**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 endedMarch
      31, 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. YesNo
****
**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 April 30,
2005.

Transitional
Small Business Disclosure Format (check one): YesNoX

********
**INDEX**
**DCAP
GROUP, INC. AND SUBSIDIARIES**

**PART
      I****.**
    **FINANCIAL
      INFORMATION****Item
      1.**
    **Financial
      Statements**Condensed
      Consolidated Balance Sheet - March 31, 2005 (Unaudited)Condensed
      Consolidated Statements of Income - Three months ended March 31, 2005 and
      2004 (Unaudited)Condensed
      Consolidated Statements of Cash Flows - Three months ended March 31, 2005
      and 2004 (Unaudited)Notes
      to Condensed Consolidated Financial Statements - Three months ended March
      31, 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)***March
      31, 2005*****
      **Assets**Current
      AssetsCash
      and cash equivalents
    
    
    
    
    $
    2,586,330Accounts
      receivable, net of allowance for
      doubtful accounts of $62,000
    
    
    
    
    
    1,378,580Finance
      contracts receivable
    
    $
    24,259,471Less: Deferred interest
    
    
    (1,945,155
    )Less: Allowance for finance receivable losses
    
    
    (39,828
    )
    
    22,274,488Prepaid
      expenses and other current assets
    
    
    
    
    
    215,180Deferred
      income taxes
    
    
    
    
    
    51,200Total
      Current Assets
    
    
    
    
    
    26,505,778Property
      and Equipment, net
    
    
    
    
    
    343,199Goodwill
    
    
    
    
    
    1,238,551Other
      Intangibles, net
    
    
    
    
    
    247,190Deferred
      Income Taxes
    
    
    
    
    
    3,600Deposits
      and Other Assets
    
    
    
    
    
    456,475Total
      Assets
    
    
    
    
    $
    28,794,793****
      **Liabilities
      and Stockholders’ Equity**Current
      Liabilities:Revolving
      credit line
    
    
    
    
    $
    12,370,289Accounts
      payable and accrued expenses
    
    
    
    
    
    896,605Premiums
      payable
    
    
    
    
    
    6,820,558Current
      portion of long-term debt
    
    
    
    
    
    2,580,900Income
      taxes payable
    
    
    
    
    
    69,400Other
      current liabilities
    
    
    
    
    
    175,084Total
      Current Liabilities
    
    
    
    
    
    22,912,836Long-Term
      Debt
    
    
    
    
    
    235,000Other
      Liabilities
    
    
    
    
    
    42,201Mandatorily
      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
    
    
    
    
    
    11,171,598Deficit
    
    
    
    
    
    (5,203,326
    )6,003,311Treasury
      stock, at cost, 776,923 shares
    
    
    
    
    
    (1,178,555
    )Total
      Stockholders’ Equity
    
    4,824,756Total
      Liabilities and Stockholders’ Equity
    $
    28,794,793
*See
notes to condensed consolidated financial statements*.
4

**DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****Condensed
      Consolidated Statements of Income (Unaudited)***Three
      Months Ended March 31,*
    
    *2005*
    
    *2004*Revenues:Commissions
      and fees
    
    $
    1,788,067
    
    $
    1,671,817Premium
      finance revenue
    
    
    1,789,536
    
    
    1,828,200Total
      Revenues
    
    
    3,577,603
    
    
    3,500,017Operating
      Expenses:General
      and administrative expenses
    
    
    2,182,208
    
    
    1,951,695Provision
      for finance receivable losses
    
    
    520,946
    
    
    532,340Depreciation
      and amortization
    
    
    111,908
    
    
    102,483Premium
      finance interest expense
    
    
    254,416
    
    
    275,841Total
      Operating Expenses
    
    
    3,069,478
    
    
    2,862,359Operating
      Income
    
    
    508,125
    
    
    637,658Other
      (Expense) Income:Interest
      income
    
    
    4,223
    
    
    1,690Interest
      expense
    
    
    (4,780
    )
    
    (10,029
    )Interest
      expense - mandatorily redeemable preferred stock
    
    
    (9,871
    )
    
    (11,300
    )Total
      Other Expense
    
    
    (10,428
    )
    
    (19,639
    )Income
      Before Provision for Income Taxes
    
    
    497,697
    
    
    618,019Provision
      for Income Taxes
    
    
    199,078
    
    
    247,708Net
      Income
    
    $
    298,619
    
    $
    370,311Net
      Income Per Common Share:Basic
    
    $
    0.11
    
    $
    0.15Diluted
    
    $
    0.09
    
    $
    0.12Weighted
      Average Number of Shares OutstandingBasic
    
    
    2,715,043
    
    
    2,470,680Diluted
    
    
    3,300,022
    
    
    3,241,159


*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,*
    
    *2005*
    
    *2004*Cash
      Flows From Operating Activities:Net
      income
    
    $
    298,619
    
    $
    370,311Adjustments
      to reconcile net income to net cash
      provided
      by operating activities:Depreciation
      and amortization
    
    
    111,908
    
    
    102,483Bad
      debt expenses
    
    
    -
    
    
    (24,019
    )Amortization
      of warrants
    
    
    14,700
    
    
    14,700Changes
      in operating assets and liabilities:Decrease
      (increase) in assets:Accounts
      receivable
    
    
    1,532,660
    
    
    746,124Prepaid
      expenses and other current assets
    
    
    40,394
    
    
    (19,516
    )Deposits
      and other assets
    
    
    (67,274
    )
    
    (6,385
    )Increase
      (decrease) in liabilities:Premiums
      payable
    
    
    2,381,179
    
    
    1,588,532Accounts
      payable and accrued expenses
    
    
    (811,553
    )
    
    (464,376
    )Taxes
      payable
    
    
    (361,093
    )
    
    245,714Other
      current liabilities
    
    
    (8,866
    )
    
    (13,448
    )Net
      Cash Provided by Operating Activities
    
    
    3,130,674
    
    
    2,540,120Cash
      Flows from Investing Activities:Increase
      in finance contracts receivable - net
    
    
    (842,454
    )
    
    (5,075,037
    )Decrease
      in notes and other receivables - net
    
    
    4,453
    
    
    4,071Purchase
      of property and equipment
    
    
    (2,854
    )
    
    (44,001
    )Net
      Cash Used In Investing Activities
    
    
    (840,855
    )
    
    (5,114,967
    )Cash
      Flows from Financing Activities:Principal
      payments on long-term debt
    
    
    (1,001,330
    )
    
    (4,467
    )Proceeds
      from revolving credit line
    
    
    16,098,509
    
    
    16,996,812Payments
      on revolving credit line
    
    
    (15,323,879
    )
    
    (13,205,968
    )Proceeds
      from exercise of stock options
    
    
    7,312
    
    
    -Net
      Cash (Used in) Provided by Financing Activities
    
    
    (219,388
    )
    
    3,786,377Net
      Increase in Cash and Cash Equivalents
    
    
    2,070,431
    
    
    1,211,530Cash
      and Cash Equivalents, beginning of period
    
    
    515,899
    
    
    1,349,304Cash
      and Cash Equivalents, end of period
    
    $
    2,586,330
    
    $
    2,560,834

*See
notes to condensed consolidated financial statements.*
6**DCAP
GROUP, INC. AND SUBSIDIARIES**
**NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
**THREE
MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)**

1.
    The
      Condensed Consolidated Balance Sheet as of March 31, 2005, the Condensed
      Consolidated Statements of Income for the three months ended March 31,
      2005 and 2004 and the Condensed Consolidated Statements of Cash Flows for
      the three months ended March 31, 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 March
      31, 2005, results of operations for the three months ended March 31, 2005
      and 2004 and cash flows for the three months ended March 31, 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 three months ended March 31, 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.

7
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 $6,582 in such costs was incurred during the three months ended
March 31, 2005 and 2004, respectively.

d.Reclassifications

Certain
reclassifications have been made to the consolidated financial statements for
the three months ended March 31, 2004 to conform with the classifications used
for the three months ended March 31, 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:

Three
      Months Ended
      March
      31, 2005
    
    
    Insurance
    
    
    Premium
      Finance
    
    
    Other
      (1)
    
    
    TotalRevenues
      from external
      customers
    
    $
    1,786,977
    
    $
    1,790,626
    
    $
    -
    
    $
    3,577,603Interest
      income
    
    
    981
    
    
    -
    
    
    3,242
    
    
    4,223Interest
      expense
    
    
    14,651
    
    
    254,416
    
    
    -
    
    
    269,067Depreciation
      and
      amortization
    
    
    41,043
    
    
    57,744
    
    
    13,121
    
    
    111,908Segment
      profit (loss)
      before
      income taxes
    
    
    464,824
    
    
    441,218
    
    
    (408,345
    )
    
    497,697Segment
      profit (loss)
    
    
    278,895
    
    
    264,730
    
    
    (245,006
    )
    
    298,619Segment
      assets
    
    
    3,283,996
    
    
    24,168,719
    
    
    1,342,078
    
    
    28,794,793
____________

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


8

Three
      Months Ended
      March
      31, 2004
    
    
    Insurance
    
    
    Premium
      Finance
    
    
    Other
      (1)
    
    
    TotalRevenues
      from external
      customers
    
    $
    1,671,817
    
    $
    1,828,200
    
    $
    -
    
    $
    3,500,017Interest
      income
    
    
    1,690
    
    
    -
    
    
    -
    
    
    1,690Interest
      expense
    
    
    20,146
    
    
    275,841
    
    
    1,183
    
    
    297,170Depreciation
      and
      amortization
    
    
    41,947
    
    
    55,044
    
    
    5,492
    
    
    102,483Segment
      profit (loss)
      before
      income taxes
    
    
    399,945
    
    
    464,852
    
    
    (246,778
    )
    
    618,019Segment
      profit (loss)
    
    
    239,980
    
    
    278,911
    
    
    (148,580
    )
    
    370,311Segment
      assets
    
    
    3,029,824
    
    
    25,785,954
    
    
    1,331,846
    
    
    30,147,624
____________

(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 three months ended
March 31, 2005 and 2004 consistent with the provisions of SFAS 123, our net
income and net income per share would have been adjusted as
follows:

Three
      Months Ended
      March 31,2005
    
    
    2004Net
      income, as reported
    
    $
    298,619
    
    $
    370,311Deduct:
      Total stock-based employee compensation
      expense
      determined under fair value based method, net of related tax
      effects
    
    
    (41,000
    )
    
    (16,000
    )Pro
      forma net income
    
    $
    257,619
    
    $
    354,311Net
      income per share:Basic
      - as reported
    
    $
    0.11
    
    $
    0.15Basic
      - pro forma
    
    $
    0.09
    
    $
    0.14Diluted
      - as reported
    
    $
    0.09
    
    $
    0.12Diluted
      - pro forma
    
    $
    0.08
    
    $
    0.11

9
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, 2005 and 2004 is as
follows:

Three
      Months Ended March 31,
    
    2005
    
    2004Weighted
      Average Number of Shares Outstanding
    
    2,715,043
    
    2,470,680Effect
      of Dilutive Securities, common stock equivalents
    
    584,979
    
    770,479Weighted
      Average Number of Shares Outstanding,
      used
      for computing diluted earnings per share
    
    3,300,022
    
    3,241,159

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

Three
      Months Ended March 31,
    
    2005
    
    2004Net
      Income
    
    $298,619
    
    $370,311Interest
      Expense on Dilutive Convertible Preferred Stock
    
    9,871
    
    11,300Net
      Income Available to Common Shareholders for
      Diluted
      Earnings Per Share
    
    $308,490
    
    $381,611

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.

**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 43 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.
10

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 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 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.

11

*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,
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.

***Results
of Operations***

Our
operating income for the three months ended March 31, 2005 was $508,125 as
compared to $637,658 for the three months ended March 31, 2004.

During
the three months ended March 31, 2005, revenues from our insurance-related
operations were $1,788,067 as compared to $1,671,817 for the three months ended
March 31, 2004. The revenue increase of $116,250 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 $38,664 during the three months ended March 31, 2005
as compared to the three months ended March 31, 2004. The total number of
policies that we financed during the first quarter of 2005 increased slightly
over the first quarter of 2004; however, the growth occurred 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
selling, general and administrative expenses for the three months ended March
31, 2005 were $230,513 more than for the three months ended March 31, 2004. The
increase in selling expenses was primarily due to our increased advertising and
marketing efforts in 2005. The increase in administrative expenses was primarily
due to increased salaries (due to, among other things, the hiring of John J.
Willis as our Chief Operating Officer in October 2004) and consulting
fees.

12

Our
provision for finance receivable losses for the first quarter of 2005 was
$11,394 less than for the first quarter 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 this quarter.

Our
depreciation and amortization expense for the three months ended March 31, 2005
was $9,425 more than for the three months ended March 31, 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 expenses during the three months ended March 31, 2005
was $21,425 less than for the three months ended March 31, 2004. This decrease
was the result of our entering into a new revolving credit line which carries a
lower interest rate. In addition, we repaid a portion of our subordinated loan
with proceeds of our revolving credit line, which carries a lower interest rate
than the subordinated loan.

In
January 2005, the holder of our mandatorily redeemable preferred stock converted
124 Series A preferred shares into our common shares. This resulted in our
incurring $1,429 less in interest expense on this stock during the three months
ended March 31, 2005 as compared to the three months ended March 31,
2004.

During
the three months ended March 31, 2005, our provision for income taxes was
$199,078 as opposed to $247,708 for the three months ended March 31, 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 $464,824 during the three months ended March 31, 2005 as
compared to a net profit before income taxes of $399,945 during the three months
ended March 31, 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 $441,218 during the three months
ended March 31, 2005 as compared to a net profit before income taxes of $464,852
during the three months ended March 31, 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
$408,345 during the three months ended March 31, 2005 as compared to $246,778
during the three months ended March 31, 2004. This increase was primarily due to
increased executive compensation and consulting fees.

13
***Liquidity
and Capital Resources***

As of
March 31, 2005, we had $2,586,330 in cash and cash equivalents and working
capital of $3,592,942. As of December 31, 2004, we had $515,899 in cash and cash
equivalents and working capital of $5,678,700.

During
the three months ended March 31, 2005, our cash and cash equivalents increased
by $2,070,431. This was due to the following:

·
    Net
      cash provided by operating activities was $3,130,674 primarily due to the
      following: (i) our net income for the period of $298,619, plus a decrease
      in accounts receivable of $1,532,660, and an increase in premiums payable
      of $2,381,179, offset by (ii) a decrease in accounts payable and accrued
      expenses of $811,553 and taxes payable of
$361,093.

·
    We
      used $840,855 in investing activities primarily due to an increase in our
      net finance contracts receivable of
$842,454.

·
    We
      used $219,388 in financing activities primarily due to the following: (i)
      proceeds of $16,098,509 from our revolving credit line from Manufacturers
      and Traders Trust Co. for premium finance purposes, offset by (ii)
      payments of $15,323,879 on the revolving credit line and $1,001,330 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 the line to the extent of 85% of eligible premium finance
receivables. As of March 31, 2005, $12,370,289 was outstanding under the loan.

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 is repayable in January 2006 and carries interest
at the rate of 12-5/8% per annum. Pursuant to our agreement with M&T, we are
required to obtain an extension of the maturity date of the subordinated debt to
December 2007. The extension is required to be obtained by June 29, 2005. We
have the right to prepay the subordinated debt (subject to M&T’s consent).
We are currently in negotiations with the holders of the subordinated debt with
regard to an extension of the maturity date.

***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.

14

**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, 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 March 31, 2005 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

15**PART
II.****OTHER
INFORMATION**

**Item
1.****LEGAL
PROCEEDINGS**

None

**Item
2. **UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS****
****
Effective
January 15, 2005, the holder of our Series A preferred shares converted 124 of
such shares into 49,600 of our common shares at a conversion price of $2.50 per
share. The offering of shares was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Section 3(a)(9) thereof as no commission
or other remuneration was paid or given directly or indirectly for soliciting
the conversion.

**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.

2 Denotes
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, 2004 and incorporated herein by reference.
16**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 13, 2005
    By:/s/ Barry B. Goldstein
      Barry
      B. Goldstein
      President
      (Principal
      Executive, Financial
      and
      Accounting Officer)