
    $
    23,059,384Less:
      Deferred interest
    
    
    (1,818,723
    )Less:
      Allowance for finance receivable losses
    
    
    (26,922
    )
    
    21,213,739Prepaid
      expenses and other current assets
    
    
    
    
    
    205,447Deferred
      income taxes
    
    
    
    
    
    51,200Total
      Current Assets
    
    
    
    
    
    27,170,437Property
      and Equipment, net
    
    
    
    
    
    317,417Goodwill
    
    
    
    
    
    1,238,551Other
      Intangibles, net
    
    
    
    
    
    227,936Deferred
      Income Taxes
    
    
    
    
    
    3,600Deposits
      and Other Assets
    
    
    
    
    
    430,357Total
      Assets
    
    
    
    
    $
    29,388,298**Liabilities
      and Stockholders’ Equity**Current
      Liabilities:Revolving
      credit line
    
    
    
    
    $
    13,692,920Accounts
      payable and accrued expenses
    
    
    
    
    
    796,175Premiums
      payable
    
    
    
    
    
    6,910,245Current
      portion of long-term debt
    
    
    
    
    
    125,000Income
      taxes payable
    
    
    
    
    
    111,631Other
      current liabilities
    
    
    
    
    
    171,143Total
      Current Liabilities
    
    
    
    
    
    21,807,114Long-Term
      Debt
    
    
    
    
    
    1,539,540Other
      Liabilities
    
    
    
    
    
    39,230Mandatorily
      Redeemable Preferred Stock
    
    
    
    
    
    780,000CommitmentsStockholders’
      Equity:Common
      stock, $.01 par value; authorized 10,000,000 shares
      issued
      3,503,822
    
    
    
    
    
    35,039Preferred
      stock; $.01 par value; authorized
      1,000,000
      shares; 0 shares issued and outstanding
    
    
    
    
    
    -Capital
      in excess of par
    
    
    
    
    
    11,331,858Deficit
    
    
    
    
    
    (4,965,928
    )6,400,969Treasury
      stock, at cost, 776,923 shares
    
    
    
    
    
    (1,178,555
    )Total
      Stockholders’ Equity
    
    5,222,414Total
      Liabilities and Stockholders’ Equity
    $
    29,388,298


**


*See
notes to condensed consolidated financial statements* .


4


**DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****Condensed
      Consolidated Statements of Income (Unaudited)***Six
      Months Ended June 30,*
    
    *2005*
    
    *2004*Revenues:Commissions
      and fees
    
    $
    3,638,169
    
    $
    3,472,839Premium
      finance revenue
    
    
    3,639,267
    
    
    3,955,086Total
      Revenues
    
    
    7,277,436
    
    
    7,427,925Operating
      Expenses:General
      and administrative expenses
    
    
    4,378,280
    
    
    4,175,252Provision
      for finance receivable losses
    
    
    1,240,291
    
    
    1,214,770Depreciation
      and amortization
    
    
    225,516
    
    
    210,465Premium
      finance interest expense
    
    
    353,204
    
    
    344,375Total
      Operating Expenses
    
    
    6,197,291
    
    
    5,944,862Operating
      Income
    
    
    1,080,145
    
    
    1,483,063Other
      (Expense) Income:Interest
      income
    
    
    8,096
    
    
    5,441Interest
      expense
    
    
    (175,296
    )
    
    (268,457
    )Interest
      expense - mandatorily redeemable preferred stock
    
    
    (19,621
    )
    
    (22,600
    )Total
      Other Expense
    
    
    (186,821
    )
    
    (285,616
    )Income
      Before Provision for Income Taxes
    
    
    893,324
    
    
    1,197,447Provision
      for Income Taxes
    
    
    357,310
    
    
    476,386Net
      Income
    
    $
    536,014
    
    $
    721,061Net
      Income Per Common Share:Basic
    
    $
    0.20
    
    $
    0.29Diluted
    
    $
    0.17
    
    $
    0.23Weighted
      Average Number of Shares OutstandingBasic
    
    
    2,720,994
    
    
    2,473,617Diluted
    
    
    3,272,325
    
    
    3,237,348








*See
notes to condensed consolidated financial statements.*




5


**DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****Condensed
      Consolidated Statements of Income (Unaudited)***Three
      Months Ended June 30,*
    
    
    *2005*
    
    
    *2004*Revenues:Commissions
      and fees
    
    $
    1,850,102
    
    $
    1,801,022Premium
      finance revenue
    
    
    1,849,731
    
    
    2,126,886Total
      Revenues
    
    
    3,699,833
    
    
    3,927,908Operating
      Expenses:General
      and administrative expenses
    
    
    2,196,072
    
    
    2,223,557Provision
      for finance receivable losses
    
    
    719,345
    
    
    682,430Depreciation
      and amortization
    
    
    113,608
    
    
    107,982Premium
      finance interest expense
    
    
    194,772
    
    
    193,702Total
      Operating Expenses
    
    
    3,223,797
    
    
    3,207,671Operating
      Income
    
    
    476,036
    
    
    720,237Other
      (Expense) Income:Interest
      income
    
    
    3,873
    
    
    3,751Interest
      expense
    
    
    (74,532
    )
    
    (133,260
    )Interest
      expense - mandatorily redeemable preferred stock
    
    
    (9,750
    )
    
    (11,300
    )Total
      Other Expense
    
    
    (80,409
    )
    
    (140,809
    )Income
      Before Provision for Income Taxes
    
    
    395,627
    
    
    579,428Provision
      for Income Taxes
    
    
    158,232
    
    
    228,678Net
      Income
    
    $
    237,395
    
    $
    350,750Net
      Income Per Common Share:Basic
    
    $
    0.09
    
    $
    0.14Diluted
    
    $
    0.08
    
    $
    0.11Weighted
      Average Number of Shares OutstandingBasic
    
    
    2,726,899
    
    
    2,490,590Diluted
    
    
    3,250,625
    
    
    3,247,573








*See
notes to condensed consolidated financial statements.*




6


**DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****Condensed
      Consolidated Statements of Cash Flows (Unaudited)***Six
      months ended June 30,*
    
    *2005*
    
    *2004*Cash
      Flows From Operating Activities:Net
      income
    
    $
    536,014
    
    $
    721,061Adjustments
      to reconcile net income to net cash
      provided
      by operating activities:Depreciation
      and amortization
    
    
    225,516
    
    
    210,465Amortization
      of warrants
    
    
    23,600
    
    
    29,400Changes
      in operating assets and liabilities:Decrease
      (increase) in assets:Accounts
      receivable
    
    
    1,311,681
    
    
    331,848Prepaid
      expenses and other current assets
    
    
    50,127
    
    
    (144,494
    )Deposits
      and other assets
    
    
    (111,188
    )
    
    (18,174
    )Increase
      (decrease) in liabilities:Premiums
      payable
    
    
    2,470,866
    
    
    507,082Accounts
      payable and accrued expenses
    
    
    (911,983
    )
    
    (245,011
    )Taxes
      payable
    
    
    (318,862
    )
    
    474,393Other
      current liabilities
    
    
    (12,804
    )
    
    (12,281
    )Net
      Cash Provided by Operating Activities
    
    
    3,262,967
    
    
    1,854,289Cash
      Flows from Investing Activities:Decrease
      (increase) in finance contracts receivable - net
    
    
    218,295
    
    
    (6,270,670
    )Decrease
      in notes and other receivables - net
    
    
    9,007
    
    
    8,234Purchase
      of property and equipment
    
    
    (5,948
    )
    
    (64,258
    )Net
      Cash Provided by (Used in) Investing Activities
    
    
    221,354
    
    
    (6,326,694
    )Cash
      Flows from Financing Activities:Principal
      payments on long-term debt
    
    
    (2,004,301
    )
    
    (21,878
    )Proceeds
      from revolving credit line
    
    
    32,848,533
    
    
    35,130,245Payments
      on revolving credit line
    
    
    (30,751,272
    )
    
    (29,719,251
    )Proceeds
      from exercise of stock options and warrants
    
    
    7,312
    
    
    194,997Net
      Cash Provided by Financing Activities
    
    
    100,272
    
    
    5,584,113Net
      Increase in Cash and Cash Equivalents
    
    
    3,584,593
    
    
    1,111,708Cash
      and Cash Equivalents, beginning of period
    
    
    515,899
    
    
    1,349,304Cash
      and Cash Equivalents, end of period
    
    $
    4,100,492
    
    $
    2,461,012







*See
notes to condensed consolidated financial statements.*




7


**DCAP
GROUP, INC. AND SUBSIDIARIES**


**NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**SIX
MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)**





1.
    The
      Condensed Consolidated Balance Sheet as of June 30, 2005, the Condensed
      Consolidated Statements of Income for the three and six months ended June
      30, 2005 and 2004 and the Condensed Consolidated Statements of Cash Flows
      for the six months ended June 30, 2005 and 2004 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 June
      30, 2005, results of operations for the three and six months ended June
      30, 2005 and 2004 and cash flows for the six months ended June 30, 2005
      and 2004.




This
report should be read in conjunction with our Annual Report on Form 10-KSB for
the year ended December 31, 2004.




The
results of operations and cash flows for the six months ended June 30, 2005 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 (except for those commissions that are receivable annually,
which we recognized on a ratable basis in 2004) and on automobile club dues
equally over the contract period. Franchise fee revenue is recognized when
substantially all of our contractual requirements under the franchise agreement
are completed. Refunds of commissions on the cancellation of insurance policies
are reflected at the time of cancellation.




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.”




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.







8


c.  Website
Development Costs




Technology
and content costs are generally expensed as incurred, except for certain costs
relating to the development of internal-use software, including those relating
to operating our website, that are capitalized and depreciated over two years. A
total of $0 and $12,945 in such costs was incurred during the six months ended
June 30, 2005 and 2004, 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) have been made to the consolidated financial statements for the six and
three months ended June 30, 2004 to conform with the classifications used for
the six and three months ended June 30, 2005.




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:




Six
      Months Ended
      June
      30, 2005
    Insurance
    Premium
      Finance
    Other
      (1)
    TotalRevenues
      from external
      customers
    $3,638,169
    $3,639,267
    $-
    $7,277,436Interest
      income
    2,070
    -
    6,026
    8,096Interest
      expense
    28,969
    353,204
    165,948
    548,121Depreciation
      and
      amortization
    81,965
    117,309
    26,242
    225,516Segment
      profit (loss)
      before
      income taxes
    961,565
    897,564
    (965,805)
    893,324Segment
      profit (loss)
    576,939
    538,871
    (579,796)
    536,014Segment
      assets
    3,262,497
    25,010,268
    1,115,533
    29,388,298


____________





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




9


Six
      Months Ended
      June
      30, 2004
    Insurance
    Premium
      Finance
    Other
      (1)
    TotalRevenues
      from external
      Customers
    $3,472,839
    $3,955,086
    $          -
    $7,427,925Interest
      income
    5,441
    -
    -
    5,441Interest
      expense
    40,719
    344,375
    250,338
    635,432Depreciation
      and
      Amortization
    84,648
    111,528
    14,289
    210,465Segment
      profit (loss)
      before
      income taxes
    817,976
    1,216,301
    (836,830)
    1,197,447Segment
      profit (loss)
    490,786
    729,780
    (499,505)
    721,061Segment
      assets
    3,565,414
    26,754,589
    1,358,568
    31,678,571


____________





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





4.
    Stock
      Options




We have
elected the disclosure only provisions of Statement of Financial Accounting
Standard No. 123, “Accounting for Stock-Based Compensation” (“FASB 123”) in
accounting for our employee stock options. Accordingly, no compensation expense
has been recognized. Had we recorded compensation expense for the stock options
based on the fair value at the grant date for awards in the six and three months
ended June 30, 2005 and 2004 consistent with the provisions of SFAS 123, our net
income and net income per share would have been adjusted as
follows:




Six
      Months Ended
      June
      30,
    Three
      Months Ended
      June
      30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net
      income, as reported
    
    $
    536,014
    
    $
    721,061
    
    $
    237,395
    
    $
    350,750Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method, net of related tax effects
    
    
    (32,000
    )
    
    (33,000
    )
    
    (16,000
    )
    
    (17,000
    )Pro
      forma net income
    
    $
    504,014
    
    $
    688,061
    
    $
    221,395
    
    $
    333,750Net
      income per share:Basic
      - as reported
    
    $
    0.20
    
    $
    0.29
    
    $
    0.09
    
    $
    0.14Basic
      - pro forma
    
    $
    0.19
    
    $
    0.28
    
    $
    0.08
    
    $
    0.13Diluted
      - as reported
    
    $
    0.17
    
    $
    0.23
    
    $
    0.08
    
    $
    0.11Diluted
      - pro forma
    
    $
    0.16
    
    $
    0.22
    
    $
    0.07
    
    $
    0.11







10






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 is as follows:




Six
      Months Ended
      June
      30,
    Three
      Months Ended
      June
      30,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted
      Average Number of Shares Outstanding
    
    
    2,720,994
    
    
    2,473,617
    
    
    2,726,899
    
    
    2,490,590Effect
      of Dilutive Securities, common stock
      equivalents
    
    
    551,331
    
    
    763,731
    
    
    523,726
    
    
    756,983Weighted
      Average Number of Shares Outstanding,
      used
      for computing diluted earnings per share
    
    
    3,272,325
    
    
    3,237,348
    
    
    3,250,625
    
    
    3,247,573





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





Six
      Months Ended
      June
      30,
    Three
      Months Ended
      June
      30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net
      Income
    
    $
    536,014
    
    $
    721,061
    
    $
    237,395
    
    $
    350,750Interest
      Expense on Dilutive Convertible Preferred Stock
    
    
    19,621
    
    
    22,600
    
    
    9,750
    
    
    11,300Net
      Income Available to Common Shareholders
      for
      Diluted Earnings Per Share
    
    $
    555,635
    
    $
    743,661
    
    $
    247,145
    
    $
    362,050





6.
    Conversion
      of Mandatorily Redeemable Preferred Stock.




On
January 15, 2005, the preferred stockholder converted 124 Series A preferred
shares into 49,600 of our common shares.




7.
    Subordinated
      Debt and Warrants




Effective
May 25, 2005, the holders of $1,500,000 outstanding principal amount of our
subordinated debt agreed to extend the maturity date of the debt from January
10, 2006 to September 30, 2007. This extension was given to satisfy a
requirement of our premium finance lender that arose in connection with the
increase in our revolving line of credit to $25,000,000 and the extension of the
line to June 30, 2007. In consideration for the extension of the due date of our
subordinated debt, we extended the expiration date of warrants held by the
debtholders for the purchase of 97,500 shares of our common stock from January
10, 2006 to September 30, 2007. The extension of the warrants was valued at
$160,260 and is being amortized as additional interest expense over the
extension period.






11




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




***Overview***




We
operate 25 storefronts, including 19 Barry Scott locations acquired through our
August 2002 acquisition of Barry Scott Companies, Inc., and five Atlantic
Insurance locations acquired through our May 2004 acquisition of substantially
all the assets of AIA Acquisition Corp. We also have 45 franchised DCAP
locations.




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.




Payments
Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
offers premium financing to clients of DCAP, Barry Scott and Atlantic Insurance
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 those commissions that are receivable annually,
which we recognized on a ratable basis in 2004). Refunds of commissions on the
cancellation of insurance policies are reflected at the time of
cancellation.





12





Franchise
fee revenue is recognized when substantially all of our contractual requirements
under the franchise agreement are completed.




Automobile
club dues are recognized equally over the contract period.




*Finance
income, fees and receivables*




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.”




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.




*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. The majority of these shortfalls result in the
write-off of such interest. 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.




*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 June 30,
2005.




*Stock-based
compensation*




We apply
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 report 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.




13


***Results
of Operations***




Our
operating income for the six months ended June 30, 2005 was $1,080,145 as
compared to $1,483,063 for the six months ended June 30, 2004.




During
the six months ended June 30, 2005, revenues from our insurance-related
operations were $3,638,169 as compared to $3,472,839 for the six months ended
June 30, 2004. The revenue increase of $165,330 was primarily attributable to a
change in underwriting in New York. There is a greater availability for coverage
in the voluntary marketplace, thus reducing the need to place clients in the New
York Auto Insurance Plan (“NYAIP”), the involuntary or residual market. We are
paid a higher commission rate on the voluntary policies, both for new and
renewal business.




Premium
finance revenues decreased $315,819 during the six months ended June 30, 2005 as
compared to the six months ended June 30, 2004. The total number of policies
that we financed during the first half of 2005 increased slightly over the first
half of 2004; however, the growth occurred outside the New York City
metropolitan area. This non-NewYork 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 six months ended June 30, 2005 were
$203,028 more than for the six months ended June 30, 2004. This increase was
primarily due to our increased advertising and marketing efforts in 2005,
increased salaries (due to, among other things, the hiring of John J. Willis as
our Chief Operating Officer in October 2004) and increased consulting
fees.




Our
provision for finance receivable losses for the first six months of 2005 was
$25,521 more than for the first six months of 2004. In early 2005, the
NYAIP, at the behest of the New York Department of Insurance (the “Department”),
notified all carriers that it has always been the Department’s position that
policy premiums were not to be increased without specific underwriting
information. Certain carriers had been increasing premiums, but without
documentation. This unwarranted increase resulted in an increase of earned
premiums by such carriers and thus, upon cancellation, an unwarranted reduction
in the return premium to the insured (or in the case of a policy which had been
premium financed, a reduction in the return premium to the finance company). One
large carrier acknowledged that it had followed this flawed underwriting, and
began making refunds late in the first quarter of 2005. We anticipate further
refunds from this carrier and are exploring our options regarding other
carriers, which to date, have not offered refunds. Refunds on previously
charged-off accounts offset our provision for finance receivable losses in the
first six months of 2005.


Our
depreciation and amortization expense for the six months ended June 30, 2005 was
$15,051 more than for the six months ended June 30, 2004. This increase was
primarily the result of the amortization of loan origination costs incurred in
connection with our revolving loan agreement entered into in December
2004.




Our
premium finance interest expense during the six months ended June 30, 2005 was
$8,829 more than for the six months ended June 30, 2004. This increase was the
result of the repayment of a portion of our subordinated loan with proceeds of
our revolving credit line, offset by a lower floating interest rate on the new
revolving credit line entered into in December 2004.












14
 
 
 
 Our
interest expense for the six months ended June 30, 2005 was $93,161 less than
for the six months ended June 30, 2004. This decrease was the result of our
repaying a portion of our subordinated loan in 2005.

During
the six months ended June 30, 2005, our provision for income taxes was $357,310
as opposed to $476,386 for the six months ended June 30, 2004. This was due to
the lower income before income taxes in 2005.

Our
insurance-related operations, on a stand-alone basis, generated a net profit
before income taxes of $961,565 during the six months ended June 30, 2005 as
compared to a net profit before income taxes of $817,976 during the six months
ended June 30, 2004. This increase was primarily due to increased revenue as
discussed above. Our premium finance operations, on a stand-alone basis,
generated a net profit before income taxes of $897,564 during the six months
ended June 30, 2005 as compared to a net profit before income taxes of
$1,216,301 during the six months endedJune 30, 2004.
The decrease was primarily due to reduced premium finance revenue in 2005 as
discussed above. Loss before income taxes from corporate-related items not
allocable to reportable segments was $965,805 during the six months ended June
30, 2005 as compared to $836,830 during the six months ended June 30, 2004. This
increase was primarily due to increased executive compensation and consulting
fees.





***Liquidity
and Capital Resources***




As of
June 30, 2005, we had $4,100,492 in cash and cash equivalents and working
capital of $5,363,323. As of December 31, 2004, we had $515,899 in cash and cash
equivalents and working capital of $5,678,700.




During
the six months ended June 30, 2005, our cash and cash equivalents increased by
$3,584,593. This was due to the following:




·
    Net
      cash provided by operating activities was $3,262,967 primarily due to the
      following: (i) our net income for the period of $536,014, plus a decrease
      in accounts receivable of $1,311,681 and an increase in premiums payable
      of $2,470,866, offset by (ii) a decrease in accounts payable and accrued
      expenses of $911,983 and taxes payable of
$318,862.




·
    Net
      cash provided by investing activities of $221,354 primarily due to a
      decrease in our net finance contracts receivable of
    $218,295.




·
    Net
      cash provided by financing activities of $100,272 primarily due to the
      following: (i) proceeds of $32,848,533 from our revolving credit line from
      Manufacturers and Traders Trust Co. for premium finance purposes, offset
      by (ii) payments of $30,751,272 on the revolving credit line and
      $2,004,301 of long-term debt.




Our
premium finance operations are financed pursuant to a $25,000,000 revolving line
of credit from Manufacturers and Traders Trust Co. (“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






15
 
 the line
to the extent of 85% of eligible premium finance receivables. As of June 30,
2005, $13,692,920 was outstanding under the line.


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. Effective May 10, 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.


******


***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.




**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 June 30, 2005
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 June 30, 2005 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.







16


**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 amended10
    Amendment
      to Secured Subordinated Promissory Notes and Warrants, dated May 25, 2005,
      between DCAP Group, Inc. and the holders of the outstanding
      notes31
    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.
 17








**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:  August 15,
    2005
    By:
    /s/  Barry B.
    GoldsteinBarry B. GoldsteinPresident
      (Principal
      Executive, Financial
      and
      Accounting Officer)





18