UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549


FORM
10-Q




(Mark one)


þ
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the quarterly period ended September 30, 2008


OR


o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period from _________to _________





Commission
File Number 0-1665





DCAP GROUP, INC.


(Exact
name of registrant as specified in its charter)


Delaware
              (State
      or other jurisdiction of
              incorporation or
      organization)
            
            36-2476480
              (I.R.S.
      Employer
              Identification
      Number)


1158
Broadway


Hewlett,
NY 11557


(Address
of principal executive offices)


(516) 374-7600




(Registrant’s
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (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 þ No o





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


Large
      accelerated filer o
            
            Accelerated
      filero
            
            Non-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            
            Smaller
      reporting company þ





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





As of
November 14, 2008, there were 2,972,746 shares of the registrant’s common stock
outstanding.










DCAP GROUP, INC.
 INDEX
 PAGEPART
      I — FINANCIAL INFORMATION
              
              
              4Item 1
      —
              
              Condensed
      Consolidated Financial Statements
              
              
              4Condensed
      Consolidated Balance Sheets at September 30, 2008  (Unaudited)
      and December 31, 2007
              
              
              4Condensed
      Consolidated Statements of Operations for the nine months ended September
      30, 2008 (Unaudited) and 2007 (Unaudited)
              
              
              5Condensed
      Consolidated Statements of Operations for the three months ended September
      30, 2008 (Unaudited) and 2007 (Unaudited)
              
              
              6Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2008 (Unaudited) and 2007  (Unaudited)
              
              
              7Notes
      to Condensed Consolidated Financial
      Statements  (Unaudited)
              
              
              8Item 2
      —
              
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              17Item 3
      —
              
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              
              30Item 4T—
              
              Controls
      and Procedures
              
              
              30PART
      II — OTHER INFORMATION
              
              
              32Item 1
      —
              
              Legal
      Proceedings
              
              
              32Item 1A
      —
              
              Risk
      Factors
              
              
              32Item
      2 —
              
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              
              32Item
      3 —
              
              Defaults
      Upon Senior Securities
              
              
              32Item 4
      —
              
              Submission
      of Matters to a Vote of Security Holders
              
              
              33Item 5
      —
              
              Other
      Information
              
              
              33Item 6
      —
              
              Exhibits
              
              
              33Signatures
              
              
              35EXHIBIT
      31(a)EXHIBIT
      31(b)EXHIBIT
      32













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, 2007 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
publicly update or revise any forward-looking statements, whether from new
information, future events or otherwise.













PART
I.  FINANCIAL
INFORMATION




Item
1.                      Financial
Statements.


DCAP
      GROUP, INC. ANDSUBSIDIARIESCondensed
      Consolidated Balance SheetsSeptember
      30,
              
              
              December
      31,2008
              
              
              2007(Unaudited)AssetsCurrent
      Assets:Cash
      and cash equivalents
              
              $
              520,558
              
              
              $
              1,030,822Accounts
      receivable, net of allowance for doubtful accounts of$25,000
      at September 30, 2008 and $50,000 at December 31, 2007
              
              
              562,331
              
              
              
              801,718Prepaid
      expenses and other current assets
              
              
              178,335
              
              
              
              295,604Assets
      from discontinued operations
              
              
              54,347
              
              
              
              12,651,223Total
      current assets
              
              
              1,315,571
              
              
              
              14,779,367Property
      and equipment, net
              
              
              325,900
              
              
              
              464,824Goodwill
              
              
              2,601,257
              
              
              
              2,601,257Other
      intangibles, net
              
              
              94,477
              
              
              
              150,910Notes
      receivable
              
              
              5,901,719
              
              
              
              5,170,804Deposits
      and other assets
              
              
              79,853
              
              
              
              78,164Total
      assets
              
              $
              10,318,777
              
              
              $
              23,245,326Liabilities
      and Stockholders' EquityCurrent
      Liabilities:Accounts
      payable and accrued expenses
              
              $
              970,731
              
              
              $
              630,412Current
      portion of long-term debt
              
              
              1,807,028
              
              
              
              2,098,989Other
      current liabilities
              
              
              154,200
              
              
              
              154,200Liabilities
      from discontinued operations
              
              
              -
              
              
              
              12,517,305Mandatorily
      redeemable preferred stock
              
              
              780,000
              
              
              
              780,000Total
      current liabilities
              
              
              3,711,959
              
              
              
              16,180,906Long-term
      debt
              
              
              442,114
              
              
              
              499,065Deferred
      income taxes
              
              
              379,000
              
              
              
              408,000CommitmentsStockholders'
      Equity:Common
      stock, $.01 par value; authorized 10,000,000 shares;
issued3,788,771
      at September 30, 2008 and 3,750,447 shares at December 31,
      2007
              
              
              37,888
              
              
              
              37,505Preferred
      stock, $.01 par value; authorized1,000,000
      shares; 0 shares issued and outstanding
              
              
              -
              
              
              
              -Capital
      in excess of par
              
              
              11,955,103
              
              
              
              11,850,872Deficit
              
              
              (4,986,905
              )
              
              
              (4,545,242
              )7,006,086
              
              
              
              7,343,135Treasury
      stock, at cost, 816,025 shares at September 30, 2008 and781,423
      shares at December 31, 2007
              
              
              (1,220,382
              )
              
              
              (1,185,780
              )Total
      stockholders' equity
              
              
              5,785,704
              
              
              
              6,157,355Total
      liabilities and stockholders' equity
              
              $
              10,318,777
              
              
              $
              23,245,326
 
 See
notes to condensed consolidated financial statements.
 4
 
 DCAP
      GROUP, INC. ANDSUBSIDIARIESCondensed
      Consolidated Statements of Operations (Unaudited)Nine
      Months Ended September 30,
              
              2008
              
              
              2007Commissions
      and fee revenue
              
              $
              3,767,475
              
              
              $
              4,486,855Operating
      expenses:General
      and administrative expenses
              
              
              4,360,796
              
              
              
              4,765,090Depreciation
      and amortization
              
              
              214,827
              
              
              
              212,081Total
      operating expenses
              
              
              4,575,623
              
              
              
              4,977,171Operating
      loss
              
              
              (808,148
              )
              
              
              (490,316
              )Other
      (expense) income:Interest
      income
              
              
              3,707
              
              
              
              7,175Interest
      income - notes receivable
              
              
              730,915
              
              
              
              971,333Interest
      expense
              
              
              (220,690
              )
              
              
              (368,713
              )Interest
      expense - mandatorily redeemable preferred stock
              
              
              (47,125
              )
              
              
              (29,250
              )Gain
      on sale of book of business
              
              
              -
              
              
              
              65,767Total
      other income
              
              
              466,807
              
              
              
              646,312(Loss)
      income from continuing operations before (benefit from) provision for
      income taxes
              
              
              (341,341
              )
              
              
              155,996(Benefit
      from) provision for income taxes
              
              
              (113,604
              )
              
              
              73,696(Loss)
      income from continuing operations
              
              
              (227,737
              )
              
              
              82,300(Loss)
      income from discontinued operations, net of income taxes
              
              
              (213,926
              )
              
              
              200,878Net
      (loss) income
              
              $
              (441,663
              )
              
              $
              283,178Basic
      and Diluted Net (Loss) Income Per Common Share:(Loss)
      income from continuing operations
              
              $
              (0.08
              )
              
              $
              0.03(Loss)
      income from discontinued operations
              
              $
              (0.07
              )
              
              $
              0.07(Loss)
      income per common share
              
              $
              (0.15
              )
              
              $
              0.10Weighted
      Average Number of Shares Outstanding:Basic
              
              
              2,972,547
              
              
              
              2,962,683Diluted
              
              
              2,972,547
              
              
              
              3,288,072
 
 See notes to condensed consolidated financial
statements.
 5
 
 DCAP
      GROUP, INC. ANDSUBSIDIARIESCondensed
      Consolidated Statements of Operations (Unaudited)Three
      Months Ended September 30,
              
              2008
              
              
              2007Commissions
      and fee revenue
              
              $
              1,143,916
              
              
              $
              1,359,996Operating
      expenses:General
      and administrative expenses
              
              
              1,218,494
              
              
              
              1,492,317Depreciation
      and amortization
              
              
              70,710
              
              
              
              74,400Total
      operating expenses
              
              
              1,289,204
              
              
              
              1,566,717Operating
      loss
              
              
              (145,288
              )
              
              
              (206,721
              )Other
      (expense) income:Interest
      income
              
              
              803
              
              
              
              3,267Interest
      income - notes receivable
              
              
              129,193
              
              
              
              322,736Interest
      expense
              
              
              (68,938
              )
              
              
              (119,022
              )Interest
      expense - mandatorily redeemable preferred stock
              
              
              (19,500
              )
              
              
              (9,750
              )Total
      other income
              
              
              41,558
              
              
              
              197,231Loss
      from continuing operations before benefit from income
taxes
              
              
              (103,730
              )
              
              
              (9,490
              )Benefit
      from income taxes
              
              
              (6,679
              )
              
              
              (773
              )Loss
      from continuing operations
              
              
              (97,051
              )
              
              
              (8,717
              )(Loss)
      income from discontinued operations, net of income taxes
              
              
              (2,974
              )
              
              
              67,841Net
      (loss) income
              
              $
              (100,025
              )
              
              $
              59,124Basic
      and Diluted Net (Loss) Income Per Common Share:Loss
      from continuing operations
              
              $
              (0.03
              )
              
              $
              -(Loss)
      income from discontinued operations
              
              $
              -
              
              
              $
              0.02(Loss)
      income per common share
              
              $
              (0.03
              )
              
              $
              0.02Weighted
      Average Number of Shares Outstanding:Basic
              
              
              2,971,521
              
              
              
              2,981,024Diluted
              
              
              2,971,521
              
              
              
              3,298,073
 
 See
notes to condensed consolidated financial statements.
 6
 
 DCAP
      GROUP, INC. ANDSUBSIDIARIESCondensed
      Consolidated Statements of Cash Flows (Unaudited)Nine
      Months Ended September 30,
              
              2008
              
              
              2007Cash
      Flows from Operating Activities:Net
      (loss) income
              
              $
              (441,663
              )
              
              $
              283,178Adjustments
      to reconcile net (loss) income to net cash(used
      in) provided by operating activities:Depreciation
      and amortization
              
              
              214,827
              
              
              
              212,081Bad
      debt expense
              
              
              29,091
              
              
              
              -Accretion
      of discount on notes receivable
              
              
              (576,228
              )
              
              
              (740,864
              )Amortization
      of warrants
              
              
              17,731
              
              
              
              34,210Stock-based
      payments
              
              
              104,614
              
              
              
              27,820Gain
      on sale of book of business
              
              
              -
              
              
              
              (65,767
              )Deferred
      income taxes
              
              
              (328,000
              )
              
              
              136,201Changes
      in operating assets and liabilities:Decrease
      (increase) in assets:Accounts
      receivable
              
              
              136,774
              
              
              
              418,336Prepaid
      expenses and other current assets
              
              
              338,692
              
              
              
              (118,412
              )Deposits
      and other assets
              
              
              (1,689
              )
              
              
              9,221Increase
      (decrease) in liabilities:Accounts
      payable and accrued expenses
              
              
              340,319
              
              
              
              (324,793
              )Other
      current liabilities
              
              
              -
              
              
              
              (12,469
              )Net
      cash used in operating activities of continuing operations
              
              
              (165,532
              )
              
              
              (141,258
              )Operating
      activities of discontinued operations
              
              
              (435,638
              )
              
              
              273,742Net
      Cash (Used in) Provided by Operating Activities
              
              
              (601,170
              )
              
              
              132,484Cash
      Flows from Investing Activities:Decrease
      in notes and other receivables - net
              
              
              30,810
              
              
              
              59,860Proceeds
      from sale of book of business
              
              
              -
              
              
              
              66,300Purchase
      of property and equipment
              
              
              (19,470
              )
              
              
              (152,695
              )Net
      cash provided by (used in) investing activities of continuing
      operations
              
              
              11,340
              
              
              
              (26,535
              )Investing
      activities of discontinued operations
              
              
              1,008,386
              
              
              
              1,354,332Net
      Cash Provided by Investing Activities
              
              
              1,019,726
              
              
              
              1,327,797Cash
      Flows from Financing Activities:Principal
      payments on long-term debt
              
              
              (366,643
              )
              
              
              (417,499
              )Proceeds
      from exercise of options and warrants
              
              
              -
              
              
              
              112,200Net
      cash used in financing activities of continuing operations
              
              
              (366,643
              )
              
              
              (305,299
              )Financing
      activities of discontinued operations
              
              
              (562,177
              )
              
              
              (1,350,669
              )Net
      Cash Used in Financing Activities
              
              
              (928,820
              )
              
              
              (1,655,968
              )Net
      Decrease in Cash and Cash Equivalents
              
              
              (510,264
              )
              
              
              (195,687
              )Cash
      and Cash Equivalents, beginning of period
              
              
              1,030,822
              
              
              
              1,196,412Cash
      and Cash Equivalents, end of period
              
              $
              520,558
              
              
              $
              1,000,725Supplemental
      Scheduleof Non-Cash Investing and Financing Activities:Liabilties
      assumed by purchaser of premium finance portfolio
              
              $
              11,229,060
              
              
              $
              -Reserve
      held by purchaser of premium finance portfolio
              
              $
              261,363
              
              
              $
              -




See
notes to condensed consolidated financial statements.
 7


DCAP
GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NINE
MONTHS ENDED SEPTEMBER 30, 2008 AND 2007





1.
Basis of Presentation




The
Condensed Consolidated Balance Sheet as of September 30, 2008, Condensed
Consolidated Statements of Operations for the nine months and three months ended
September 30, 2008 and 2007 and Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2008 and 2007 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 September 30, 2008,
results of operations for the nine months and three months ended September 30,
2008 and 2007 and cash flows for the nine months ended September 30, 2008 and
2007. This report should be read in conjunction with our Annual Report on Form
10-KSB for the year ended December 31, 2007. The consolidated balance sheet at
December 31, 2007 was derived from the audited financial statements as of that
date.




The
results of operations and cash flows for the nine months ended September 30,
2008 are not necessarily indicative of the results to be expected for the full
year.




Organization and Nature of
Business




DCAP
Group, Inc. and Subsidiaries (referred to herein as "we" or "us") operate a
network of retail offices and franchise operations engaged in the sale of retail
auto, motorcycle, boat, business, and homeowner's insurance, and until February
1, 2008 provided premium financing of insurance policies for customers of our
offices as well as customers of non-affiliated entities. On February 1, 2008, we
sold our outstanding premium finance loan portfolio. As a result of the sale,
our premium financing operations have been classified as discontinued operations
and prior periods have been restated. The purchaser of the premium finance
portfolio has agreed that, during the five year period ending January 31, 2013
(subject to automatic renewal for successive two year terms under certain
circumstances), it will purchase, assume and service premium finance contracts
originated by us in the states of New York and Pennsylvania. In connection
with such purchases, we will be entitled to receive a fee generally equal to a
percentage of the amount financed. Our continuing operations of the premium
financing business will consist of the revenue earned from placement fees and
any related expenses. We also provide automobile club services for roadside
emergencies and tax preparation services.




2.
Summary of Significant Accounting Policies




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.




8


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. For our continuing premium
finance operations, we earn placement fees upon the establishment of a premium
finance contract.




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
advertising expense. We are obligated to provide marketing and training support
to each franchisee.  During the nine months ended September 30, 2008
and 2007, approximately $-0- and $110,000, respectively, was recognized as
initial franchise fee income.




Fees for
income tax preparation are recognized when the services are completed.
Automobile club dues are recognized equally over the contract
period.




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 approximately $3,000 and $49,000 in such capitalized costs were
incurred during the nine months ended September 30, 2008 and 2007,
respectively.




Reclassifications




Certain
reclassifications have been made to the consolidated financial statements for
the nine months and three months ended September 30, 2007 to conform to the
classifications used for the nine months and three months ended September 30,
2008.




3.
Notes Receivable




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 provided for interest at the rate of 7.5% per
annum.  The promissory note was paid in full on July 28,
2006.  CMIC is a New York property and casualty insurer. 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.  During the
nine months ended September 30, 2008 and 2007, interest payments totaling $-0-
and $125,000, respectively, were received.  The discount on the
Surplus Notes and the accrued interest at the time of acquisition were accreted
over a 30 month period through July 31, 2008, the estimated period to collect
such amounts.  Such accretion amount, together with interest on the
Surplus Notes for the nine months and three months ended September 30, 2008 and
2007, are included in our consolidated statement of operations as “Interest
income-notes receivable.”




9


Possible Future Conversion
of Notes Receivable




In March
2007, CMIC’s Board of Directors adopted a resolution to convert CMIC from an
advance premium cooperative insurance company to a stock property and casualty
insurance company.  CMIC has advised us that it has obtained
permission from the Superintendent of Insurance of the State of New York (the
“Superintendent”) to proceed with the conversion process (subject to certain
conditions as discussed below).




The
conversion by CMIC to a stock property and casualty insurance company is subject
to a number of conditions, including the approval of the plan of conversion,
which was filed with the Superintendent on April 25, 2008, by both the
Superintendent and CMIC’s policyholders.  As part of the approval
process, the Superintendent had an appraisal performed with respect to the fair
market value of CMIC as of December 31, 2006.  In addition, the
Insurance Department conducted a five year examination of CMIC as of December
31, 2006 and held public hearing in October 2008 to consider the conversion
plan. We, as a holder of the CMIC Surplus Notes, at our option, would be able to
exchange the Surplus Notes for an equitable share of the securities or other
consideration, or both, of the corporation into which CMIC would be
converted.  Based upon the amount payable on the Surplus Notes and the
statutory surplus of CMIC, the plan of conversion provides that, in the event of
a conversion by CMIC into a stock corporation, in exchange for our relinquishing
our rights to any unpaid principal and interest under the Surplus Notes, we
would receive 100% of the stock of CMIC.  It is anticipated that the
policyholders meeting to approve the conversion will occur on or about December
31, 2008.  As indicated above, such approval, as well as the prior
approval of the Superintendent, is required for the conversion to occur. Upon
the effectiveness of the conversion, CMIC’s name will change to “Kingstone
Insurance Company.”  We are seeking stockholder approval of an
amendment to our certificate of incorporation to change our name to “Kingstone
Companies, Inc.”  Such name change would only take place in the event
that the conversion occurs and we obtain a controlling interest in Kingstone
Insurance Company.  No assurances can be given that the conversion
will occur or as to the terms of the conversion.




Our
Chairman is also Chairman of CMIC and one of our other directors and our Chief
Accounting Officer are also directors of CMIC.




4.
Employee Stock Compensation




In
November 1998, we adopted the 1998 Stock Option Plan, which provided for the
issuance of incentive stock options and non-statutory stock options. Under this
plan, options to purchase not more than 400,000 of our common shares 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 common shares 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 determined the expiration date with respect to non-statutory options
granted under this plan.  This plan terminated in November
2008.




10


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 common shares 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.




Our
results for the nine months and three months ended September 30, 2008 include
share-based compensation expense related to stock options totaling approximately
$64,000 and $16,000, respectively. Our results for the nine months and three
months ended September 30, 2007 include share-based compensation expense
totaling approximately $19,000 and $9,000, respectively. Such amounts have been
included in the Condensed Consolidated Statements of Operations within general
and administrative expenses.




Stock
option compensation expense in 2008 and 2007 is the estimated fair value of
options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the award.




We did
not grant any options under either plan during the nine months and three months
ended September 30, 2008. During the nine months and three months ended
September 30, 2007, we did not grant any options under the 1998 Stock Option
Plan but did grant 59,524 options at $2.52 per share under the 2005 Equity
Participation Plan. The weighted average fair value of options granted during
the nine months and three months ended September 30, 2007 was $.78.




The
following table represents our stock options granted, exercised, and forfeited
during the first nine months of 2008.




Stock
      Options
              
              Number
      of Shares
              
              
              Weighted
      Average Exercise Price per Share
              
              
              Weighted
      Average Remaining Contractual Term
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2008
              
              
              268,624
              
              
              $
              2.55
              
              
              
              -
              
              
              
              -Granted
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (82,324
              )
              
              $
              2.62
              
              
              
              -
              
              
              
              -Outstanding
      at September 30, 2008
              
              
              186,300
              
              
              $
              2.51
              
              
              
              3.45
              
              
              $
              -Vested
      and Exercisable at September 30, 2008
              
              
              112,498
              
              
              $
              2.82
              
              
              
              3.08
              
              
              $
              -
  11
  The
aggregate intrinsic value of options outstanding and options exercisable at
September 30, 2008 is calculated as the difference between the exercise price of
the underlying options and the market price of our common shares for the shares
that had exercise prices that were lower than the $.80 closing price of our
common shares on September 30, 2008.  We received cash proceeds from
options exercised in the nine months ended September 30, 2008 and 2007 of
approximately $-0- and $112,000, respectively.




As of
September 30, 2008, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $40,000. Unamortized compensation
cost as of September 30, 2008 is expected to be recognized over a remaining
weighted-average vesting period of 2.01 years.




5.
Net (Loss) Income Per Share




Basic net
(loss) income per share is computed by dividing (loss) 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,
warrants and conversion of mandatorily redeemable preferred
shares.  The computation of diluted earnings per share excludes those
options and warrants with an exercise price in excess of the average market
price of our common shares during the periods presented.  For the nine
months and three months ended September 30, 2007, the inclusion of 208,624 of
options and warrants in the computation of diluted earnings per share would have
been anti-dilutive.  During the nine months and three months ended
September 30, 2008, we recorded a loss available to common shareholders and, as
a result, the weighted average number of common shares used in the calculation
of basic and diluted loss per share is the same, and have not been adjusted for
the effects of 498,300 potential common shares from unexercised stock options
and the conversion of convertible preferred shares, which were anti-dilutive for
such period.




The
reconciliation is as follows:




Nine
      Months Ended
              
              
              Three
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Weighted
      average number of shares outstanding
              
              
              2,972,547
              
              
              
              2,962,683
              
              
              
              2,971,521
              
              
              
              2,981,024Effect
      of dilutive securities, common share equivalents
              
              
              -
              
              
              
              325,389
              
              
              
              -
              
              
              
              317,049Weighted
      average number of shares outstanding,used
      for computing diluted earnings per share
              
              
              2,972,547
              
              
              
              3,288,072
              
              
              
              2,971,521
              
              
              
              3,298,073





Net
(loss) income from continuing operations available to common shareholders for
the computation of diluted earnings (loss) per share is computed as
follows:






12




Nine
      Months Ended
              
              
              Three
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      (loss) income from continuing operations
              
              $
              (227,737
              )
              
              $
              82,300
              
              
              $
              (97,051
              )
              
              $
              (8,717
              )Interest
      expense on dilutive convertible preferred stock
              
              
              -
              
              
              
              29,250
              
              
              
              -
              
              
              
              9,750Net
      (loss) income from continuing operations availableto
      common shareholders for diluted earnings (loss) per share
              
              $
              (227,737
              )
              
              $
              111,550
              
              
              $
              (97,051
              )
              
              $
              1,033


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




Nine
      Months Ended
              
              
              Three
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      (loss) income
              
              $
              (441,663
              )
              
              $
              283,178
              
              
              $
              (100,025
              )
              
              $
              59,124Interest
      expense on dilutive convertible preferred stock
              
              
              -
              
              
              
              29,250
              
              
              
              -
              
              
              
              9,750Net
      (loss) income available to common shareholders fordiluted
      earnings (loss) per share
              
              $
              (441,663
              )
              
              $
              312,428
              
              
              $
              (100,025
              )
              
              $
              68,874


6.
Term Loan and Subordinated Notes




In June
2008, the maturity date of our M&T term loan was extended to December 31,
2008. Principal payments of $55,174 are due on the first day of each month and
one final payment on the maturity date. The balance of the term loan as of
September 30, 2008 was $222,857.  Interest at the rate of LIBOR plus
2.75% is payable monthly.




In August
2008, the maturity date of our $1,500,000 subordinated note obligation was
extended from September 30, 2008 to the earlier of July 10, 2009 or 90 days
following the conversion of CMIC to a stock property and casualty insurance
company and the issuance to us of a controlling interest in CMIC (see Note 3)
(subject to acceleration under certain circumstances). In exchange for this
extension, the holders will receive an aggregate incentive payment equal to
$10,000 times the number of months (or partial months) the debt is outstanding
after September 30, 2008 through the maturity date. If a prepayment of principal
reduces the debt below $1,500,000, the incentive payment for all subsequent
months will be reduced in proportion to any such reduction to the debt. The
aggregate incentive payment is due upon full repayment of the debt.




Jack
Seibald, one of our directors and a principal stockholder, indirectly holds
approximately $288,000 of the principal amount of the subordinated
debt.  In addition, a limited liability company of which Barry
Goldstein, our Chief Executive Officer, is a minority member holds $115,000 of
the principal amount of the subordinated debt.




13


7.
Exchange of Preferred Stock




Effective
April 16, 2008, the holder of our Series B preferred shares, AIA Acquisition
Corp. (“AIA”), exchanged such shares for an equal number of Series C preferred
shares, the terms of which are substantially identical to those of the Series B
preferred shares, except that they are mandatorily redeemable on April 30, 2009
(as opposed to April 30, 2008 for the Series B preferred shares) and they
provide for dividends at the rate of 10% per annum (as compared to 5% per annum
for the Series B preferred shares).




Effective
August 23, 2008, the mandatory redemption date for the preferred shares held by
AIA was further extended to July 31, 2009 through the issuance of Series D
preferred shares in exchange for an equal number of Series C preferred shares
held by AIA. The terms of the Series D preferred shares are substantially
identical to those of the Series C preferred shares, except for the mandatory
redemption date. The current aggregate redemption amount for the Series D
preferred shares held by AIA is $780,000, plus accumulated and unpaid
dividends.  The Series D preferred shares are convertible into our
common shares at a price of $2.50 per share.  Members of the family of
Barry B. Goldstein, our Chief Executive Officer, are principal stockholders of
AIA.




8.
Employment Agreement




Our
President, Chairman of the Board and Chief Executive Officer, Barry B.
Goldstein, is employed pursuant to an employment agreement dated October 16,
2007 (the “Employment Agreement”) that expires on June 30, 2009. The Employment
Agreement will automatically renew for a one-year term if Mr. Goldstein is in
our employ on June 30, 2009.  Pursuant to the Employment Agreement,
Mr. Goldstein is entitled to receive an annual base salary of $350,000 (which
base salary has been in effect since January 1, 2004) (“Base Salary”) and annual
bonuses based on our net income.  On August 25, 2008, we and Mr. Goldstein
entered into an amendment (the “Amendment”) to the Employment Agreement. The
Amendment entitles Mr. Goldstein to devote certain time to Commercial Mutual
Insurance Company (“CMIC”) to fulfill his duties and responsibilities as its
Chairman of the Board and Chief Investment Officer. Such permitted activity is
subject to a reduction in Base Salary under the Employment Agreement on a
dollar-for-dollar basis to the extent of the salary payable by CMIC to Mr.
Goldstein pursuant to his CMIC employment contract, which is currently $150,000
per year. CMIC is a New York property and casualty insurer.





9.
Discontinued Operations




On
February 1, 2008, we sold our outstanding premium finance loan portfolio. Under
the terms of the sale, the purchaser of the premium finance portfolio has agreed
that, during the five year period ending January 31, 2013 (subject to automatic
renewal for successive two year terms under certain circumstances), it will
purchase, assume and service all eligible premium finance contracts originated
by us in the states of New York and Pennsylvania.  In connection with
such purchases, we will be entitled to receive a fee generally equal to a
percentage of the amount financed. As a result of the sale of the premium
finance portfolio on February 1, 2008, the operating results of the premium
financing operations for the nine months and three months ended September 30,
2008 and 2007 have been presented as discontinued operations.  Net
assets and liabilities to be disposed of or liquidated, at their book value,
have been separately classified in the accompanying balance sheets at September
30, 2008 and December 31, 2007. Continuing operations of our premium financing
operations will only consist of placement fee revenue and any related
expenses.




14


Summarized
financial information of the premium financing segment as discontinued
operations for the nine months and three months ended September 30, 2008 and
2007 follows:


Nine
      Months Ended
              
              
              Three
      Months EndedSeptember
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Premium
      finance revenue
              
              $
              225,322
              
              
              $
              2,419,506
              
              
              $
              -
              
              
              $
              777,638Operating
      Expenses:General
      and administrative expenses
              
              
              181,943
              
              
              
              1,084,342
              
              
              
              -
              
              
              
              343,887Provision
      for finance receivable losses
              
              
              89,316
              
              
              
              396,065
              
              
              
              -
              
              
              
              120,455Depreciation
      and amortization
              
              
              46,556
              
              
              
              75,349
              
              
              
              -
              
              
              
              24,411Interest
      expense
              
              
              45,181
              
              
              
              498,519
              
              
              
              -
              
              
              
              165,539Total
      operating expenses
              
              
              362,996
              
              
              
              2,054,275
              
              
              
              -
              
              
              
              654,292(Loss)
      income from operations
              
              
              (137,674
              )
              
              
              365,231
              
              
              
              -
              
              
              
              123,346Loss
      on sale of premim financing portfolio
              
              
              (251,282
              )
              
              
              -
              
              
              
              (5,407
              )
              
              
              -(Loss)
      income before provision for income taxes
              
              
              (388,956
              )
              
              
              365,231
              
              
              
              (5,407
              )
              
              
              123,346(Benefit
      from) provision for income taxes
              
              
              (175,030
              )
              
              
              164,353
              
              
              
              (2,433
              )
              
              
              55,505(Loss)
      income from discontinued operations,net
      of income taxes
              
              $
              (213,926
              )
              
              $
              200,878
              
              
              $
              (2,974
              )
              
              $
              67,841




The
components of assets and liabilities of discontinued operations as of September
30, 2008 and December 31, 2007 are as follows:




September
      30,
              
              
              December
      31,2008
              
              
              2007(Unaudited)Finance
      contracts receivable, net
              
              $
              -
              
              
              $
              12,498,809Due
      from purchaser of premium finance portfolio
              
              
              28,697
              
              
              
              -Other
      current assets
              
              
              25,650
              
              
              
              31,680Deferred
      income taxes
              
              
              -
              
              
              
              69,000Property
      and equipment, net
              
              
              -
              
              
              
              3,324Other
      assets
              
              
              -
              
              
              
              48,410Total
      assets
              
              $
              54,347
              
              
              $
              12,651,223Revolving
      credit line
              
              $
              -
              
              
              $
              9,488,437Accounts
      payable and accrued expenses
              
              
              -
              
              
              
              139,480Premiums
      payable
              
              
              -
              
              
              
              2,889,388Total
      liabilities
              
              $
              -
              
              
              $
              12,517,305
  15
  Finance income, fees and
receivables (discontinued operations)




For our
premium finance operations, we used the interest method to recognize interest
income over the life of each loan in accordance with SFAS 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 recorded the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest was 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 approximately26.1% and 26.4%
per annum for the nine months ended September 30, 2008 and 2007,
respectively.




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




Allowance for finance
receivable losses (discontinued operations)




Customers
who purchase insurance policies are often unable to pay the premium in a lump
sum and, therefore, require extended payment terms. Premium financing involves
making a loan to the customer that is backed by the unearned portion of the
insurance premiums being financed. No credit checks were made prior to the
decision to extend credit to a customer. Losses on finance receivables included
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 were exhausted, the
remaining account balance, including unrealized interest, was written off. We
reviewed 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 nine months
ended September 30, 2008 and 2007, the provision for finance receivable losses
was approximately $89,000 and $396,000, respectively, and actual principal
write-offs for such period, net of actual and anticipated recoveries of previous
write-offs, were approximately $50,000 and $434,000, respectively.













Item
2.  Management's Discussion and
Analysis or Plan of Operation.




Overview




We
operate 26 storefronts, including sixteen Barry Scott locations, five Atlantic
Insurance locations, and five Accurate Agency locations. We also have 38
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, homeowner’s and small business insurance. Our customer base is
primarily individuals and small 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;
however, as discussed below, in March 2007, the Board of Directors of Commercial
Mutual Insurance Company (“CMIC”) adopted a resolution to convert CMIC from an
advance premium insurance company to a stock property and casualty insurance
company.  We hold surplus notes of CMIC in the aggregate principal
amount of $3,750,000 (the “Surplus Notes”).  The plan of conversion
provides that, in the event of a conversion by CMIC into a stock corporation, in
exchange for our relinquishing our rights to any unpaid principal and interest
under the Surplus Notes, we would receive 100% of the stock of CMIC.




The
stores also offer automobile club services for roadside assistance and some of
our franchise locations offer income tax preparation services.




Payments
Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
is licensed within the states of New York, Pennsylvania and New Jersey. Until
February 1, 2008, Payments Inc. offered premium financing to clients of DCAP,
Barry Scott, Atlantic Insurance and Accurate Agency offices, as well as
non-affiliated insurance agencies.  On February 1, 2008, Payments Inc.
sold its outstanding premium finance loan portfolio. As a result of the sale,
its business of internally financing insurance contracts has been reclassified
as discontinued operations and prior periods have been restated. Effective
February 1, 2008, revenues from its premium financing business will consist of
placement fees based upon premium finance contracts purchased, assumed and
serviced by the purchaser of the loan portfolio.




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. However, 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. In addition, other companies may utilize different estimates, which
may impact comparability of our results of operations to those of companies in
similar businesses.




17


Commission
and fee income




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. For our continuing
premium finance operations, we earn placement fees upon the establishment of a
premium finance contract.




Franchise
fee revenue is recognized when substantially all of our contractual requirements
under the franchise agreement are completed.  Franchisees also pay a
monthly franchise fee plus a monthly advertising fee.  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 (discontinued operations)




For our
premium finance operations, we used the interest method to recognize interest
income over the life of each loan in accordance with Statement of Financial
Accounting Standard (“SFAS”) 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 recorded the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest was 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 26.1% and
26.4% per annum for the nine months ended September 30, 2008 and 2007,
respectively.




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




Allowance
for finance receivable losses (discontinued operations)




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 were made prior to the
decision to extend credit to a customer. Losses on finance receivables included
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 were exhausted, the
remaining account balance, including unrealized interest, was written off. We
reviewed 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 nine months
ended September 30, 2008 and 2007, the provision for finance receivable losses
was approximately $89,000 and $396,000, respectively, and actual principal
write-offs for such period, net of actual and anticipated recoveries of previous
write-offs, were approximately $50,000 and $477,000, respectively.




18


Goodwill




The
carrying value of goodwill 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 September
30, 2008.




Stock-based
compensation




Effective
January 1, 2006, our plans have been accounted for in accordance with the
recognition and measurement provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123(R)”), which replaced SFAS No. 123, “Accounting for Stock-Based
Compensation,” and supersede APB Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) 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 123(R) and certain SEC
rules and regulations and provides interpretations with respect to the valuation
of share-based payments for public companies.




In
adopting SFAS 123(R), we applied the modified prospective approach to
transition. Under the modified prospective approach, the provisions of SFAS
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 SFAS 123.




Recent
Accounting Pronouncements




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141R “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. SFAS 141R also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R is effective for the Company in its
fiscal year beginning January 1, 2009.  While the Company has not yet
evaluated this statement for the impact, if any, that SFAS 141R will have on its
consolidated financial position and results of operations, the Company will be
required to expense costs related to any acquisitions after January 1,
2009.




19




In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure requirements about fair value measurements. SFAS
No. 157 was effective for us on January 1, 2008. However, in February
2008, the FASB released FASB Staff Position (FSP FAS 157-2 — Effective
Date of FASB Statement No. 157), which delayed the effective date of SFAS
No. 157 for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The adoption of SFAS No. 157 for our financial
assets and liabilities did not have a material impact on our consolidated
financial statements. We do not believe the adoption of SFAS No. 157 for
our nonfinancial assets and liabilities, effective January 1, 2009, will
have a material impact on our consolidated financial statements.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”). The new standard changes the accounting and reporting of noncontrolling
interests, which have historically been referred to as minority interests. SFAS
160 requires that noncontrolling interests be presented in the consolidated
balance sheets within shareholders’ equity, but separate from the parent’s
equity, and that the amount of consolidated net income attributable to the
parent and to the noncontrolling interest be clearly identified and presented in
the consolidated statements of income. Any losses in excess of the
noncontrolling interest’s equity interest will continue to be allocated to the
noncontrolling interest. Purchases or sales of equity interests that do not
result in a change of control will be accounted for as equity transactions. Upon
a loss of control, the interest sold, as well as any interest retained, will be
measured at fair value, with any gain or loss recognized in earnings. In partial
acquisitions, when control is obtained, the acquiring company will recognize at
fair value, 100% of the assets and liabilities, including goodwill, as if the
entire target company had been acquired. SFAS 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008, with early adoption prohibited. The new standard will be
applied prospectively, except for the presentation and disclosure requirements,
which will be applied retrospectively for all periods presented. The Company has
not yet determined the impact, if any, that this statement will have on its
condensed consolidated financial statements and will adopt the standard at the
beginning of fiscal 2009.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”(“SFAS 161”). SFAS 161 applies to all entities.  SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged.  SFAS 161 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We do not
believe this pronouncement will have a material effect on our financial
statements.







20




Results
of Operations




Nine Months Ended September
30, 2008 Compared to Nine Months Ended September 30, 2007





On
February 1, 2008, we sold our outstanding premium finance loan portfolio. As a
result of the sale, our premium financing operations have been reclassified as
discontinued operations and prior periods have been restated. Separate
discussions follow for results of continuing operations and discontinued
operations.




Continuing
Operations




The
following table summarizes the changes in the significant components of the
results of continuing operations (in thousands) for the periods
indicated:


Nine
      months endedSeptember
      30,YTD
              
              
              YTD
              
              
              Change2008
              
              
              2007
              
              
              $
              
              
              
              %Commissions
      and fee revenue
              
              $
              3,767
              
              
              $
              4,487
              
              
              $
              (720
              )
              
              
              (16
              )
      %General
      and administrtaive expenses
              
              
              4,361
              
              
              
              4,765
              
              
              
              (404
              )
              
              
              (8
              )
      %Interest
      expense
              
              
              221
              
              
              
              369
              
              
              
              (148
              )
              
              
              (40
              )
      %Interest
      income - notes receivable
              
              
              731
              
              
              
              971
              
              
              
              (240
              )
              
              
              (25
              )
      %Gain
      on sale of book of business
              
              
              -
              
              
              
              66
              
              
              
              (66
              )
              
              
              (100
              )
      %(Benefit
      from) provision for income taxes
              
              
              (114
              )
              
              
              74
              
              
              
              (188
              )
              
              
              (254
              )
      %(Loss)
      income from continuing operationsbefore
      income taxes
              
              
              (341
              )
              
              
              156
              
              
              
              (497
              )
              
              
              (319
              )
      %




During
the nine months ended September 30, 2008 (“2008”), revenues from continuing
operations were $3,767,000 as compared to $4,487,000 for the nine months ended
September 30, 2007 (“2007”).  The 16% revenue decrease of $720,000 was
primarily attributable to a $902,000 reduction in commissions and fees earned
due to the sale of fewer insurance policies in 2008 than in
2007.  Such reduction in sales was generally caused by the continued
heightened competition from the voluntary insurance market which is offering
lower premium rates to our main customer, the non-standard
insured.  The decrease in commissions and fees earned from the sale of
insurance policies was offset by $330,000 of premium finance placement fees
earned in 2008, compared to none in 2007. Effective February 1, 2008, we began
earning placement fees in accordance with the terms of the sale of our premium
finance portfolio.




21


Our
general and administrative expenses in 2008 were $4,361,000, as compared to
$4,765,000 in 2007. The 8% net decrease of $404,000 was primarily attributable
to decreases in: (i) fixed and variable compensation paid to employees due to a
reduction in policies sold at our stores, (ii) executive compensation, and (iii)
fees paid to consultants, offset by an increase in occupancy costs due to rent
increases and escalations.




Our
interest expense in 2008 was $221,000, as compared to $369,000 in 2007. The 40%
decrease of $148,000 was primarily due to: (i) a reduction in the principal
balance of our debt and (ii) our no longer allocating a portion of the interest
on our revolving credit line from our discontinued premium finance business to
continuing operations.




Our
interest income from notes receivable in 2008 was $731,000, as compared to
$971,000 in 2007. The 25% decrease of $240,000 was primarily due to: (i) the
discount on Surplus Notes and the accrued interest at the time of acquisition
being fully accreted in July 2008, and (ii) a reduction in the variable interest
rate in 2008 due to a decrease in the prime rate.




Our gain
on sale of book of business in 2008 was $-0-, as compared to $66,000 in 2007.
The $66,000 decrease in 2008 was due to a sale in 2007, compared to no such
sales in 2008.




During
2008, we recorded a benefit from income taxes of $114,000 compared to a
provision for income taxes of $74,000 in 2007. The change of $188,000 is due to
a $497,000 decrease in income from continuing operations in 2008 as compared to
2007, offset by provision for state taxes.




Our
continuing operations generated a net loss before income taxes of $341,000 in
2008 as compared to a net profit before income taxes of $156,000 in
2007.  This decrease of $497,000 was primarily due to reductions in
revenue consisting of: (i) a 16% decrease in commissions and fee revenue of
$720,000, (ii) a decrease in accrued interest income from our Surplus Notes, and
(iii) the elimination of any sale of book of business in 2008, offset by
reductions in costs and expenses consisting of: (i) a decrease in executive
compensation, employee head count and variable compensation paid on commissions
generated, (ii) a decrease in fees paid to consultants, and (iii) a decrease in
interest expense.




Discontinued
Operations




The
following table summarizes our changes in the results of discontinued operations
(in thousands) for the periods indicated:




22




Nine
      months endedSeptember
      30,YTD
              
              
              YTD
              
              
              Change2008*
              
              
              2007
              
              
              $
              
              
              
              %Premium
      finance revenue
              
              $
              225
              
              
              $
              2,419
              
              
              
              (2,194
              )
              
              
              (91
              )
      %Operating
      Expenses:General
      and administrative expenses
              
              
              182
              
              
              
              1,084
              
              
              
              (902
              )
              
              
              (83
              )
      %Provision
      for finance receivable losses
              
              
              89
              
              
              
              396
              
              
              
              (307
              )
              
              
              (78
              )
      %Depreciation
      and amortization
              
              
              47
              
              
              
              75
              
              
              
              (28
              )
              
              
              (37
              )
      %Interest
      expense
              
              
              45
              
              
              
              499
              
              
              
              (454
              )
              
              
              (91
              )
      %Total
      Operating Expenses
              
              
              363
              
              
              
              2,054
              
              
              
              (1,691
              )
              
              
              (82
              )
      %(Loss)
      income from operations
              
              
              (138
              )
              
              
              365
              
              
              
              (503
              )
              
              
              (138
              )
      %Loss
      on sale of premium financing portfolio
              
              
              (251
              )
              
              
              -
              
              
              
              (251
              )
              
              
              -
              %(Loss)
      income before (benefit from)  provision for income
      taxes
              
              
              (389
              )
              
              
              365
              
              
              
              (754
              )
              
              
              (207
              )
      %(Benefit
      from) provision for income taxes
              
              
              (175
              )
              
              
              164
              
              
              
              (339
              )
              
              
              (207
              )
      %(Loss)
      income from discontinued operations
              
              $
              (214
              )
              
              $
              201
              
              
              $
              (415
              )
              
              
              (206
              )
      %


___________________




* Our
premium finance portfolio was sold on February 1, 2008.  Premium
finance revenue for 2008 only includes the period from January 1, 2008 through
January 31, 2008.




Our
premium finance revenue decreased $2,194,000 in 2008 as compared to
2007.  The 91% decrease is due to only including one month of revenue
in 2008 compared to nine months in 2007.




Our
general and administrative expenses from discontinued operations decreased
$902,000 in 2008 as compared to 2007.  The 83% decrease is due to only
including one month of operating expenses related to revenue in 2008 compared to
nine months in 2007.




Our
provision for finance receivable losses for 2008 was $307,000 less than for
2007.  The 78% decrease was due to the discontinuance of loan
originations offset by a provision for losses from loans originated in the prior
year.




Our
premium finance interest expense for 2008 was $454,000 less than for
2007.  The 91% decrease was due to the payment in full of the
outstanding balance of our revolving credit line on February 1,
2008.




Loss on
sale of premium financing portfolio was $251,000 in 2008, compared to no such
loss in 2007. The 2008 loss was primarily due to: (i) a $162,000 adjustment to
the selling price as a result of a change in the estimated collectible amount of
the portfolio, and (ii) the incurrence of $83,000 in fees related to the sale of
our premium finance portfolio.




Our
discontinued premium finance operations, on a stand-alone basis, generated a net
loss before income taxes of $389,000 in 2008 as compared to a net profit before
income taxes of $365,000 in 2007.  The decrease in profit of $754,000
in 2008 was due to: (i) the cessation of revenues as of January 31, 2008, and
(ii) the loss on sale of portfolio, offset by the elimination and reductions in
operating expenses.




23


The
following table summarizes our change in net (loss) income (in thousands) for
the periods indicated.




Nine
      months endedSeptember
      30,YTD
              
              
              YTD
              
              
              Change2008
              
              
              2007
              
              
              $
              
              
              
              %(Loss)
      income from continuing operations
              
              $
              (228
              )
              
              $
              82
              
              
              $
              (310
              )
              
              
              (378
              )
      %(Loss)
      income from discontinued operations, net of taxes
              
              
              (214
              )
              
              
              201
              
              
              
              (415
              )
              
              
              (206
              )
      %Net
      (loss) income
              
              $
              (442
              )
              
              $
              283
              
              
              $
              (725
              )
              
              
              (256
              )
      %


Our net
loss for 2008 was $442,000 as compared to net income of $283,000 for
2007.




Three Months Ended September
30, 2008 Compared to Three Months Ended September 30, 2007





On
February 1, 2008, we sold our outstanding premium finance loan portfolio. As a
result of the sale, our premium financing operations have been reclassified as
discontinued operations and prior periods have been restated. Separate
discussions follow for results of continuing operations and discontinued
operations.




Continuing
Operations




The
following table summarizes the changes in the significant components of the
results of continuing operations (in thousands) for the periods
indicated:


Three
      months endedSeptember
      30,Q3
              
              
              Q3
              
              
              Change2008
              
              
              2007
              
              
              $
              
              
              
              %Commissions
      and fee revenue
              
              $
              1,144
              
              
              $
              1,360
              
              
              $
              (216
              )
              
              
              (16
              )
      %General
      and administrtaive expenses
              
              
              1,218
              
              
              
              1,493
              
              
              
              (275
              )
              
              
              (18
              )
      %Interest
      expense
              
              
              69
              
              
              
              119
              
              
              
              (50
              )
              
              
              (42
              )
      %Interest
      income - notes receivable
              
              
              129
              
              
              
              323
              
              
              
              (194
              )
              
              
              (60
              )
      %Benefit
      from income taxes
              
              
              (7
              )
              
              
              (1
              )
              
              
              (6
              )
              
              
              -
              %Loss
      from continuing operationsbefore
      benefit from income taxes
              
              
              (104
              )
              
              
              (9
              )
              
              
              (95
              )
              
              
              1,056
              %




During
the three months ended September 30, 2008 (“Q3 2008”), revenues from continuing
operations were $1,144,000 as compared to $1,360,000 for the three months ended
September 30, 2008 (“Q3 2007”). The 16% revenue decrease of $216,000 was
primarily attributable to a $278,000 reduction in commissions and fees earned
due to the sale of fewer insurance policies in Q3 2008 than in Q3
2007.  Such reduction in sales was generally caused by the continued
heightened competition from the voluntary insurance market which is offering
lower premium rates to our main customer, the non-standard
insured.  The decrease in commissions and fees earned from the sale of
insurance policies was offset by $111,000 of premium finance placement fees
earned in Q3 2008, compared to none in Q3 2007. Effective February 1, 2008, we
began earning placement fees in accordance with the terms of the sale of our
premium finance portfolio.




24


Our
general and administrative expenses in Q3 2008 were $1,218,000, as compared to
$1,493,000 in Q3 2007. The 18% net decrease of $275,000 was primarily
attributable to decreases in: (i) fixed and variable compensation paid to
employees due to a reduction in policies sold at our stores, (ii) executive
compensation, and (iii) fees paid to consultants, offset by an increase in
occupancy costs due to rent increases and escalations.




Our
interest expense in Q3 2008 was $69,000, as compared to $119,000 in Q3 2007. The
42% decrease of $50,000 was primarily due to: (i) a reduction in the principal
balance of our debt and (ii) our no longer allocating a portion of the interest
on our revolving credit line from our discontinued premium finance business to
continuing operations.




Our
interest income from notes receivable in Q3 2008 was $129,000, as compared to
$323,000 in Q3 2007. The 60% decrease of $194,000 was primarily due to: (i) the
discount on Surplus Notes and the accrued interest at the time of acquisition
being fully accreted in July 2008, and (ii) a reduction in the variable interest
rate in 2008 due to a decrease in the prime rate.




During Q3
2008, we recorded a benefit from income taxes of $7,000 compared to a benefit
from income taxes of $1,000 in Q3 2007. The change of $6,000 is due to a $95,000
decrease in income from continuing operations in Q3 2008 as compared to Q3 2007,
offset by provision for state taxes.




Our
continuing operations generated a net loss before income taxes of $104,000 in Q3
2008 as compared to a net loss before income taxes of $9,000 in Q3
2007.  The increase in loss of $95,000 was primarily due to reductions
in revenue consisting of: (i) a 16% decrease in commissions and fee revenue of
$216,000, and (ii) a decrease in accrued interest income from our Surplus Notes,
offset by a reductions in costs and expenses consisting of: (i) a
decrease in executive compensation, employee head count and variable
compensation paid on commissions generated, (ii) a decrease in fees paid to
consultants, and (iii) a decrease in interest expense.




Discontinued
Operations




The
following table summarizes our changes in the results of discontinued operations
(in thousands) for the periods indicated:






25




Three
      months endedSeptember
      30,Q3
              
              
              Q3
              
              
              Change2008
              *
              
              2007
              
              
              $
              
              
              
              %Premium
      finance revenue
              
              $
              -
              
              
              $
              777
              
              
              
              (777
              )
              
              
              (100
              )
      %Operating
      Expenses:General
      and administrative expenses
              
              
              -
              
              
              
              344
              
              
              
              (344
              )
              
              
              (100
              )
      %Provision
      for finance receivable losses
              
              
              -
              
              
              
              120
              
              
              
              (120
              )
              
              
              (100
              )
      %Depreciation
      and amortization
              
              
              -
              
              
              
              24
              
              
              
              (24
              )
              
              
              (100
              )
      %Interest
      expense
              
              
              -
              
              
              
              166
              
              
              
              (166
              )
              
              
              (100
              )
      %Total
      Operating Expenses
              
              
              -
              
              
              
              654
              
              
              
              (654
              )
              
              
              (100
              )
      %(Loss)
      income from operations
              
              
              -
              
              
              
              123
              
              
              
              (123
              )
              
              
              (100
              )
      %Loss
      on sale of premium financing portfolio
              
              
              (5
              )
              
              
              -
              
              
              
              (5
              )
              
              
              -
              %(Loss)
      income before (benefit from)  provision for income
      taxes
              
              
              (5
              )
              
              
              123
              
              
              
              (128
              )
              
              
              (104
              )
      %(Benefit
      from) provision for income taxes
              
              
              (2
              )
              
              
              55
              
              
              
              (57
              )
              
              
              (104
              )
      %(Loss)
      income from discontinued operations
              
              $
              (3
              )
              
              $
              68
              
              
              $
              (71
              )
              
              
              (104
              )
      %


___________________




* Our
premium finance portfolio was sold on February 1, 2008.  Premium
finance revenue for 2008 only includes the period from January 1, 2008 through
January 31, 2008.




Our
premium finance revenue was $-0- in Q3 2008 compared $777,000 in Q3
2007. The decrease is due to the sale of the premium finance portfolio in
the first quarter of 2008, which as result, there was no revenue in Q3 2008,
compared to including three months of revenue in Q3 2007.




Our
operating expenses from discontinued operations were $-0- in Q3 2008 compared
$654,000 in Q3 2007. The decrease is due to the sale of the premium finance
portfolio in the first quarter of 2008, which as result, there were no operating
expenses in Q3 2008, compared to including three months of operating expenses in
Q3 2007.




Our
discontinued premium finance operations, on a stand-alone basis, generated a net
loss before income taxes of $5,000 in Q3 2008 as compared to a net profit before
income taxes of $123,000 in Q3 2007.  The decrease in profit of
$128,000 in 2008 was due to the cessation of revenues as of January 31,
2008, offset by the elimination and reductions in operating
expenses.




The
following table summarizes our change in net (loss) income (in thousands) for
the periods indicated.






26




Three
      months endedSeptember
      30,Q3
              Q3
              Change2008
              2007
              $
              %Loss
      from continuing operations
              $      (97)
              $        (9)
              $      (88)
              978
              %(Loss)
      income from discontinued operations, net of taxes
              (3)
              68
              (71)
              (104)
              %Net
      (loss) income
              $    (100)
              $        59
              $    (159)
              (269)
              %




Our net
loss for Q3 2008 was $100,000 as compared to net income of $59,000 for Q3
2007.




Liquidity
and Capital Resources




As of
September 30, 2008, we had $520,558 in cash and cash equivalents and a working
capital deficit of $2,396,388. As of December 31, 2007, we had $1,030,822 in
cash and cash equivalents and a working capital deficit of
$1,401,539.




As
discussed below, during 2007, the holders of $1,500,000 outstanding principal
amount of subordinated debt agreed to extend the maturity date of the debt from
September 30, 2007 to September 30, 2008, and in August 2008, agreed to further
extend the maturity date to the earlier of July 10, 2009 or 90 days following
the conversion of Commercial Mutual Insurance Company (“CMIC”) to a stock
property and casualty insurance company and the issuance to us of a controlling
interest in CMIC (as discussed below) (subject to acceleration under certain
circumstances).  The $1,500,000 principal balance of these notes is
included in our September 30, 2008 balance sheet under “Current portion of
long-term debt.”  In addition, as discussed below, effective April 16,
2008, the holder of our Series B preferred shares (which were mandatorily
redeemable on April 30, 2008) exchanged such shares for an equal number of
preferred shares, which were mandatorily redeemable on April 30, 2009. In
August 2008, the redemption date was further extended to July 31, 2009. The
mandatorily redeemable balance of $780,000 is included in our September 30, 2008
balance sheet under “Current Liabilities”.  Further, as discussed
below, term loan payments in the aggregate principal amount of $222,857 are
payable to Manufacturers and Traders Trust Company (“M&T”) through December
2008.  The principal balance of this obligation is included in our
September 30, 2008 balance sheet under “Current Liabilities.”  We plan
to seek to further extend the maturity dates and/or refinance the subordinated
debt and preferred stock obligations.  We also plan to sell and/or
close certain stores that are not operating profitably.




We
believe that, based on our present cash resources and assuming that our efforts
with regard to the subordinated debt and preferred stock obligations, as
discussed above, are successful and/or that we complete the sale of certain
stores and/or closings as contemplated, we will have sufficient cash on a
short-term basis and over the next 12 months to fund our working capital
needs.  No definitive arrangements are in place with regard to any of
the foregoing and no assurances can be given that any will occur on commercially
reasonable terms or otherwise.




During
2008, cash and cash equivalents decreased by $510,000 primarily due to the
following:




27


·
            Net
      cash used in operating activities during 2008 was $601,000 due to the
      following:  (i) cash used in the operating activities of our
      discontinued operations of $436,000 as a result of the liquidation of
      substantially all of the related operating assets and liabilities on
      February 1, 2008 and (ii) net loss adjusted for non-cash items was
      $980,000. Non-cash items totaled $538,000, which include depreciation and
      amortization, bad debt expense, accretion of discount on notes receivable,
      amortization of warrants, stock-based payments, and deferred income taxes.
      The use of cash was offset by a decrease in prepaid expenses, which
      primarily consists of a $368,000 Federal tax refund claim received from a
      carry-back of net operating losses, and an increase in accounts payable
      and accrued expenses of $340,000.




·
            Net
      cash provided by investing activities during 2008 was $1,020,000 primarily
      due to the $1,008,000 cash flow from finance contracts receivable included
      in discontinued operations.




·
            Net
      cash used in financing activities during 2008 was $929,000 due to: (i) a
      $562,000 decrease in our revolving credit line utilized in our
      discontinued operations prior to the sale of our premium finance portfolio
      on February 1, 2008, and (ii) principal payments on long-term debt and
      lease obligations of $367,000.




Our discontinued premium finance
operations were financed pursuant to a $20,000,000 revolving line of credit from
M&T entered into on July 28, 2006.  The line of credit was
terminated and the $8,926,000 balance was paid in full on February 1, 2008 in
connection with the sale of our premium finance portfolio. The line of credit
also allowed for a $2,500,000 term loan (of the $20,000,000 credit line
availability) to be used to provide liquidity for ongoing working capital
purposes.  Any draws against this line bear interest at LIBOR plus
2.75%.  As of July 28, 2006, we made our first draw of $1,300,000
against the term line.  The draw is repayable in quarterly principal
installments of $130,000 each, commencing September 1, 2006.  The
remaining principal balance of $390,000, was payable to the extent of $130,000
on June 1, 2008 and $260,000 on June 30, 2008.  In June 2008, the
maturity date of the M&T term loan was extended to December 31, 2008.
Principal payments of $55,714 are due on the first day of each month and one
final payment on the maturity date. The first principal payment was paid on June
30, 2008. As of September 30, 2008, the balance of the term loan was
$222,857.  Interest is payable monthly.




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.  During 2005, we utilized the M&T line of credit to
repay an aggregate of $2,000,000 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.  In May 2005, we obtained an extension
of the maturity date of the remaining subordinated debt to September 30,
2007.  During 2007, the holders of the $1,500,000 outstanding
principal amount of subordinated debt agreed to extend the maturity date of the
debt from September 30, 2007 to September 30, 2008.  In August 2008,
the maturity date of our $1,500,000 subordinated note obligation was extended
from September 30, 2008 to the earlier of July 10, 2009 or 90 days following the
conversion of CMIC to a stock property and casualty insurance company and the
issuance to us of a controlling interest in CMIC (subject to acceleration under
certain circumstances).  In exchange for this extension, the holders
will receive an aggregate incentive payment equal to $10,000 times the number of
months (or partial months) the debt is outstanding after September 30, 2008
through the maturity date. If a prepayment of principal reduces the debt below
$1,500,000, the incentive payment for all subsequent months will be reduced in
proportion to any such reduction to the debt. The aggregate incentive payment is
due upon full repayment of the debt.




28


Effective
April 16, 2008, the holder of our Series B preferred shares exchanged such
shares for an equal number of Series C preferred shares, which provided for
dividends at the rate of 10% per annum (as compared to 5% per annum for the
Series B preferred shares) and were mandatorily redeemable on April 30,
2009.  Effective August 23, 2008, the mandatory redemption date for
preferred shares was further extended to July 31, 2009 through the issuance of
Series D preferred shares in exchange for an equal number of Series C preferred
shares.




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




Commercial
Mutual Insurance Company




On
January 31, 2006, we purchased $3,750,000 of Surplus Notes issued by CMIC for a
price of $3,075,141, of which $1,303,434 was paid by delivery of a six month
promissory note which provided for interest at the rate of 7.5% per
annum.  The promissory note was paid in full on July 28,
2006.  Accrued but unpaid interest on the Surplus Notes totaled
$1,794,688 at the time of the purchase.  As of September 30, 2008, the
balance of the Surplus Notes, including accrued interest was $5,902,000. The
Surplus Notes 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 Insurance Department of the State of New York.




In March
2007, CMIC’s Board of Directors adopted a resolution to convert CMIC from an
advance premium cooperative insurance company to a stock property and casualty
insurance company.  CMIC has advised us that it has obtained
permission from the Superintendent of Insurance of the State of New York (the
“Superintendent”) to proceed with the conversion process (subject to certain
conditions as discussed below).




The
conversion by CMIC to a stock property and casualty insurance company is subject
to a number of conditions, including the approval of the plan of conversion,
which was filed with the Superintendent on April 25, 2008, by both the
Superintendent and CMIC’s policyholders.  As part of the approval
process, the Superintendent had an appraisal performed with respect to the fair
market value of CMIC as of December 31, 2006.  In addition, the
Insurance Department conducted a five year examination of CMIC as of December
31, 2006 and held a public hearing in October 2008 to consider the conversion
plan. We, as a holder of the CMIC Surplus Notes, at our option, would be able to
exchange the Surplus Notes for an equitable share of the securities or other
consideration, or both, of the corporation into which CMIC would be
converted.  Based upon the amount payable on the Surplus Notes and the
statutory surplus of CMIC, the plan of conversion provides that, in the event of
a conversion by CMIC into a stock corporation, in exchange for our relinquishing
our rights to any unpaid principal and interest under the Surplus Notes, we
would receive 100% of the stock of CMIC.  It is anticipated that the
policyholder meeting to approve the conversion will occur on or about December
31, 2008. As indicated above, such approval, as well as the prior approval of
the Superintendent, is required for the conversion to occur. Upon the
effectiveness of the conversion, CMIC’s name will change to “Kingstone Insurance
Company.”  We are seeking stockholder approval of an amendment to our
certificate of incorporation to change our name to “Kingstone Companies,
Inc.”  Such name change would only take place in the event that the
conversion occurs and we obtain a controlling interest in Kingstone Insurance
Company.  No assurances can be given that the conversion will occur or
as to the terms of the conversion.




29


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.Quantitative
and Qualitative Disclosures about Market Risk.





As a
smaller reporting company, the registrant is not required to provide a response
to Item 3.





Item  4T.Controls
and Procedures.





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to assure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosures.




As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered by
this Quarterly Report, under the supervision and with the participation of our
principal executive officer and principal financial officer, we evaluated the
effectiveness of our disclosure controls and procedures.  Based on
this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of
September 30, 2008.




Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting,
except as described below.




30


As
previously reported in our Annual Report on Form 10-KSB for the year ended
December 31, 2007, we determined that, as of that date, there were material
weaknesses in our internal control over financial reporting relating to (1) the
financial reporting of a subsidiary, and (2) information technology applications
and infrastructure.




Item (1)
above was remediated during the first quarter of fiscal year 2008 as a result of
the sale of this subsidiary’s assets in February 2008. The material weaknesses
in our internal control over financial reporting related to item (2) continues
to persist through the current fiscal quarter. Accordingly, we are in the
process of developing and implementing a plan to address the material weakness
related to information technology applications and infrastructure. We have hired
a consulting firm to advise us in connection with remediation of this existing
deficiency.







31





PART
II.  OTHER
INFORMATION




Item  1.Legal
Proceedings.





None.





Item 1A.Risk
Factors.





As a smaller reporting company, the
registrant is not required to provide a response to Item 1A.





Item 2.Unregistered
Sales of Equity Securities and Use of Proceeds.




(a)  During
the third quarter of 2008, we issued an aggregate of 16,876 common shares to our
non-employee directors as director fees for such quarter.  The above
offering of shares was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) thereof as a transaction not
involving any public offering.  We reached this determination based on
the following: (i) each director represented that he was an “accredited
investor” and he acquired the shares for his own account; (ii) the certificate
representing the shares bears a restrictive legend permitting transfer only upon
the registration of the shares or pursuant to an exemption from such
registration requirements; and (iii) we did not offer or sell the shares by any
form of general solicitation or general advertising.








(c)  The
following table set forth certain information with respect to purchases of
common shares made by us or any “affiliated purchaser” during the quarter ended
September 31, 2008:


Period
              
              Total
      Number of Shares Purchased (1)
              
              
              Average
      Price Paid per Share
              
              
              Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              
              
              Maximum
      Number of Sharesthat May Be Purchased Under the Plans or
      Programs7/1/08
      - 7/31/08
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -8/1/08
      - 8/31/08
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -9/1/08
      - 9/30/08
              
              
              297,378
              
              
              $
              0.75
              
              
              
              -
              
              
              
              -Total
              
              
              297,378
              
              
              $
              0.75
              
              
              
              -
              
              
              
              -


__________





(1) Represents shares repurchased by an
affiliated purchaser.





Item 3.Defaults
Upon Senior Securities.





None.





32


Item  4.Submission
of Matters to a Vote of Security Holders





There
were no matters submitted to a vote of security holders during the quarterly
period covered by this report.





Item  5.Other
Information.





None.





Item  6.Exhibits.





2
            Amended
      and Restated Purchase and Sale Agreement, dated as of February 1, 2008, by
      and among Premium Financing Specialists, Inc., Payments Inc. and DCAP
      Group, Inc.13(a)
            Restated
      Certificate of Incorporation23(b)
            Certificate
      of Designation of Series A Preferred Stock33(c)
            Certificate
      of Designation of Series B Preferred Stock43(d)
            Certificate
      of Designation of Series C Preferred Stock53(e)
            Certificate
      of Designation of Series D Preferred Stock3(f)
            By-laws,
      as amended610(a)
            Amendment
      No. 1, dated as of August 25, 2008, to Employment Agreement, dated as of
      October 16, 2007, between DCAP Group, Inc. and Barry
    Goldstein





1Denotes document filed as
an exhibit to our Current Report on Form 8-K for an event dated February 1, 2008
and incorporated herein by reference.


2 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.


3 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.


4Denotes document
filed as an exhibit to our Annual Report on Form 10-KSB for the year ended
December 31, 2006 and incorporated herein by reference.


5Denotes document
filed as an exhibit to our Quarterly Report on Form 10Q-SB for the period ended
March 31, 2008 and incorporated herein by reference.


6Denotes
document filed as an exhibit to our Current Report on Form 8-K for an event
dated December 26, 2007 and incorporated herein by reference.










10(b)
              Letter
      agreement, dated August 13, 2008, between DCAP Group, Inc. and Jack
      Seibald as representative and attorney-in-fact with respect to the
      outstanding subordinated debt31(a)
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive Officer as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231(b)
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial Officer 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
 
 34




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:  November
      14, 2008
              By:
              /s/ Barry
      B. GoldsteinBarry
      B. GoldsteinPresident


By:
              /s/ Victor
      BrodskyVictor
      BrodskyChief
      Accounting Officer