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 June 30, 2009


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





KINGSTONE COMPANIES,
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)




DCAP
Group, Inc.


(Former
Name, if Changed Since Last Report)




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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes o 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
August 14, 2009, there were 2,979,582 shares of the registrant’s common stock
outstanding.








KINGSTONE COMPANIES,
INC.


INDEX


PAGEPART
      I — FINANCIAL INFORMATION
                
                
                4Item 1
      —
                
                Financial
      Statements
                
                
                4Condensed
      Consolidated Balance Sheets at June 30, 2009 (Unaudited) and December 31,
      2008
                
                
                4Condensed
      Consolidated Statements of Operations for the six months ended June 30,
      2009 (Unaudited) and 2008 (Unaudited)
                
                
                5Condensed
      Consolidated Statements of Operations for the three months ended June 30,
      2009 (Unaudited) and 2008 (Unaudited)
                
                
                6Condensed
      Consolidated Statements of Cash Flows for the six months ended June 30,
      2009 (Unaudited) and 2008  (Unaudited)
                
                
                7Notes
      to Condensed Consolidated Financial
      Statements  (Unaudited)
                
                
                8Item 2
      —
                
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                
                23Item 3
      —
                
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                
                40Item 4T—
                
                Controls
      and Procedures
                
                
                40PART
      II — OTHER INFORMATION
                
                
                41Item 1
      —
                
                Legal
      Proceedings
                
                
                41Item 1A
      —
                
                Risk
      Factors
                
                
                41Item
      2 —
                
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                
                41Item
      3 —
                
                Defaults
      Upon Senior Securities
                
                
                41Item 4
      —
                
                Submission
      of Matters to a Vote of Security Holders
                
                
                41Item 5
      —
                
                Other
      Information
                
                
                41Item 6
      —
                
                Exhibits
                
                
                41Signatures
                
                
                44EXHIBIT
      3(b)EXHIBIT
      31(a)EXHIBIT
      31(b)EXHIBIT
      32





2


Forward-Looking
Statements




This
Quarterly Report contains forward-looking statements as that term is defined in
the federal securities laws.  The events described in forward-looking
statements contained in this Quarterly Report may not
occur.  Generally these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of our plans
or strategies, projected or anticipated benefits from acquisitions 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 7 of our
Annual Report on Form 10-K for the year ended December 31, 2008 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.




3


PART
I.  FINANCIAL
INFORMATION




Item
1.                      Financial
Statements.




KINGSTONE
      COMPANIES, INC. AND SUBSIDIARIES(Formerly
      DCAP Group, Inc.)Condensed
      Consolidated Balance SheetsJune
      30,
                                                        
                                                        
                                                        December
      31,2009
                                                        
                                                        
                                                        2008(Unaudited)AssetsCurrent
      Assets:Cash
      and cash equivalents
                                                        
                                                        $
                                                        167,835
                                                        
                                                        
                                                        $
                                                        142,949Accounts
      receivable, net of allowance for doubtful accounts
                                                        
                                                        
                                                        70,017
                                                        
                                                        
                                                        
                                                        67,265Notes
      receivable - sale of businesses, current portion
                                                        
                                                        
                                                        345,984
                                                        
                                                        
                                                        
                                                        -Prepaid
      expenses and other current assets
                                                        
                                                        
                                                        22,312
                                                        
                                                        
                                                        
                                                        28,778Deferred
      income taxes
                                                        
                                                        
                                                        26,000
                                                        
                                                        
                                                        
                                                        -Assets
      from discontinued operations
                                                        
                                                        
                                                        6,837
                                                        
                                                        
                                                        
                                                        3,178,219Total
      current assets
                                                        
                                                        
                                                        638,985
                                                        
                                                        
                                                        
                                                        3,417,211Property
      and equipment, net
                                                        
                                                        
                                                        74,829
                                                        
                                                        
                                                        
                                                        82,617Notes
      receivable - Commercial Mutual Insurance Company
                                                        
                                                        
                                                        5,996,461
                                                        
                                                        
                                                        
                                                        5,935,704Notes
      receivable - sale of businesses, net of current portion
                                                        
                                                        
                                                        758,515
                                                        
                                                        
                                                        
                                                        -Deposits
      and other assets
                                                        
                                                        
                                                        1,100
                                                        
                                                        
                                                        
                                                        1,100Total
      assets
                                                        
                                                        $
                                                        7,469,890
                                                        
                                                        
                                                        $
                                                        9,436,632Liabilities
      and Stockholders' EquityCurrent
      Liabilities:Accounts
      payable and accrued expenses
                                                        
                                                        $
                                                        529,211
                                                        
                                                        
                                                        $
                                                        812,541Current
      portion of long-term debt
                                                        
                                                        
                                                        23,378
                                                        
                                                        
                                                        
                                                        1,593,210Other
      current liabilities
                                                        
                                                        
                                                        154,200
                                                        
                                                        
                                                        
                                                        154,200Liabilities
      from discontinued operations
                                                        
                                                        
                                                        79,163
                                                        
                                                        
                                                        
                                                        223,493Mandatorily
      redeemable preferred stock
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        780,000Total
      current liabilities
                                                        
                                                        
                                                        785,952
                                                        
                                                        
                                                        
                                                        3,563,444Long-term
      debt, net of current portion
                                                        
                                                        
                                                        523,763
                                                        
                                                        
                                                        
                                                        415,618Deferred
      income taxes
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        200,000Mandatorily
      redeemable preferred stock
                                                        
                                                        
                                                        1,299,231
                                                        
                                                        
                                                        
                                                        -CommitmentsStockholders'
      Equity:Common
      stock, $.01 par value; authorized 10,000,000 shares;issued
      3,788,771 shares
                                                        
                                                        
                                                        37,888
                                                        
                                                        
                                                        
                                                        37,888Preferred
      stock, $.01 par value; authorized1,000,000
      shares; 0 shares issued and outstanding
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Capital
      in excess of par
                                                        
                                                        
                                                        11,976,022
                                                        
                                                        
                                                        
                                                        11,962,512Deficit
                                                        
                                                        
                                                        (5,932,584
                                                        )
                                                        
                                                        
                                                        (5,522,448
                                                        )6,081,326
                                                        
                                                        
                                                        
                                                        6,477,952Treasury
      stock, at cost, 816,025 shares
                                                        
                                                        
                                                        (1,220,382
                                                        )
                                                        
                                                        
                                                        (1,220,382
                                                        )Total
      stockholders' equity
                                                        
                                                        
                                                        4,860,944
                                                        
                                                        
                                                        
                                                        5,257,570Total
      liabilities and stockholders' equity
                                                        
                                                        $
                                                        7,469,890
                                                        
                                                        
                                                        $
                                                        9,436,632
 
 See
notes to condensed consolidated financial statements.
 4





KINGSTONE
      COMPANIES, INC. AND SUBSIDIARIES(Formerly
      DCAP Group, Inc.)Condensed
      Consolidated Statements of Operations (Unaudited)Six
      Months Ended June 30,
                                        
                                        2009
                                        
                                        
                                        2008Fee
      revenue
                                        
                                        $
                                        224,560
                                        
                                        
                                        $
                                        218,766Operating
      expenses:General
      and administrative expenses
                                        
                                        
                                        666,896
                                        
                                        
                                        
                                        644,671Depreciation
      and amortization
                                        
                                        
                                        8,594
                                        
                                        
                                        
                                        15,372Total
      operating expenses
                                        
                                        
                                        675,490
                                        
                                        
                                        
                                        660,043Operating
      loss
                                        
                                        
                                        (450,930
                                        )
                                        
                                        
                                        (441,277
                                        )Other
      (expense) income:Interest
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,809Interest
      income - notes receivable
                                        
                                        
                                        67,782
                                        
                                        
                                        
                                        601,722Interest
      expense
                                        
                                        
                                        (133,351
                                        )
                                        
                                        
                                        (130,297
                                        )Interest
      expense - mandatorily redeemable preferred stock
                                        
                                        
                                        (52,452
                                        )
                                        
                                        
                                        (27,625
                                        )Forgiveness
      of debt
                                        
                                        
                                        132,836
                                        
                                        
                                        
                                        -Total
      other income
                                        
                                        
                                        14,815
                                        
                                        
                                        
                                        445,609(Loss)
      income from continuing operations before benefit from income
      taxes
                                        
                                        
                                        (436,115
                                        )
                                        
                                        
                                        4,332Benefit
      from income taxes
                                        
                                        
                                        (209,752
                                        )
                                        
                                        
                                        (279,522
                                        )(Loss)
      income from continuing operations
                                        
                                        
                                        (226,363
                                        )
                                        
                                        
                                        283,854Loss
      from discontinued operations, net of income taxes
                                        
                                        
                                        (183,773
                                        )
                                        
                                        
                                        (625,492
                                        )Net
      loss
                                        
                                        $
                                        (410,136
                                        )
                                        
                                        $
                                        (341,638
                                        )Basic
      and Diluted Net (Loss) Income Per Common Share:(Loss)
      income from continuing operations
                                        
                                        $
                                        (0.08
                                        )
                                        
                                        $
                                        0.10Loss
      from discontinued operations
                                        
                                        $
                                        (0.06
                                        )
                                        
                                        $
                                        (0.21
                                        )Loss
      per common share
                                        
                                        $
                                        (0.14
                                        )
                                        
                                        $
                                        (0.11
                                        )Number
      of weighted average shares used in computationof
      basic and diluted loss per common share
                                        
                                        
                                        2,972,746
                                        
                                        
                                        
                                        2,973,066





See
notes to condensed consolidated financial statements.





5





KINGSTONE
      COMPANIES, INC. AND SUBSIDIARIES(Formerly
      DCAP Group, Inc.)Condensed
      Consolidated Statements of Operations (Unaudited)Three
      Months Ended June 30,
                                          
                                          2009
                                          
                                          
                                          2008Fee
      revenue
                                          
                                          $
                                          112,523
                                          
                                          
                                          $
                                          119,582Operating
      expenses:General
      and administrative expenses
                                          
                                          
                                          384,983
                                          
                                          
                                          
                                          323,632Depreciation
      and amortization
                                          
                                          
                                          4,158
                                          
                                          
                                          
                                          10,217Total
      operating expenses
                                          
                                          
                                          389,141
                                          
                                          
                                          
                                          333,849Operating
      loss
                                          
                                          
                                          (276,618
                                          )
                                          
                                          
                                          (214,267
                                          )Other
      (expense) income:Interest
      income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          211Interest
      income - notes receivable
                                          
                                          
                                          37,313
                                          
                                          
                                          
                                          294,611Interest
      expense
                                          
                                          
                                          (53,084
                                          )
                                          
                                          
                                          (58,528
                                          )Interest
      expense - mandatorily redeemable preferred stock
                                          
                                          
                                          (32,952
                                          )
                                          
                                          
                                          (17,875
                                          )Forgiveness
      of debt
                                          
                                          
                                          132,836
                                          
                                          
                                          
                                          -Total
      other income
                                          
                                          
                                          84,113
                                          
                                          
                                          
                                          218,419(Loss)
      income from continuing operations before benefit from income
      taxes
                                          
                                          
                                          (192,505
                                          )
                                          
                                          
                                          4,152Benefit
      from income taxes
                                          
                                          
                                          (121,977
                                          )
                                          
                                          
                                          (91,621
                                          )(Loss)
      income from continuing operations
                                          
                                          
                                          (70,528
                                          )
                                          
                                          
                                          95,773Loss
      from discontinued operations, net of income taxes
                                          
                                          
                                          (168,094
                                          )
                                          
                                          
                                          (207,753
                                          )Net
      loss
                                          
                                          $
                                          (238,622
                                          )
                                          
                                          $
                                          (111,980
                                          )Basic
      and Diluted Net (Loss) Income Per Common Share:(Loss)
      income from continuing operations
                                          
                                          $
                                          (0.02
                                          )
                                          
                                          $
                                          0.03Loss
      from discontinued operations
                                          
                                          $
                                          (0.06
                                          )
                                          
                                          $
                                          (0.07
                                          )Loss
      per common share
                                          
                                          $
                                          (0.08
                                          )
                                          
                                          $
                                          (0.04
                                          )Number
      of weighted average shares used in computationof
      basic and diluted loss per common share
                                          
                                          
                                          2,972,746
                                          
                                          
                                          
                                          2,973,066





See notes to condensed consolidated
financial statements.


6





KINGSTONE
      COMPANIES, INC. AND SUBSIDIARIES(Formerly
      DCAP Group, Inc.)Condensed
      Consolidated Statements of Cash Flows (Unaudited)Six
      Months Ended June 30,
                                                  
                                                  2009
                                                  
                                                  
                                                  2008Cash
      Flows from Operating Activities:Net
      loss
                                                  
                                                  $
                                                  (410,136
                                                  )
                                                  
                                                  $
                                                  (341,638
                                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                  
                                                  
                                                  8,594
                                                  
                                                  
                                                  
                                                  15,372Accretion
      of discount on notes receivable
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (493,909
                                                  )Amortization
      of warrants
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  11,820Stock-based
      payments
                                                  
                                                  
                                                  13,510
                                                  
                                                  
                                                  
                                                  74,999Deferred
      income taxes
                                                  
                                                  
                                                  (226,000
                                                  )
                                                  
                                                  
                                                  (348,000
                                                  )Changes
      in operating assets and liabilities:Decrease
      (increase) in assets:Accounts
      receivable
                                                  
                                                  
                                                  (2,752
                                                  )
                                                  
                                                  
                                                  (47,827
                                                  )Prepaid
      expenses and other current assets
                                                  
                                                  
                                                  6,466
                                                  
                                                  
                                                  
                                                  29,276Deposits
      and other assets
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  11,536Increase
      (decrease) in liabilities:Accounts
      payable, accrued expenses and taxes payable
                                                  
                                                  
                                                  (283,330
                                                  )
                                                  
                                                  
                                                  52,885Net
      cash used in operating activities of continuing operations
                                                  
                                                  
                                                  (893,648
                                                  )
                                                  
                                                  
                                                  (1,035,486
                                                  )Operating
      activities of discontinued operations
                                                  
                                                  
                                                  109,851
                                                  
                                                  
                                                  
                                                  (22,445
                                                  )Net
      Cash Used in Operating Activities
                                                  
                                                  
                                                  (783,797
                                                  )
                                                  
                                                  
                                                  (1,057,931
                                                  )Cash
      Flows from Investing Activities:Increase
      in notes receivable and accrued interest - Commercial Mutual Insurance
      Company
                                                  
                                                  
                                                  (60,757
                                                  )
                                                  
                                                  
                                                  (107,813
                                                  )Increase
      in notes receivable and accrued interest - Sale of
    businesses
                                                  
                                                  
                                                  (106,926
                                                  )
                                                  
                                                  
                                                  -Collections
      of notes receivable and accrued interest - Sale of
    businesses
                                                  
                                                  
                                                  50,000
                                                  
                                                  
                                                  
                                                  -Purchase
      of property and equipment
                                                  
                                                  
                                                  (806
                                                  )
                                                  
                                                  
                                                  -Net
      cash used in investing activities of continuing operations
                                                  
                                                  
                                                  (118,489
                                                  )
                                                  
                                                  
                                                  (107,813
                                                  )Investing
      activities of discontinued operations
                                                  
                                                  
                                                  1,869,628
                                                  
                                                  
                                                  
                                                  1,156,532Net
      Cash Provided by Investing Activities
                                                  
                                                  
                                                  1,751,139
                                                  
                                                  
                                                  
                                                  1,048,719Cash
      Flows from Financing Activities:Proceeds
      from long term debt
                                                  
                                                  
                                                  500,000
                                                  
                                                  
                                                  
                                                  -Principal
      payments on long-term debt
                                                  
                                                  
                                                  (1,442,456
                                                  )
                                                  
                                                  
                                                  (233,227
                                                  )Net
      cash used in financing activities of continuing operations
                                                  
                                                  
                                                  (942,456
                                                  )
                                                  
                                                  
                                                  (233,227
                                                  )Financing
      activities of discontinued operations
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (562,177
                                                  )Net
      Cash Used in Financing Activities
                                                  
                                                  
                                                  (942,456
                                                  )
                                                  
                                                  
                                                  (795,404
                                                  )Net
      Increase (Decrease) in Cash and Cash Equivalents
                                                  
                                                  
                                                  24,886
                                                  
                                                  
                                                  
                                                  (804,616
                                                  )Cash
      and Cash Equivalents, beginning of period
                                                  
                                                  
                                                  142,949
                                                  
                                                  
                                                  
                                                  1,030,822Cash
      and Cash Equivalents, end of period
                                                  
                                                  $
                                                  167,835
                                                  
                                                  
                                                  $
                                                  226,206Supplemental
      Schedule of Non-Cash Investing and Financing Activities:Notes
      receivable issued in connection with sale of businesses
                                                  
                                                  $
                                                  1,047,573
                                                  
                                                  
                                                  $
                                                  -Notes
      payable exchanged for mandatorily redeemable preferred
    stock
                                                  
                                                  $
                                                  519,231
                                                  
                                                  
                                                  $
                                                  -Liabilties
      assumed by purchaser of premium finance portfolio
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  11,229,060Reserve
      held by purchaser of premium finance portfolio
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  261,363





See notes to condensed consolidated
financial statements.


7




KINGSTONE
COMPANIES, INC. AND SUBSIDIARIES


FORMERLY
DCAP GROUP, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SIX
MONTHS ENDED JUNE 30, 2009 AND 2008





1.
Basis of Presentation




The
Condensed Consolidated Balance Sheet as of June 30, 2009, Condensed Consolidated
Statements of Operations for the six months and three months ended June 30, 2009
and 2008 and Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2009 and 2008 have been prepared by us without
audit.  In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments necessary to
present fairly in all material respects our financial position as of June 30,
2009, results of operations for the six months and three months ended June 30,
2009 and 2008 and cash flows for the six months ended June 30, 2009 and 2008.
This report should be read in conjunction with our Annual Report on Form 10-K
for the year ended December 31, 2008. The consolidated balance sheet at December
31, 2008 was derived from the audited financial statements as of that
date.




The
results of operations and cash flows for the six months ended June 30, 2009 are
not necessarily indicative of the results to be expected for the full
year.




Organization and Nature of
Business




The
consolidated financial statements consist of Kingstone Companies, Inc. (formerly
known as DCAP Group, Inc.) and its wholly-owned subsidiaries (referred to herein
as "we" or "us"). Effective as of July 1, 2009, we changed the name of our
company from DCAP Group, Inc. to Kingstone Companies, Inc.




Until
December 2008, our continuing operations primarily consisted of the ownership
and operation of a network of retail offices engaged in the sale of retail auto,
motorcycle, boat, business, and homeowner's insurance.




In
December 2008, due to declining revenues and profits, we made a decision to
restructure our network of retail offices (the “Retail Business”). The plan of
restructuring called for the closing of seven of our least profitable locations
during the month of December 2008 and the entry into negotiations to sell the
remaining 19 locations in our Retail Business. On April 17, 2009, we sold
substantially all of the assets, including the book of business, of our 16
remaining Retail Business locations that we owned in New York State (the “New
York Sale”) (see Note 11). Effective June 30, 2009, we sold all of the
outstanding stock of the subsidiary that operated our three remaining Retail
Locations in Pennsylvania (the “Pennsylvania Sale”) (see Note 11).  As
a result of the restructuring in December 2008, the New York Sale on April 17,
2009 and the Pennsylvania Sale effective June 30, 2009, our Retail Business has
been presented as discontinued operations and prior periods have been
restated.




Until May
2009, we operated a DCAP franchise business.  Effective May 1, 2009,
we sold all of the outstanding stock of the subsidiaries that operated such DCAP
franchise business (see Note 11).  As a result of the sale, our
franchise business has been presented as discontinued operations and prior
periods have been restated.




8


Until
February 2008, we 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 (see Note 11). 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.




Our
Retail Business also provided automobile club services and certain of our
franchisees provided tax preparation services.




2.
Summary of Significant Accounting Policies




Principles of
consolidation




The
accompanying consolidated financial statements include the accounts of our
subsidiaries, all of which are wholly-owned by us.  All significant
intercompany accounts and transactions have been eliminated.




Critical Accounting
Policies




See Item
2 of this Form 10-Q for a discussion of critical accounting policies and recent
accounting pronouncements.




3.
Notes Receivable – Commercial Mutual Insurance Company




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 was a New York property and casualty insurer. As of June
30, 2009, the Surplus Notes acquired by us were past due and provided for
interest at the prime rate or 8.5% per annum, whichever is
less.  Payments of principal and interest on the Surplus Notes could
only be made out of the surplus of CMIC and required the approval of the New
York State Department of Insurance.  We did not receive any interest
payments during the six months ended June 30, 2009 and 2008. 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 six months ended June 30, 2009 and 2008 are included in our consolidated
statement of operations as “Interest income-notes receivable.”




9


Exchange of Notes
Receivable




See Note
12 for a discussion of the exchange of the Surplus Notes into 100% of the equity
of CMIC (renamed Kingstone Insurance Company).




4.
Notes Receivable – Sale of Businesses




Retail
Business




New York Stores: On April 17,
2009, our wholly-owned subsidiaries that owned and operated our 16 Retail
Business locations in New York State sold substantially all of their assets,
including their book of business (the “New York Assets”). The purchase price for
the New York Assets was approximately $2,337,000, of which approximately
$1,786,000 was paid at closing.  Promissory notes in the aggregate
approximate principal amount of $551,000 (the “New York Notes”) were also
delivered at the closing.  The New York Notes are payable in
installments of approximately $275,500 on each of March 31, 2010 and September
30, 2010 and provide for interest at the rate of 5.25% per annum.




Pennsylvania
Stores:  Effective June 30, 2009, we sold all of the
outstanding stock of the subsidiary that operated our three remaining
Pennsylvania stores (the “Pennsylvania Stock”).  The purchase price
for the Pennsylvania Stock was approximately $397,000 which was paid by delivery
of two promissory notes, one in the approximate principal amount of $238,000 and
payable with interest at the rate of 9.375% per annum in 120 equal monthly
installments, and the other in the approximate principal amount of $159,000 and
payable with interest at the rate of 6% per annum in 60 monthly installments
commencing August 10, 2011 (with interest only being payable prior to such
date).




Franchise
Business




Effective
May 1, 2009, we sold all of the outstanding stock of the subsidiaries that
operated our DCAP franchise business (collectively, the “Franchise
Stock”).  The purchase price for the Franchise Stock was $200,000
which was paid by delivery of a promissory note in such principal amount (the
“Franchise Note”).  The Franchise Note is payable in installments of
$50,000 on May 15, 2009, $50,000 on May 1, 2010 and $100,000 on May 1, 2011 and
provides for interest at the rate of 5.25% per annum.  A principal of
the buyer is the son-in-law of Morton L. Certilman, one of our principal
shareholders.




Notes
receivable arising from the sale of businesses as of June 30, 2009 consists
of:




10





LessTotal
                      
                      
                      CurrentNote
                      
                      
                      Maturities
                      
                      
                      Long-TermSale
      of NY stores
                      
                      $
                      550,543
                      
                      
                      $
                      275,272
                      
                      
                      $
                      275,271Sale
      of Pennsylvania stores
                      
                      
                      397,030
                      
                      
                      
                      13,786
                      
                      
                      
                      383,244Sale
      of Franchise business
                      
                      
                      150,000
                      
                      
                      
                      50,000
                      
                      
                      
                      100,0001,097,573
                      
                      
                      
                      339,058
                      
                      
                      
                      758,515Accrued
      interest
                      
                      
                      6,926
                      
                      
                      
                      6,926
                      
                      
                      
                      -Total
                      
                      $
                      1,104,499
                      
                      
                      $
                      345,984
                      
                      
                      $
                      758,515




5.
Employee Stock Compensation




In
November 1998, we adopted the 1998 Stock Option Plan (the “1998 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 shares of
our Common Stock were permitted to be granted, at a price to be determined by
our Board of Directors or the Stock Option Committee at the time of grant.
During 2002, we increased the number of shares of Common Stock authorized to be
issued pursuant to the 1998 Plan to 750,000. Incentive stock options granted
under the 1998 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 the 1998 Plan. The 1998 Plan terminated in
November 2008.




In
December 2005, our shareholders ratified the adoption of the 2005 Equity
Participation Plan (the “2005 Plan” and together with the 1998 Plan, the
“Plans”), which provides for the issuance of incentive stock options,
non-statutory stock options and restricted stock. Under the 2005 Plan, a maximum
of 300,000 shares of Common Stock may be issued pursuant to options granted and
restricted stock issued. Incentive stock options granted under the 2005 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 the 2005 Plan.




Our
results for the six months and three months ended June 30, 2009 include
share-based compensation expense related to stock options totaling approximately
$14,000 and $7,000, respectively. Our results for the six months and three
months ended June 30, 2008 include share-based compensation expense totaling
approximately $48,000 and $24,000, respectively. Such amounts have been included
in the Condensed Consolidated Statements of Operations within general and
administrative expenses.




Stock
option compensation expense in 2009 and 2008 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. No stock options were granted during
the six months ended June 30, 2009 and 2008.




A summary
of option activity under the Plans as of June 30, 2009, and changes during the
six months then ended, is as follows:






11





Stock
      Options
                                                                                                  
                                                                                                  Number
      of Shares
                                                                                                  
                                                                                                  
                                                                                                  Weighted
      Average Exercise Price per Share
                                                                                                  
                                                                                                  
                                                                                                  Weighted
      Average Remaining Contractual Term
                                                                                                  
                                                                                                  
                                                                                                  Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2008
                                                                                                  
                                                                                                  
                                                                                                  177,400
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  2.40
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -Granted
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -Exercised
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -Forfeited
                                                                                                  
                                                                                                  
                                                                                                  (12,400
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  5.40
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -Outstanding
      at June 30, 2009
                                                                                                  
                                                                                                  
                                                                                                  165,000
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  2.17
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2.98
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  28,000Vested
      and Exercisable at June 30, 2009
                                                                                                  
                                                                                                  
                                                                                                  119,792
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  2.22
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2.86
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  19,823




The
aggregate intrinsic value of options outstanding and options exercisable at June
30, 2009 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 $2.24 closing price of our common
shares on June 30, 2009.  No options were exercised in the six months
ended June 30, 2009 and 2008.




As of
June 30, 2009, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $16,000. Unamortized compensation
cost as of June 30, 2009 is expected to be recognized over a remaining
weighted-average vesting period of 1.29 years.




6.
Net (Loss) Income Per Common Share




Basic net
earnings per common share is computed by dividing income (loss) 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. During the six and
three months ended June 30, 2009, 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 common share is the same, and
have not been adjusted for the effects of 814,615 potential common shares from
unexercised stock options and the conversion of convertible preferred shares,
which were anti-dilutive for such period. During the six and three months ended
June 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 common share is the same, and have not been adjusted
for the effects of 655,324 potential common shares from unexercised stock
options and warrants, and the conversion of convertible preferred shares, which
were anti-dilutive for such period.




12


7.
Long-Term Debt




Long-term
debt and capital lease obligations consist of:




June
      30, 2009
                                            
                                            
                                            December
      31, 2008Less
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            LessTotal
                                            
                                            
                                            Current
                                            
                                            
                                            Long-Term
                                            
                                            
                                            Total
                                            
                                            
                                            Current
                                            
                                            
                                            Long-TermDebt
                                            
                                            
                                            Maturities
                                            
                                            
                                            Debt
                                            
                                            
                                            Debt
                                            
                                            
                                            Maturities
                                            
                                            
                                            DebtCapitalized
      lease
                                            
                                            $
                                            47,141
                                            
                                            
                                            $
                                            23,378
                                            
                                            
                                            $
                                            23,763
                                            
                                            
                                            $
                                            58,133
                                            
                                            
                                            $
                                            22,338
                                            
                                            
                                            $
                                            35,795Note
      payable,Accurate
      acquisition
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            450,695
                                            
                                            
                                            
                                            70,872
                                            
                                            
                                            
                                            379,823Notes
      payable
                                            
                                            
                                            500,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            500,000
                                            
                                            
                                            
                                            1,500,000
                                            
                                            
                                            
                                            1,500,000
                                            
                                            
                                            
                                            -$
                                            547,141
                                            
                                            
                                            $
                                            23,378
                                            
                                            
                                            $
                                            523,763
                                            
                                            
                                            $
                                            2,008,828
                                            
                                            
                                            $
                                            1,593,210
                                            
                                            
                                            $
                                            415,618




Note Payable, Accurate
Acquisition




On April
17, 2009, we paid the balance of the note payable incurred in connection with
the Accurate acquisition.




Notes
Payable




As of
December 31, 2008, the outstanding principal balance of Notes Payable was
$1,500,000. On May 12, 2009, three of the holders of the notes exchanged an
aggregate of $519,231 of note principal for Series E Preferred Stock having an
aggregate redemption amount equal to such aggregate principal amount of notes
(see Note 8). Concurrently, we paid $49,543 to the three holders, which amount
represents all accrued and unpaid interest and incentive payments through the
date of exchange.  As part of the transaction, a retirement trust
established for the benefit of Jack Seibald, one of our directors and principal
stockholders, exchanged its note in the approximate principal amount of
$288,000  for shares of Series E Preferred Stock.  In
addition, a limited liability company of which Barry Goldstein, our Chief
Executive Officer and one of our directors and principal stockholders, is a
minority member exchanged its note in the approximate principal amount of
$115,000 for shares of Series E Preferred Stock.




On May
12, 2009, we prepaid $686,539 in principal of the Notes Payable to the remaining
five note holders, together with $81,200, which amount represents accrued and
unpaid interest and incentive payments on such prepayment.




On June
29, 2009, we prepaid the remaining $294,230 in principal of the Notes Payable to
such remaining note holders, together with $19,400, which amount represents
accrued and unpaid interest and incentive payments on such
prepayment.




In June
2009, we borrowed $500,000 and issued promissory notes in such aggregate
principal amount (the “2009 Notes”).  The 2009 Notes provide for
interest at the rate of 12.625% per annum and are payable on July 10,
2011. The 2009 Notes are prepayable by us without premium or penalty;
provided, however, that, under any circumstances, the holders of the 2009 Notes
are entitled to receive an aggregate of six months interest from the issue date
of the 2009 Notes with respect to the amount prepaid.




13


A limited
liability company of which Mr. Goldstein is a minority member purchased a 2009
Note in the principal amount of $120,000.




8.
Exchange and Issuance of Preferred Stock




Effective
April 16, 2008, AIA Acquisition Corp. (“AIA”), the holder of our Series B
Preferred Stock exchanged such shares for an equal number of shares of Series C
Preferred Stock, the terms of which were substantially identical to those of the
shares of Series B Preferred Stock, except that the outside date for mandatory
redemption was April 30, 2009 and the Series C Preferred Stock provided for
dividends at the rate of 10% per annum.




Effective
August 23, 2008, AIA exchanged the Series C Preferred Stock for an equal number
of shares of Series D Preferred Stock, the terms of which were substantially
identical to those of the shares of Series C Preferred Stock, except that the
outside date for mandatory redemption was July 31, 2009.





Effective
May 12, 2009, AIA exchanged the Series D Preferred Stock for an equal number of
shares of Series E Preferred Stock.  The terms of the Series E
Preferred Stock vary from those of the Series D Preferred Stock as follows: (i)
the Series E Preferred Stock is mandatorily redeemable on July 31, 2011 (as
compared to July 31, 2009 for the Series D Preferred Stock), (ii) the Series E
Preferred Stock provides for dividends at the rate of 11.5% per annum (as
compared to 10% per annum for the Series D Preferred Stock), (iii) the Series E
Preferred Stock is convertible into our Common Stock at a price of $2.00 per
share (as compared to $2.50 per share for the Series D Preferred Stock), (iv)
our obligation to redeem the Series E Preferred Stock is not accelerated based
upon a sale of substantially all of our assets or certain of our subsidiaries
(as compared to the Series D Preferred Stock which provided for such
acceleration) and (v) our obligation to redeem the Series E Preferred Stock is
not secured by the pledge of the outstanding stock of our subsidiary, AIA-DCAP
Corp. (as compared to the Series D Preferred Stock which provided for such
pledge).The current
aggregate redemption amount for the Series E Preferred Stock held by AIA is
$780,000, plus accumulated and unpaid dividends.  Members of Mr.
Goldstein’s family are principal stockholders of AIA.





On May
12, 2009, three holders of our Notes Payable exchanged $519,231 of the principal
balance of such notes for shares of Series E Preferred Stock having an aggregate
redemption amount of $519,231 (see Note 7).





As of
June 30, 2009, there were 1,299 shares outstanding of Series E Preferred Stock,
convertible into 649,615 shares of Common Stock.





In
accordance with SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", the
various series of Preferred Stock have been reported as a liability, and the
preferred dividends have been classified as interest expense.





9.
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,
2010.  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 Kingstone Insurance Company (“KICO”)
(formerly known as Commercial Mutual Insurance Company) 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 KICO to Mr. Goldstein pursuant to his KICO employment contract,
which, effective July 1, 2009, is $157,500 per year. KICO is a New York property
and casualty insurer. On July 1, 2009, we acquired 100% of the stock of
KICO.





14




10.
Disclosures about Fair Value of Financial Instruments




The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:




Cash and short-term
investments




The
carrying amount approximates fair value because of the short maturity of those
instruments.




Notes receivable




The
carrying amount of notes receivable related to the sale of businesses
approximates fair value because of the recently negotiated interest rates based
on term of the loan, risk and guaranty. For “Notes receivable – Commercial
Mutual Insurance Company” (now known as Kingstone Insurance Company or “KICO”),
we acquired a 100% equity interest in KICO on July 1, 2009 in exchange for our
relinquishing our rights to any unpaid principal and interest under the notes
receivable. We are in the process of obtaining an appraisal of KICO and cannot
make a reasonable estimate of fair value until such appraisal is
completed.




Long-term
debt and mandatorily redeemable preferred stock




For the
fair value of our long-term debt and mandatorily redeemable preferred stock for
which there are no quoted market prices, we estimate that the carrying amount of
notes payable and mandatorily redeemable preferred stock approximates fair value
because of the recently negotiated interest rates based on term of the loan,
risk and guaranty.




The
estimated fair values of our financial instruments are as follows:




15




June
      30, 2009
                      
                      
                      December
      31, 2008Carrying
                      
                      
                      Fair
                      
                      
                      Carrying
                      
                      
                      FairAmount
                      
                      
                      Value
                      
                      
                      Amount
                      
                      
                      ValueCash
      and short-term investments
                      
                      $
                      167,835
                      
                      
                      $
                      167,835
                      
                      
                      $
                      142,949
                      
                      
                      $
                      142,949Notes
      receivable - sale of businesses
                      
                      
                      345,984
                      
                      
                      
                      345,984
                      
                      
                      
                      -
                      
                      
                      
                      -Notes
      receivable - Commercial Mutual Insurance Company
                      
                      
                      5,996,461
                      
                      
                      
                      (1)
                      
                      
                      
                      5,935,704
                      
                      
                      
                      (1)Long-term
      debt
                      
                      
                      547,141
                      
                      
                      
                      547,141
                      
                      
                      
                      2,008,828
                      
                      
                      
                      2,008,828Mandatorily
      redeemable preferred stock
                      
                      
                      1,299,231
                      
                      
                      
                      1,299,231
                      
                      
                      
                      780,000
                      
                      
                      
                      780,000




(1)
Not practicable to estimate fair value.




11.
Discontinued Operations




Premium
Financing





On
February 1, 2008, our wholly-owned subsidiary, Payments Inc. (“Payments”), sold
its outstanding premium finance loan portfolio to Premium Financing Specialists,
Inc. (“PFS”). Under the terms of the sale, Payments was entitled to receive an
amount based upon the net earnings generated by the acquired loan portfolio as
it was collected. For the six months ended June 30, 2009 and 2008, Payments
received approximately $18,000 and $63,000 based on the net earnings generated
from collections of the acquired loan portfolio. Under the terms of the sale,
PFS 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 six months and
three months ended June 30, 2009 and 2008 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 June 30, 2009 and December 31, 2008. Continuing
operations of our premium financing operations only consists of placement fee
revenue and any related expenses.





Summarized
financial information of the premium financing business as discontinued
operations for the six months and three months ended June 30, 2009 and 2008
follows (unaudited):




16




Six
      Months Ended
                    
                    
                    Three
      Months EndedJune
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Premium
      finance revenue
                    
                    $
                    -
                    
                    
                    $
                    225,322
                    
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      Expenses:General
      and administrative expenses
                    
                    
                    -
                    
                    
                    
                    181,943
                    
                    
                    
                    -
                    
                    
                    
                    2,915Provision
      for finance receivable losses
                    
                    
                    -
                    
                    
                    
                    89,316
                    
                    
                    
                    -
                    
                    
                    
                    -Depreciation
      and amortization
                    
                    
                    -
                    
                    
                    
                    46,556
                    
                    
                    
                    -
                    
                    
                    
                    -Interest
      expense
                    
                    
                    -
                    
                    
                    
                    45,181
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      operating expenses
                    
                    
                    -
                    
                    
                    
                    362,996
                    
                    
                    
                    -
                    
                    
                    
                    2,915Loss
      from operations
                    
                    
                    -
                    
                    
                    
                    (137,674
                    )
                    
                    
                    -
                    
                    
                    
                    (2,915
                    )Loss
      on sale of premim financing portfolio
                    
                    
                    -
                    
                    
                    
                    245,875
                    
                    
                    
                    -
                    
                    
                    
                    162,252Loss
      before provision for income taxes
                    
                    
                    -
                    
                    
                    
                    (383,549
                    )
                    
                    
                    -
                    
                    
                    
                    (165,167
                    )Provision
      for income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Loss
      from discontinued operations,net
      of income taxes
                    
                    $
                    -
                    
                    
                    $
                    (383,549
                    )
                    
                    $
                    -
                    
                    
                    $
                    (165,167
                    )




The
components of assets and liabilities of the premium financing discontinued
operations as of June 30, 2009 and December 31, 2008 are as
follows:




June
      30,
                                
                                
                                December
      31,2009
                                
                                
                                2008(Unaudited)Due
      from purchaser of premium finance portfolio
                                
                                $
                                -
                                
                                
                                $
                                18,291Total
      assets
                                
                                $
                                -
                                
                                
                                $
                                18,291Total
      liabilities
                                
                                $
                                -
                                
                                
                                $
                                -





Retail
Business





In
December 2008, due to declining revenues and profits we decided to restructure
our network of retail offices (the “Retail Business”). The plan of restructuring
called for the closing of seven of our least profitable locations during the
month of December 2008 and the entry into negotiations to sell the remaining 19
locations in our Retail Business.





On April
17, 2009, our wholly-owned subsidiaries that owned and operated our 16 remaining
Retail Business locations in New York State sold substantially all of their
assets, including the book of business (the “New York Assets”).  The
purchase price for the New York Assets was approximately $2,337,000, of which
approximately $1,786,000 was paid at closing.  Promissory notes in the
aggregate approximate principal amount of $551,000 (the “New York Notes”) were
also delivered at the closing. The New York Notes are payable in installments of
approximately $275,500 on each of March 31, 2010 and September 30, 2010 and
provide for interest at the rate of 5.25% per annum. As additional
consideration, we shall be entitled to receive through September 30, 2010 an
additional amount equal to 60% of the net commissions derived from the book of
business of six New York retail locations that we closed in 2008.





17


Effective
June 30, 2009, we sold all of the outstanding stock of the subsidiary that
operated our three remaining Pennsylvania stores (the “Pennsylvania
Stock”).  The purchase price for the Pennsylvania Stock was
approximately $397,000 which was paid by delivery of two promissory notes, one
in the approximate principal amount of $238,000 and payable with interest at the
rate of 9.375% per annum in 120 equal monthly installments, and the other in the
approximate principal amount of $159,000 and payable with interest at the rate
of 6% per annum in 60 monthly installments commencing August 10, 2011 (with
interest only being payable prior to such date).





As a
result of the restructuring in December 2008, the sale of the New York Assets on
April 17, 2009 and the sale of the Pennsylvania Stock effective June 30, 2009,
the operating results of the Retail Business operations for the six months and
three months ended June 30, 2009 and 2008 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 June 30, 2009 and December 31, 2008.





Summarized
financial information of the Retail Business as discontinued operations for the
six months and three months ended June 30, 2009 and 2008 follows
(unaudited):




Six
      Months Ended
                    
                    
                    Three
      Months EndedJune
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Commissions
      and fee revenue
                    
                    $
                    1,028,797
                    
                    
                    $
                    2,145,346
                    
                    
                    $
                    247,666
                    
                    
                    $
                    1,060,475Operating
      Expenses:General
      and administrative expenses
                    
                    
                    1,178,888
                    
                    
                    
                    1,941,587
                    
                    
                    
                    438,257
                    
                    
                    
                    939,325Depreciation
      and amortization
                    
                    
                    59,481
                    
                    
                    
                    109,811
                    
                    
                    
                    14,811
                    
                    
                    
                    53,443Interest
      expense
                    
                    
                    10,483
                    
                    
                    
                    21,455
                    
                    
                    
                    1,161
                    
                    
                    
                    10,503Impairment
      of intangibles
                    
                    
                    49,470
                    
                    
                    
                    
                    
                    
                    
                    49,470
                    
                    
                    
                    -Total
      operating expenses
                    
                    
                    1,298,322
                    
                    
                    
                    2,072,853
                    
                    
                    
                    503,699
                    
                    
                    
                    1,003,271Loss
      (income) from operations
                    
                    
                    (269,525
                    )
                    
                    
                    72,493
                    
                    
                    
                    (256,033
                    )
                    
                    
                    57,204Loss
      on sale of business
                    
                    
                    21,392
                    
                    
                    
                    -
                    
                    
                    
                    21,392
                    
                    
                    
                    -(Loss)
      income before benefit from income taxes
                    
                    
                    (290,917
                    )
                    
                    
                    72,493
                    
                    
                    
                    (277,425
                    )
                    
                    
                    57,204Benefit
      from income taxes
                    
                    
                    (76,499
                    )
                    
                    
                    -
                    
                    
                    
                    (76,499
                    )
                    
                    
                    -(Loss)
      income from discontinued operations,net
      of income taxes
                    
                    $
                    (214,418
                    )
                    
                    $
                    72,493
                    
                    
                    $
                    (200,926
                    )
                    
                    $
                    57,204




The
components of assets and liabilities of the Retail Business discontinued
operations as of June 30, 2009 and December 31, 2008 are as
follows:




18


June
      30,
                              
                              
                              December
      31,2009
                              
                              
                              2008(Unaudited)Accounts
      receivable
                              
                              $
                              -
                              
                              
                              $
                              404,180Other
      current assets
                              
                              
                              -
                              
                              
                              
                              32,325Property
      and equipment, net
                              
                              
                              -
                              
                              
                              
                              144,750Goodwill
                              
                              
                              -
                              
                              
                              
                              2,207,658Other
      intangibles, net
                              
                              
                              -
                              
                              
                              
                              75,666Other
      assets
                              
                              
                              6,837
                              
                              
                              
                              30,277Total
      assets
                              
                              $
                              6,837
                              
                              
                              $
                              2,894,856Accounts
      payable and accrued expenses
                              
                              $
                              79,163
                              
                              
                              $
                              136,685Deferred
      income taxes
                              
                              
                              -
                              
                              
                              
                              77,000Total
      liabilities
                              
                              $
                              79,163
                              
                              
                              $
                              213,685




Franchise
Business




Effective
May 1, 2009, we sold all of the outstanding stock of the subsidiaries that
operated our DCAP franchise business (collectively, the “Franchise Stock”). The
purchase price for the Franchise Stock was $200,000 which was paid by delivery
of a promissory note in such principal amount (the “Franchise
Note”).  The Franchise Note is payable in installments of $50,000 on
May 15, 2009, $50,000 on May 1, 2010 and $100,000 on May 1, 2011 and provides
for interest at the rate of 5.25% per annum.  A principal of the buyer
is the son-in-law of Morton L. Certilman, one of our principal
shareholders.




As a
result of the sale of the Franchise Stock, the operating results of the
franchise business operations for the six months and three months ended June 30,
2009 and 2008 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 June 30,
2009 and December 31, 2008.




Summarized
financial information of the franchise business as discontinued operations for
the six months and three months ended June 30, 2009 and 2008 follows
(unaudited):




19




Six
      Months Ended
                    
                    
                    Three
      Months EndedJune
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Commissions
      and fee revenue
                    
                    $
                    213,831
                    
                    
                    $
                    260,542
                    
                    
                    $
                    58,249
                    
                    
                    $
                    127,906Operating
      Expenses:General
      and administrative expenses
                    
                    
                    179,813
                    
                    
                    
                    556,044
                    
                    
                    
                    25,309
                    
                    
                    
                    219,027Depreciation
      and amortization
                    
                    
                    2,061
                    
                    
                    
                    18,934
                    
                    
                    
                    (1,204
                    )
                    
                    
                    8,669Total
      operating expenses
                    
                    
                    181,874
                    
                    
                    
                    574,978
                    
                    
                    
                    24,105
                    
                    
                    
                    227,696Income
      (loss) from operations
                    
                    
                    31,957
                    
                    
                    
                    (314,436
                    )
                    
                    
                    34,144
                    
                    
                    
                    (99,790
                    )Loss
      on sale of business
                    
                    
                    1,312
                    
                    
                    
                    -
                    
                    
                    
                    1,312
                    
                    
                    
                    -Income
      (loss) before provision for income taxes
                    
                    
                    30,645
                    
                    
                    
                    (314,436
                    )
                    
                    
                    32,832
                    
                    
                    
                    (99,790
                    )Provision
      for income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Income
      (loss) from discontinued operations,net
      of income taxes
                    
                    $
                    30,645
                    
                    
                    $
                    (314,436
                    )
                    
                    $
                    32,832
                    
                    
                    $
                    (99,790
                    )




The
components of assets and liabilities of the franchise business discontinued
operations as of June 30, 2009 and December 31, 2008 are as
follows:




June
      30,
                              
                              
                              December
      31,2009
                              
                              
                              2008(Unaudited)Accounts
      receivable
                              
                              $
                              -
                              
                              
                              $
                              134,522Other
      current assets
                              
                              
                              -
                              
                              
                              
                              101,678Deferred
      income taxes
                              
                              
                              -
                              
                              
                              
                              16,000Property
      and equipment, net
                              
                              
                              -
                              
                              
                              
                              7,876Other
      assets
                              
                              
                              -
                              
                              
                              
                              4,996Total
      assets
                              
                              $
                              -
                              
                              
                              $
                              265,072Accounts
      payable and accrued expenses
                              
                              $
                              -
                              
                              
                              $
                              9,809Total
      liabilities
                              
                              $
                              -
                              
                              
                              $
                              9,809




Summarized Financial
Information of Discontinued Operations




Summarized
financial information of consolidated discontinued operations for the six months
and three months ended June 30, 2009 and 2008 follows (unaudited):




20


Six
      Months Ended
                    
                    
                    Three
      Months EndedJune
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Commissions
      and fee revenue
                    
                    $
                    1,242,628
                    
                    
                    $
                    2,405,888
                    
                    
                    $
                    305,915
                    
                    
                    $
                    1,188,381Premium
      finance revenue
                    
                    
                    -
                    
                    
                    
                    225,322
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      revenue
                    
                    
                    1,242,628
                    
                    
                    
                    2,631,210
                    
                    
                    
                    305,915
                    
                    
                    
                    1,188,381Operating
      Expenses:General
      and administrative expenses
                    
                    
                    1,358,701
                    
                    
                    
                    2,679,574
                    
                    
                    
                    463,566
                    
                    
                    
                    1,161,267Provision
      for finance receivable losses
                    
                    
                    -
                    
                    
                    
                    89,316
                    
                    
                    
                    -
                    
                    
                    
                    -Depreciation
      and amortization
                    
                    
                    61,542
                    
                    
                    
                    175,301
                    
                    
                    
                    13,607
                    
                    
                    
                    62,112Interest
      expense
                    
                    
                    10,483
                    
                    
                    
                    66,636
                    
                    
                    
                    1,161
                    
                    
                    
                    10,503Impairment
      of intangibles
                    
                    
                    49,470
                    
                    
                    
                    -
                    
                    
                    
                    49,470
                    
                    
                    
                    -Total
      operating expenses
                    
                    
                    1,480,196
                    
                    
                    
                    3,010,827
                    
                    
                    
                    527,804
                    
                    
                    
                    1,233,882Loss
      from operations
                    
                    
                    (237,568
                    )
                    
                    
                    (379,617
                    )
                    
                    
                    (221,889
                    )
                    
                    
                    (45,501
                    )Loss
      on sale of businesses
                    
                    
                    22,704
                    
                    
                    
                    245,875
                    
                    
                    
                    22,704
                    
                    
                    
                    162,252Loss
      before benefit from income taxes
                    
                    
                    (260,272
                    )
                    
                    
                    (625,492
                    )
                    
                    
                    (244,593
                    )
                    
                    
                    (207,753
                    )Benefit
      from income taxes
                    
                    
                    (76,499
                    )
                    
                    
                    -
                    
                    
                    
                    (76,499
                    )
                    
                    
                    -Loss
      from discontinued operations,net
      of income taxes
                    
                    $
                    (183,773
                    )
                    
                    $
                    (625,492
                    )
                    
                    $
                    (168,094
                    )
                    
                    $
                    (207,753
                    )




The
components of assets and liabilities of our consolidated discontinued operations
as of June 30, 2009 and December 31, 2008 are as follows:




June
      30,
                              
                              
                              December
      31,2009
                              
                              
                              2008(Unaudited)Accounts
      receivable
                              
                              $
                              -
                              
                              
                              $
                              538,702Due
      from purchaser of premium finance portfolio
                              
                              
                              -
                              
                              
                              
                              18,291Other
      current assets
                              
                              
                              -
                              
                              
                              
                              134,003Deferred
      income taxes
                              
                              
                              -
                              
                              
                              
                              16,000Property
      and equipment, net
                              
                              
                              -
                              
                              
                              
                              152,626Goodwill
                              
                              
                              -
                              
                              
                              
                              2,207,658Other
      intangibles, net
                              
                              
                              -
                              
                              
                              
                              75,666Other
      assets
                              
                              
                              6,837
                              
                              
                              
                              35,273Total
      assets
                              
                              $
                              6,837
                              
                              
                              $
                              3,178,219Accounts
      payable and accrued expenses
                              
                              $
                              79,163
                              
                              
                              $
                              146,494Deferred
      income taxes
                              
                              
                              -
                              
                              
                              
                              77,000Total
      liabilities
                              
                              $
                              79,163
                              
                              
                              $
                              223,494


Summary of Significant
Accounting Policies of Discontinued Operations




Finance income,
fees and receivables -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
approximately 26.1% per annum for the six months ended June 30, 2008. Upon
completion of collection efforts, after cancellation of the underlying insurance
policies, any uncollected earned interest or fees were charged off.


21


Commission and
fee income – In our discontinued operations, we recognized commission
revenue from insurance policies at the beginning of the contract period. Refunds
of commissions on the cancellation of insurance policies were reflected at the
time of cancellation. Fees for income tax preparation were recognized when the
services are completed. Automobile club dues were recognized equally over the
contract period.




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




12.
Subsequent Events




Exchange of Notes
Receivable




Effective
July 1, 2009, Commercial Mutual Insurance Company (“CMIC”) converted from an
advance premium cooperative to a stock property and casualty insurance company.
Upon the effectiveness of the conversion, CMIC’s name was changed to Kingstone
Insurance Company (“KICO”) and our name was changed to Kingstone Companies, Inc.
Pursuant to the plan of conversion, we acquired a 100% equity interest in KICO
in consideration of the exchange of our $3,750,000 principal amount of Surplus
Notes of KICO.  In addition, we forgave all accrued and unpaid
interest of $2,246,000 on the Surplus Notes as of the date of exchange (see Note
3).




Our
Chairman is also Chairman of the Board and Chief Investment Officer of KICO. Our
other directors and our Chief Financial Officer are also directors of
KICO.




The
financial statements and pro forma financial information, which are required to
be filed in connection with this acquisition, will be filed on Form 8-K/A not
later than September 14, 2009.




22


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




Overview




Until
December 2008, our continuing operations primarily consisted of the ownership
and operation of 19 storefronts, including 12 Barry Scott locations in New York
State, three Atlantic Insurance locations in Pennsylvania, and four Accurate
Agency locations in New York State. In December 2008, due to declining revenues
and profits, we made a decision to restructure our network of retail offices
(the “Retail Business”). The plan of restructuring called for the closing of
seven of our least profitable locations during December 2008 and the sale of the
remaining 19 Retail Business locations.  On April 17, 2009, we sold
substantially all of the assets, including the book of business, of the 16
remaining Retail Business locations that we owned in New York State (the “New
York Sale”). Effective June 30, 2009, we sold all of the outstanding stock of
the subsidiary that operated our three remaining Retail Business locations in
Pennsylvania (the “Pennsylvania Sale”).  As a result of the
restructuring in December 2008, the New York Sale on April 17, 2009 and the
Pennsylvania Sale effective June 30, 2009, our Retail Business has been
presented as discontinued operations and prior periods have been
restated.




Through
April 30, 2009, we received fees from 33 franchised locations in connection with
their use of the DCAP name. Effective May 1, 2009, we sold all of the
outstanding stock of the subsidiaries that operated our DCAP franchise
business.  As a result of the sale, our franchise business has been
presented as discontinued operations and prior periods have been
restated.




Payments
Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
is licensed within the states of New York and Pennsylvania. 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, our
business of internally financing insurance contracts has been presented as
discontinued operations.  Effective February 1, 2008, revenues from
our premium financing business have consisted of placement fees based upon
premium finance contracts purchased, assumed and serviced by the purchaser of
the loan portfolio.




In our
Retail Business discontinued operations, the insurance storefronts served as
insurance agents or brokers and placed various types of insurance on behalf of
customers.  Our Retail Business focused on automobile, motorcycle and
homeowner’s insurance and our customer base was primarily individuals rather
than businesses.




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




The
stores from our Retail Business discontinued operations received commissions
from insurance companies for their services.  Prior to July 1, 2009,
neither we nor the stores served as an insurance company and therefore we did
not assume underwriting risks; however, as discussed below, effective July 1,
2009, we acquired a 100% equity interest in Commercial Mutual Insurance Company
(now renamed Kingstone Insurance Company or “KICO”). KICO is a property and
casualty insurance company licensed to operate in New York State.




23


Critical
Accounting Policies




Our
consolidated financial statements include accounts of Kingstone Companies, Inc.,
formerly known as DCAP Group, Inc., and all wholly-owned 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.




Placement
fee revenue




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




Franchise
fee revenue (discontinued operations)




Franchise
fee revenue on initial franchisee fees was recognized when substantially all of
our contractual requirements under the franchise agreement were
completed.  Franchisees also paid a monthly franchise fee plus a
monthly advertising fee.  We were obligated to provide marketing and
training support to each franchisee.




Commission
revenue (discontinued operations)




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




Automobile
club dues were 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% for
the six months ended June 30, 2008.




24


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 occurred when the
unearned premiums received from the insurer upon cancellation of a financed
policy were 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.




Goodwill
(discontinued operations)




The
carrying value of goodwill was initially reviewed for impairment as of
January 1, 2002, and was reviewed annually or whenever events or changes in
circumstances indicate that the carrying amount might not be recoverable. If the
fair value of the reporting unit 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 impairment
expense. Based on our most recent analysis, our results of operations for the
six months ended June 30, 2009 include a charge to impairment expense of
approximately $49,000.




Stock-based
compensation




Our stock
option and other equity-based compensation plans are accounted for in accordance
with the recognition and measurement provisions of  SFAS No. 123
(revised 2004), “Share-Based
Payment” (“SFAS 123(R)”). SFAS 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.




Recent
Accounting Pronouncements




In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP
157-4”), which amends SFAS 157 to provide additional guidance for estimating
fair value when the volume and level of activity for an asset or liability have
significantly decreased. Guidance on identifying circumstances that indicate a
transaction is not orderly is also provided. If it is concluded that there has
been a significant decrease in the volume and level of market activity for an
asset or liability in relation to normal market activity for an asset or
liability, transactions or quoted prices may not be determinative of fair value,
and further analysis of the transactions or quoted prices may be needed. A
significant adjustment to the transactions or quoted prices may be necessary to
estimate fair value which may be determined based on the point within a range of
fair value estimates that is most representative of fair value under the current
market conditions. Determination of whether the transaction is orderly is based
on the weight of the evidence. The disclosure requirements of SFAS 157 are
increased since disclosures of the inputs and valuation technique(s) used to
measure fair value and a discussion of changes in valuation techniques and
related inputs during the reporting period are required.




25


FSP 157-4
defines the disclosures required for major categories by SFAS 157 to be the
major security types as defined in FASB Statement No. 115. FSP 157-4 does not
require disclosures for earlier periods presented for comparative purposes at
initial adoption. FSP 157-4 is effective for interim periods ending after June
15, 2009 with early adoption permitted but only in conjunction with the early
adoption of FSP FAS 115-2 and FAS 124-2. Revisions resulting from a change in
valuation technique or its application shall be accounted for as a change in
accounting estimate and disclosed, along with a quantification of the total
effect of the change in valuation technique and related inputs, if practicable,
by major category. We have adopted the provisions of FSP 157-4 as of April 1,
2009. Currently there was no material impact to our results of operations or
financial position upon adoption of FSP 157-4.




In April
2009, the FASB issued FAS FSP No. 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP 115-2 and 124-2”). FSP 115-2 and
124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. FSP 115-2 and 124-2 does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. FSP 115-2 and 124-2 requires the entity to assess whether
the impairment is other-than-temporary if the fair value of a debt security is
less than its amortized cost basis at the balance sheet date. This statement
also provides guidance to assessing whether or not the impairment is
other-than-temporary and guidance on determining the amount of the
other-than-temporary impairment that should be recognized in earnings and other
comprehensive income. FSP 115-2 and 124-2 also requires an entity to disclose
information that enables users to understand the types of securities held,
including those investments in an unrealized loss position for which the
other-than-temporary impairment has or has not been recognized. FSP 115-2 and
124-2 are effective for interim and annual reporting periods ending after June
15, 2009. Currently there was no material impact of FSP 115-2 and 124-2 on our
results of operations, financial position and liquidity.




In April
2009, the FASB issued FAS FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments” (“FSP 107-1”). FSP 107-1 requires
disclosures about fair value of financial instruments at interim reporting
periods. FSP 107-1 is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009 provided FSP 115-2 and 124-2 (described above) are also
early adopted. The adoption of FSP 107-1 did not currently have a material
impact on our consolidated financial statements.




26


In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”(“SFAS
165”). SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15,
2009. We have evaluated subsequent events through August 14, 2009, the date our
financial statements were issued. We do not believe SFAS 165 will result in
significant changes to reporting of subsequent events either through recognition
or disclosure.




In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140” (“SFAS
166”). SFAS 166 eliminates the concept of a “qualifying special-purpose entity”
from SFAS 140 and changes the requirements for derecognizing financial assets.
SFAS 166 is effective for interim or annual financial periods beginning
after November 15, 2009. Earlier application is prohibited. SFAS 166 must be
applied to transfers occurring on or after the effective date. We are currently
evaluating the impact of the pending adoption of SFAS 166 on our consolidated
financial statements.




In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46R” (“SFAS 167”). SFAS 167 amends the evaluation criteria
to identify the primary beneficiary of a variable interest entity provided by
SFAS Interpretation No. 46R, “Consolidation of Variable Interest
Entities—An Interpretation of ARB No. 51”. Additionally, SFAS 167
requires ongoing reassessments of whether an enterprise is the primary
beneficiary of the variable interest entity. SFAS 167 shall be effective as of
the beginning of each reporting entity’s first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter. 
Earlier application is prohibited. We are currently evaluating the impact
of the pending adoption of SFAS 167 on our consolidated financial
statements.




In June
2009, the FASB issued SFAS No.168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162” (“SFAS 168”). U.S.
GAAP will no longer be issued in the form of an “accounting standard,” but
rather as an update to the applicable “topic” or “subtopic” within the
codification. As such, accounting guidance will be classified as either
“authoritative” or “nonauthoritative” based on its inclusion or exclusion from
the codification. The codification will be the single source of
authoritative U.S. accounting and reporting standards, except for rules and
interpretive releases of the SEC under authority of federal securities laws,
which are sources of authoritative GAAP for SEC registrants. The
codification of U.S. GAAP will be effective for interim or annual periods ending
after September 15, 2009.  We do not expect SFAS 168 to have a material
impact on our consolidated financial statements.




Results
of Operations




In
December 2008, due to declining revenues and profits, we made a decision to
restructure our network of retail offices (the “Retail Business”). The plan of
restructuring called for the closing of seven of our least profitable locations
during December 2008 and the sale of the remaining 19 Retail Business locations.
On April 17, 2009, we sold substantially all of the assets, including the book
of business, of the 16 remaining Retail Business locations that we owned in New
York State (the “New York Sale”). Effective June 30, 2009, we sold all of the
outstanding stock of the subsidiary that operated our three remaining Retail
Business locations in Pennsylvania (the “Pennsylvania Sale”).  As a
result of the restructuring in December 2008, the New York Sale on April 17,
2009 and the Pennsylvania Sale effective June 30, 2009, our Retail Business has
been presented as discontinued operations and prior periods have been
restated.




27


Effective
May 1, 2009, we sold all of the outstanding stock of the subsidiaries that
operated our DCAP franchise business.  As a result of the sale, our
franchise business has been presented as discontinued operations and prior
periods have been restated.




On
February 1, 2008, we sold our outstanding premium finance loan portfolio. As a
result of the sale, our premium financing operations have been presented as
discontinued operations.




Separate
discussions follow for results of continuing operations and discontinued
operations.




Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008




Continuing
Operations




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




Six
      months endedJune
      30,Change2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      $
                                                      
                                                      
                                                      
                                                      %Fee
      revenue
                                                      
                                                      $
                                                      225
                                                      
                                                      
                                                      $
                                                      219
                                                      
                                                      
                                                      $
                                                      6
                                                      
                                                      
                                                      
                                                      3
                                                      %General
      and administrative expenses
                                                      
                                                      
                                                      667
                                                      
                                                      
                                                      
                                                      645
                                                      
                                                      
                                                      
                                                      22
                                                      
                                                      
                                                      
                                                      3
                                                      %Interest
      income - notes receivable
                                                      
                                                      
                                                      67
                                                      
                                                      
                                                      
                                                      602
                                                      
                                                      
                                                      
                                                      (535
                                                      )
                                                      
                                                      
                                                      (89
                                                      )
      %Interest
      expense - mandatorily redeemable preferred stock
                                                      
                                                      
                                                      52
                                                      
                                                      
                                                      
                                                      28
                                                      
                                                      
                                                      
                                                      24
                                                      
                                                      
                                                      
                                                      86
                                                      %Forgiveness
      of debt
                                                      
                                                      
                                                      133
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      133
                                                      
                                                      
                                                      
                                                      n/a(Loss)
      income from continuing operations before taxes
                                                      
                                                      
                                                      (436
                                                      )
                                                      
                                                      
                                                      4
                                                      
                                                      
                                                      
                                                      (440
                                                      )
                                                      
                                                      
                                                      n/aBenefit
      from income taxes
                                                      
                                                      
                                                      (210
                                                      )
                                                      
                                                      
                                                      (280
                                                      )
                                                      
                                                      
                                                      70
                                                      
                                                      
                                                      
                                                      25
                                                      %(Loss)
      income from continuing operations
                                                      
                                                      
                                                      (226
                                                      )
                                                      
                                                      
                                                      284
                                                      
                                                      
                                                      
                                                      (510
                                                      )
                                                      
                                                      
                                                      (180
                                                      )
      %


During
the six months ended June 30, 2009 (“2009”), revenues from continuing operations
were $225,000, as compared to $219,000 for the six months ended June 30, 2008
(“2008”).  The 3% increase of $6,000 in commissions and fees was a
result of an increase in miscellaneous fees offset by a decrease in average
monthly premium finance placement fees earned in 2009, compared to five months
of fees earned in 2008. Effective February 1, 2008, we began earning placement
fees in accordance with the terms of the sale of our premium finance
portfolio.




28


Our
general and administrative expenses in 2009 were $667,000, as compared to
$645,000 in 2008. The 3% decrease of $22,000 was primarily attributable to a
decrease in executive compensation, offset by the expensing
of  costs  related to the acquisition of Kingstone Insurance
Company and an increase in allocation of expenses from discontinued operations
to continuing operations.




Our
interest income from notes receivable in 2009 was $67,000, as compared to
$602,000 in 2008. The 89% decrease of $535,000 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 2009 due to a decrease in the prime rate.




Our
interest expense on mandatorily redeemable preferred stock in 2009 was $52,000,
as compared to $28,000 in 2008. The 86% increase of $24,000 was primarily due to
the increase in the interest rate from 5% to 10% on April 16, 2008 and an
increase in the redemption amount of the preferred stock from $780,000 to
$1,299,000 on May 12, 2009.




Our
income from forgiveness of debt in 2009 was $133,000, as compared to $-0- in
2008. The balance in 2009 was primarily due to settlements made with vendors for
disputed amounts from prior periods.




Our
continuing operations generated a net loss before income taxes of $436,000 in
2009 as compared to net income of $4,000 in 2008.  The change of
$440,000 was primarily due to the decrease in interest income from our surplus
notes, offset by income from forgiveness of debt.




Discontinued
Operations




Retail
Business




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






29




Six
      months endedJune
      30,Change2009
                                                                
                                                                
                                                                2008
                                                                
                                                                
                                                                $
                                                                
                                                                
                                                                
                                                                %Commissions
      and fee revenue
                                                                
                                                                $
                                                                1,029
                                                                
                                                                
                                                                $
                                                                2,145
                                                                
                                                                
                                                                $
                                                                (1,116
                                                                )
                                                                
                                                                
                                                                (52
                                                                )
      %Operating
      Expenses:General
      and administrative expenses
                                                                
                                                                
                                                                1,179
                                                                
                                                                
                                                                
                                                                1,942
                                                                
                                                                
                                                                
                                                                (763
                                                                )
                                                                
                                                                
                                                                (39
                                                                )
      %Depreciation
      and amortization
                                                                
                                                                
                                                                59
                                                                
                                                                
                                                                
                                                                110
                                                                
                                                                
                                                                
                                                                (51
                                                                )
                                                                
                                                                
                                                                (46
                                                                )
      %Interest
      expense
                                                                
                                                                
                                                                11
                                                                
                                                                
                                                                
                                                                21
                                                                
                                                                
                                                                
                                                                (10
                                                                )
                                                                
                                                                
                                                                (48
                                                                )
      %Impairment
      of intangibles
                                                                
                                                                
                                                                49
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                49
                                                                
                                                                
                                                                
                                                                n/aTotal
      operating expenses
                                                                
                                                                
                                                                1,298
                                                                
                                                                
                                                                
                                                                2,073
                                                                
                                                                
                                                                
                                                                (775
                                                                )
                                                                
                                                                
                                                                (37
                                                                )
      %(Loss)
      income from operations
                                                                
                                                                
                                                                (269
                                                                )
                                                                
                                                                
                                                                72
                                                                
                                                                
                                                                
                                                                (341
                                                                )
                                                                
                                                                
                                                                (474
                                                                )
      %Loss
      on sale of business
                                                                
                                                                
                                                                (21
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (21
                                                                )
                                                                
                                                                
                                                                n/a(Loss)
      income before benefit from income taxes
                                                                
                                                                
                                                                (290
                                                                )
                                                                
                                                                
                                                                72
                                                                
                                                                
                                                                
                                                                (362
                                                                )
                                                                
                                                                
                                                                (503
                                                                )
      %Benefit
      from income taxes
                                                                
                                                                
                                                                (76
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (76
                                                                )
                                                                
                                                                
                                                                n/a(Loss)
      income from discontinued operations
                                                                
                                                                $
                                                                (214
                                                                )
                                                                
                                                                $
                                                                72
                                                                
                                                                
                                                                $
                                                                (286
                                                                )
                                                                
                                                                
                                                                (397
                                                                )
      %




Our
discontinued Retail Business revenue was $1,029,000 in 2009, as compared to
$2,145,000 in 2008. The 52% revenue decrease of $1,116,000 was primarily
attributable to ceasing operations of the 16 remaining stores located in New
York as a result of the sale of their assets on April 17, 2009. In addition,
during the period prior to April 17, 2009, there was a decrease in commissions
and fees earned due the sale of fewer insurance policies in 2009 than in
2008.  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.




Our
discontinued Retail Business general and administrative expenses in 2009 were
$1,179,000, as compared to $1,942,000 in 2008. The 39% net decrease of $763,000
was primarily attributable to ceasing operations of the 16 remaining stores
located in New York as a result of the sale of their assets on April 17,
2009.  In addition, during the period prior to April 17, 2009, there
was a $263,000 decrease in costs related to the eight stores that were closed in
2008 and decreases in fixed and variable compensation paid to employees due to a
reduction in policies sold at our stores.




Our
discontinued Retail Business impairment of intangibles for 2009 was $49,000
greater than for 2008. The increase in 2009 was due to goodwill impairment of
$49,000 in 2009, compared to none in 2008.




Our
discontinued Retail Business benefit from income taxes was $76,000 in 2009, as
compared to $-0- in 2008. The increase was primarily attributable to the
elimination of items that gave rise to deferred taxes as a result of the sale of
assets on April 17, 2009. Continuing operations will receive the future tax
benefit of current net operating losses generated from discontinued
operations.




30


Our
discontinued Retail Business operations, on a stand-alone basis, generated a net
loss after income taxes of $214,000 in 2009, as compared to net
income after income taxes of $72,000 in 2008.  The change of
$286,000 in 2009 was primarily due to the $1,116,000 decrease in revenues,
offset by a $763,000 decrease in general and administrative
expenses.




Franchise
Business




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




Six
      months endedJune
      30,Change2009
                                                              
                                                              
                                                              2008
                                                              
                                                              
                                                              $
                                                              
                                                              
                                                              
                                                              %Commissions
      and fee revenue
                                                              
                                                              $
                                                              214
                                                              
                                                              
                                                              $
                                                              261
                                                              
                                                              
                                                              $
                                                              (47
                                                              )
                                                              
                                                              
                                                              (18
                                                              )
      %Operating
      Expenses:General
      and administrative expenses
                                                              
                                                              
                                                              180
                                                              
                                                              
                                                              
                                                              556
                                                              
                                                              
                                                              
                                                              (376
                                                              )
                                                              
                                                              
                                                              (68
                                                              )
      %Depreciation
      and amortization
                                                              
                                                              
                                                              2
                                                              
                                                              
                                                              
                                                              19
                                                              
                                                              
                                                              
                                                              (17
                                                              )
                                                              
                                                              
                                                              (89
                                                              )
      %Total
      operating expenses
                                                              
                                                              
                                                              182
                                                              
                                                              
                                                              
                                                              575
                                                              
                                                              
                                                              
                                                              (393
                                                              )
                                                              
                                                              
                                                              (68
                                                              )
      %Income
      (loss) from operations
                                                              
                                                              
                                                              32
                                                              
                                                              
                                                              
                                                              (314
                                                              )
                                                              
                                                              
                                                              346
                                                              
                                                              
                                                              
                                                              (110
                                                              )
      %Loss
      on sale of business
                                                              
                                                              
                                                              (1
                                                              )
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (1
                                                              )
                                                              
                                                              
                                                              n/aIncome
      (loss) before provision for income taxes
                                                              
                                                              
                                                              31
                                                              
                                                              
                                                              
                                                              (314
                                                              )
                                                              
                                                              
                                                              345
                                                              
                                                              
                                                              
                                                              (110
                                                              )
      %Provision
      for income taxes
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              n/aIncome
      (loss) from discontinued operations
                                                              
                                                              $
                                                              31
                                                              
                                                              
                                                              $
                                                              (314
                                                              )
                                                              
                                                              $
                                                              345
                                                              
                                                              
                                                              
                                                              (110
                                                              )
      %




Our
discontinued franchise business general and administrative expenses in 2009 were
$180,000, as compared to $556,000 in 2008. The 68% net decrease of $376,000 was
primarily attributable to ceasing of operations of the franchise business
effective May 1, 2009 as a result of the sale of all of the outstanding stock of
the subsidiaries that operated our DCAP franchise business. In addition, during
the period prior to May 1, 2009, there was a decrease in advertising campaigns
and executive employment costs in 2009 as compared to 2008.




Our
discontinued franchise business, on a stand-alone basis, generated net income of
$31,000 in 2009 as compared to a net loss of $314,000 in 2008.  The
change of $345,000 in 2009 was primarily due to the reduction in general and
administrative expenses.




Premium
Finance




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




31




Six
      months endedJune
      30,Change2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    $
                                                    
                                                    
                                                    
                                                    %Premium
      finance revenue
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    225
                                                    
                                                    
                                                    $
                                                    (225
                                                    )
                                                    
                                                    
                                                    (100
                                                    )
      %Operating
      Expenses:General
      and administrative expenses
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    182
                                                    
                                                    
                                                    
                                                    (182
                                                    )
                                                    
                                                    
                                                    (100
                                                    )
      %Provision
      for finance receivable losses
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    89
                                                    
                                                    
                                                    
                                                    (89
                                                    )
                                                    
                                                    
                                                    (100
                                                    )
      %Depreciation
      and amortization
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    47
                                                    
                                                    
                                                    
                                                    (47
                                                    )
                                                    
                                                    
                                                    (100
                                                    )
      %Interest
      expense
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    45
                                                    
                                                    
                                                    
                                                    (45
                                                    )
                                                    
                                                    
                                                    (100
                                                    )
      %Total
      operating expenses
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    363
                                                    
                                                    
                                                    
                                                    (363
                                                    )
                                                    
                                                    
                                                    (100
                                                    )
      %Loss
      from operations
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (138
                                                    )
                                                    
                                                    
                                                    138
                                                    
                                                    
                                                    
                                                    (100
                                                    )
      %Loss
      on sale of premium financing portfolio
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (245
                                                    )
                                                    
                                                    
                                                    245
                                                    
                                                    
                                                    
                                                    (100
                                                    )
      %Loss
      before benefit from income taxes
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (383
                                                    )
                                                    
                                                    
                                                    383
                                                    
                                                    
                                                    
                                                    (100
                                                    )
      %Provision
      for income taxes
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    n/aLoss
      from discontinued operations
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    (383
                                                    )
                                                    
                                                    $
                                                    383
                                                    
                                                    
                                                    
                                                    (100
                                                    )
      %




There was
no activity in our discontinued premium finance business in 2009. Our premium
finance portfolio was sold on February 1, 2008.  Premium finance
operations for 2008 only includes the period from January 1, 2008 through
January 31, 2008.




Consolidated Results of
Operations




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




Six
      months endedJune
      30,Change2009
                                                            
                                                            
                                                            2008
                                                            
                                                            
                                                            $
                                                            
                                                            
                                                            
                                                            %(Loss)
      income from continuing operations
                                                            
                                                            $
                                                            (226
                                                            )
                                                            
                                                            $
                                                            284
                                                            
                                                            
                                                            $
                                                            (510
                                                            )
                                                            
                                                            
                                                            (180
                                                            )
      %Loss
      from discontinued operations, net of taxes
                                                            
                                                            
                                                            (184
                                                            )
                                                            
                                                            
                                                            (625
                                                            )
                                                            
                                                            
                                                            441
                                                            
                                                            
                                                            
                                                            71
                                                            %Net
      loss
                                                            
                                                            $
                                                            (410
                                                            )
                                                            
                                                            $
                                                            (341
                                                            )
                                                            
                                                            $
                                                            (69
                                                            )
                                                            
                                                            
                                                            (20
                                                            )
      %





Our net
loss for 2009 was $410,000 as compared to a net loss of $341,000 for
2008.




Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008





Continuing
Operations




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






32




Three
      months endedJune
      30,Change2009
                                                
                                                
                                                2008
                                                
                                                
                                                $
                                                
                                                
                                                
                                                %Fee
      revenue
                                                
                                                $
                                                113
                                                
                                                
                                                $
                                                120
                                                
                                                
                                                $
                                                (7
                                                )
                                                
                                                
                                                (6
                                                )
      %General
      and administrative expenses
                                                
                                                
                                                385
                                                
                                                
                                                
                                                324
                                                
                                                
                                                
                                                61
                                                
                                                
                                                
                                                19
                                                %Interest
      income - notes receivable
                                                
                                                
                                                37
                                                
                                                
                                                
                                                295
                                                
                                                
                                                
                                                (258
                                                )
                                                
                                                
                                                (87
                                                )
      %Interest
      expense - mandatorily redeemable preferred stock
                                                
                                                
                                                32
                                                
                                                
                                                
                                                18
                                                
                                                
                                                
                                                14
                                                
                                                
                                                
                                                78
                                                %Forgiveness
      of debt
                                                
                                                
                                                133
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                133
                                                
                                                
                                                
                                                n/aLoss
      from continuing operations before taxes
                                                
                                                
                                                (192
                                                )
                                                
                                                
                                                4
                                                
                                                
                                                
                                                (196
                                                )
                                                
                                                
                                                n/aBenefit
      from income taxes
                                                
                                                
                                                (122
                                                )
                                                
                                                
                                                (92
                                                )
                                                
                                                
                                                (30
                                                )
                                                
                                                
                                                (33
                                                )
      %(Loss)
      income from continuing operations
                                                
                                                
                                                (70
                                                )
                                                
                                                
                                                96
                                                
                                                
                                                
                                                (166
                                                )
                                                
                                                
                                                (173
                                                )
      %




During
the three months ended June 30, 2009 (“Q2 2009”), revenues from continuing
operations were $113,000, as compared to $120,000 for the three months ended
June 30, 2008 (“Q2 2008”).  The 6% increase of $7,000 in commissions
and fees was a result of an increase in miscellaneous fees offset by a decrease
of $18,000 in premium finance placement fees earned in Q2 2009 compared to Q2
2008. Effective February 1, 2008, we began earning placement fees in accordance
with the terms of the sale of our premium finance portfolio.




Our
general and administrative expenses in Q2 2009 were $385,000, as compared to
$324,000 in Q2 2008. The 19% increase of $61,000 was primarily attributable to
the expensing of costs related to the acquisition of Kingstone Insurance Company
and an increase in allocation of expenses from discontinued operations to
continuing operations, offset by a decrease in executive
compensation.




Our
interest income from notes receivable in Q2 2009 was $37,000, as compared to
$295,000 in 2008. The 87% decrease of $258,000 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 Q2 2009 due to a decrease in the prime rate.




Our
interest expense on mandatorily redeemable preferred stock in Q2 2009 was
$32,000, as compared to $18,000 in Q2 2008. The 78% increase of $14,000 was
primarily due to the increase in the redemption amount of the preferred stock
from $780,000 to $1,299,000 on May 12, 2009.




Our
income from forgiveness of debt in Q2 2009 was $133,000, as compared to $-0- in
Q2 2008. The balance in Q2 2009 was primarily due to settlements made with
vendors for disputed amounts from prior periods.




Our
continuing operations generated a net loss before income taxes of $192,000 in Q2
2009 as compared to net income of $4,000 in Q2 2008.  The change of
$196,000 was primarily due to the decrease in interest income from our surplus
notes, offset by income from forgiveness of debt.




33


Discontinued
Operations




Retail
Business




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




Three
      months endedJune
      30,Change2009
                                                
                                                
                                                2008
                                                
                                                
                                                $
                                                
                                                
                                                
                                                %Commissions
      and fee revenue
                                                
                                                $
                                                247
                                                
                                                
                                                $
                                                1,060
                                                
                                                
                                                $
                                                (813
                                                )
                                                
                                                
                                                (77
                                                )
      %Operating
      Expenses:General
      and administrative expenses
                                                
                                                
                                                438
                                                
                                                
                                                
                                                939
                                                
                                                
                                                
                                                (501
                                                )
                                                
                                                
                                                (53
                                                )
      %Depreciation
      and amortization
                                                
                                                
                                                15
                                                
                                                
                                                
                                                53
                                                
                                                
                                                
                                                (38
                                                )
                                                
                                                
                                                (72
                                                )
      %Interest
      expense
                                                
                                                
                                                1
                                                
                                                
                                                
                                                11
                                                
                                                
                                                
                                                (10
                                                )
                                                
                                                
                                                (91
                                                )
      %Impairment
      of intangibles
                                                
                                                
                                                49
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                49
                                                
                                                
                                                
                                                n/aTotal
      operating expenses
                                                
                                                
                                                503
                                                
                                                
                                                
                                                1,003
                                                
                                                
                                                
                                                (500
                                                )
                                                
                                                
                                                (50
                                                )
      %(Loss)
      income from operations
                                                
                                                
                                                (256
                                                )
                                                
                                                
                                                57
                                                
                                                
                                                
                                                (313
                                                )
                                                
                                                
                                                (549
                                                )
      %Loss
      on sale of business
                                                
                                                
                                                (21
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (21
                                                )
                                                
                                                
                                                n/a(Loss)
      income before benefit from income taxes
                                                
                                                
                                                (277
                                                )
                                                
                                                
                                                57
                                                
                                                
                                                
                                                (334
                                                )
                                                
                                                
                                                (586
                                                )
      %Benefit
      from income taxes
                                                
                                                
                                                (76
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (76
                                                )
                                                
                                                
                                                n/a(Loss)
      income from discontinued operations
                                                
                                                $
                                                (201
                                                )
                                                
                                                $
                                                57
                                                
                                                
                                                $
                                                (258
                                                )
                                                
                                                
                                                (453
                                                )
      %


The above
changes resulted from the ceasing operations of the 16 remaining stores located
in New York as a result of the sale of their assets on April 17,
2009.




Our
discontinued Retail Business impairment of intangibles for Q2 2009 was
$49,000 greater than for Q2 2008. The increase in Q2 2009 was due to goodwill
impairment of $49,000 in Q2 2009, compared to none in Q2 2008.




Our
discontinued Retail Business benefit from income taxes was $76,000 in Q2 2009,
as compared to $-0- in Q2 2008. The increase was primarily attributable to the
elimination of items that gave rise to deferred taxes as a result of the sale of
assets on April 17, 2009. Continuing operations will receive the future tax
benefit of current net operating losses generated from discontinued
operations.




Our
discontinued Retail Business operations, on a stand-alone basis, generated a net
loss after income taxes of $201,000 in Q2 2009, as compared to net
income after income taxes of $57,000 in Q2 2008.  The change of
$258,000 in Q2 2009 was primarily due to the $813,000 decrease in revenues,
offset by a $501,000 decrease in general and administrative
expenses.




34


Franchise
Business




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




Three
      months endedJune
      30,Change2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      $
                                                      
                                                      
                                                      
                                                      %Commissions
      and fee revenue
                                                      
                                                      $
                                                      58
                                                      
                                                      
                                                      $
                                                      128
                                                      
                                                      
                                                      $
                                                      (70
                                                      )
                                                      
                                                      
                                                      (55
                                                      )
      %Operating
      Expenses:General
      and administrative expenses
                                                      
                                                      
                                                      25
                                                      
                                                      
                                                      
                                                      219
                                                      
                                                      
                                                      
                                                      (194
                                                      )
                                                      
                                                      
                                                      (89
                                                      )
      %Depreciation
      and amortization
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      9
                                                      
                                                      
                                                      
                                                      (10
                                                      )
                                                      
                                                      
                                                      (111
                                                      )
      %Total
      operating expenses
                                                      
                                                      
                                                      24
                                                      
                                                      
                                                      
                                                      228
                                                      
                                                      
                                                      
                                                      (204
                                                      )
                                                      
                                                      
                                                      (89
                                                      )
      %Income
      (loss) from operations
                                                      
                                                      
                                                      34
                                                      
                                                      
                                                      
                                                      (100
                                                      )
                                                      
                                                      
                                                      134
                                                      
                                                      
                                                      
                                                      (134
                                                      )
      %Loss
      on sale of business
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      n/aIncome
      (loss) before provision for income taxes
                                                      
                                                      
                                                      33
                                                      
                                                      
                                                      
                                                      (100
                                                      )
                                                      
                                                      
                                                      133
                                                      
                                                      
                                                      
                                                      (133
                                                      )
      %Provision
      for income taxes
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      n/aIncome
      (loss) from discontinued operations
                                                      
                                                      $
                                                      33
                                                      
                                                      
                                                      $
                                                      (100
                                                      )
                                                      
                                                      $
                                                      133
                                                      
                                                      
                                                      
                                                      (133
                                                      )
      %


The above
changes resulted from the ceasing of operations of the franchise business
effective May 1, 2009 as a result of the sale of all of the outstanding stock of
the subsidiaries that operated our DCAP franchise business.




Premium
Finance




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






35
 
  Three
      months endedJune
      30,Change2009
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        $
                                                        
                                                        
                                                        
                                                        %Premium
      finance revenue
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        
                                                        n/aOperating
      Expenses:General
      and administrative expenses
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        3
                                                        
                                                        
                                                        
                                                        (3
                                                        )
                                                        
                                                        
                                                        (100
                                                        )
      %Provision
      for finance receivable losses
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        n/aDepreciation
      and amortization
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        n/aInterest
      expense
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        n/aTotal
      operating expenses
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        3
                                                        
                                                        
                                                        
                                                        (3
                                                        )
                                                        
                                                        
                                                        (100
                                                        )
      %Loss
      from operations
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (3
                                                        )
                                                        
                                                        
                                                        3
                                                        
                                                        
                                                        
                                                        (100
                                                        )
      %Loss
      on sale of premium financing portfolio
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (162
                                                        )
                                                        
                                                        
                                                        162
                                                        
                                                        
                                                        
                                                        (100
                                                        )
      %Loss
      before benefit from income taxes
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (165
                                                        )
                                                        
                                                        
                                                        165
                                                        
                                                        
                                                        
                                                        (100
                                                        )
      %Provision
      for income taxes
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        n/aLoss
      from discontinued operations
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        (165
                                                        )
                                                        
                                                        $
                                                        165
                                                        
                                                        
                                                        
                                                        (100
                                                        )
      %




There was
no activity in our discontinued premium finance business in Q2 2009. Our premium
finance portfolio was sold on February 1, 2008.  Premium finance
operations for 2008 only includes the period from January 1, 2008 through
January 31, 2008. In Q2 2008 we adjusted the estimated balance that we expected
to receive as additional consideration from the sale of our premium finance
portfolio.




Consolidated Results of
Operations




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




Three
      months endedJune
      30,Change2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      $
                                                      
                                                      
                                                      
                                                      %(Loss)
      income from continuing operations
                                                      
                                                      $
                                                      (70
                                                      )
                                                      
                                                      $
                                                      96
                                                      
                                                      
                                                      $
                                                      (166
                                                      )
                                                      
                                                      
                                                      (173
                                                      )
      %Loss
      from discontinued operations, net of taxes
                                                      
                                                      
                                                      (168
                                                      )
                                                      
                                                      
                                                      (208
                                                      )
                                                      
                                                      
                                                      40
                                                      
                                                      
                                                      
                                                      19
                                                      %Net
      loss
                                                      
                                                      $
                                                      (238
                                                      )
                                                      
                                                      $
                                                      (112
                                                      )
                                                      
                                                      $
                                                      (126
                                                      )
                                                      
                                                      
                                                      (113
                                                      )
      %





Our net
loss for Q2 2009 was $238,000 as compared to a net loss of $112,000 for Q2
2008.




Liquidity
and Capital Resources




As of
June 30, 2009, we had $167,835 in cash and cash equivalents and a working
capital deficit of $146,967. As of December 31, 2008, we had $142,949 in cash
and cash equivalents and a working capital deficit of $146,233.




36


Sale of
Businesses




On April
17, 2009, we sold substantially all of the assets, including the book of
business, of the 16 Retail Business locations that we owned in New York State
(the “New York Assets”). The purchase price for the New York Assets was
approximately $2,337,000, of which approximately $1,786,000 was paid at
closing.  Promissory notes in the aggregate approximate principal
amount of $551,000 (the “New York Notes”) were also delivered at the closing.
The New York Notes are payable in installments of approximately $275,500 on each
of March 31, 2010 and September 30, 2010 and provide for interest at the rate of
5.25% per annum. As additional consideration, we will be entitled to receive
through September 30, 2010 an amount equal to 60% of the net commissions derived
from the book of business of six retail locations that we closed in
2008.




Effective
June 30, 2009, we sold all of the outstanding stock of the subsidiary that
operated our three remaining Pennsylvania stores (the “Pennsylvania
Stock”).  The purchase price for the Pennsylvania Stock was
approximately $397,000 which was paid by delivery of two promissory notes, one
in the approximate principal amount of $238,000 and payable with interest at the
rate of 9.375% per annum in 120 equal monthly installments, and the other in the
approximate principal amount of $159,000 and payable with interest at the rate
of 6% per annum in 60 monthly installments commencing August 10, 2011 (with
interest only being payable prior to such date).




Effective
May 1, 2009, we sold all of the outstanding stock of the subsidiaries that
operated our DCAP franchise business.  The purchase price for the
stock was $200,000 which was paid by delivery of a promissory note in such
principal amount (the “Franchise Note”).  The Franchise Note is
payable in installments of $50,000 on May 15, 2009, $50,000 on May 1, 2010 and
$100,000 on May 1, 2011 and provides for interest at the rate of 5.25% per
annum.




Redemption and Exchange of
Debt




Accurate
Acquisition




On April
17, 2009, we paid the balance of the note payable incurred in connection with
our purchase of the Accurate agency business.




Notes
Payable




In August
2008, the holders of $1,500,000 outstanding principal amount of notes payable
(the “Notes Payable”) agreed to extend the maturity date of the debt from
September 30, 2008 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 (subject to acceleration under certain circumstances).  In
exchange for this extension, the holders were entitled to receive an aggregate
incentive payment equal to $10,000 times the number of months (or partial
months) the debt was outstanding after September 30, 2008 through the maturity
date. The agreement provided that, if a prepayment of principal reduced the debt
below $1,500,000, the incentive payment for all subsequent months would be
reduced in proportion to any such reduction to the debt. The agreement also
provided that the aggregate incentive payment was due upon full repayment of the
debt.




37


On May
12, 2009, three of the holders exchanged an aggregate of $519,231 of Notes
Payable principal for Series E Preferred Stock having an aggregate redemption
amount equal to such aggregate principal amount of notes (see discussion below).
Concurrently, we paid $49,543 to the three holders, which amount represents all
accrued and unpaid interest and incentive payments through the date of exchange.
In addition, on May 12, 2009, we prepaid $686,539 in principal of the Notes
Payable to the five remaining holders of the notes, together with $81,200, which
amount represents accrued and unpaid interest and incentive payments on such
prepayment.




On June
29, 2009, we prepaid the remaining $294,230 in principal of the Notes Payable,
together with $19,400, which amount represents accrued and unpaid interest and
incentive payments on such prepayment.




In June
2009, we borrowed $500,000 and issued promissory notes in such aggregate
principal amount (the “2009 Notes”).  The 2009 Notes provide for
interest at the rate of 12.625% per annum and are payable July 10,
2011. The 2009 Notes are prepayable by us without premium or penalty;
provided, however, that, under any circumstances, the holders of the 2009 Notes
are entitled to receive an aggregate of six months interest from the issue date
of the 2009 Notes with respect to the amount prepaid. The $500,000 principal
balance of the 2009 Notes is included in our June 30, 2009 balance sheet under
“Long-term debt”.




Exchange of Mandatorily
Redeemable Preferred Stock




Effective
May 12, 2009, the holder of our Series D Preferred Stock exchanged such shares
for an equal number of shares of Series E Preferred Stock which are mandatorily
redeemable on July 31, 2011. The mandatorily redeemable balance of $1,299,231 is
included in our June 30, 2009 balance sheet as a non-current
liability.




Exchange of Note Receivables
and Acquisition of Kingstone Insurance Company




Effective
July 1, 2009, CMIC converted from an advance premium cooperative to a stock
property and casualty insurance company. Upon the effectiveness of the
conversion, CMIC’s name was changed to Kingstone Insurance Company (“KICO”).
Pursuant to the plan of conversion, we acquired a 100% equity interest in KICO
in consideration of the exchange of our $3,750,000 principal amount of surplus
notes of CMIC.  In addition, we forgave all accrued and unpaid
interest of $2,246,000 on the surplus notes as of the date of
exchange.




Liquidity and Cash
Flow




In
connection with the plan of conversion of CMIC, we have agreed with the New York
State Insurance Department (the “Insurance Department”) that, for a period of
two years following the effective date of conversion of July 1, 2009, without
the approval of the Insurance Department, no dividend may be paid by KICO to
us.  Therefore, in order to satisfy our working capital requirements
we are seeking to obtain debt or equity financing.




During
2009, cash and cash equivalents increased by $25,000 primarily due to the
following:




38


·
            Net
      cash used in operating activities during 2009 was $784,000, which was due
      to a net loss of $410,000 and non-cash items reducing cash flow totaling
      $204,000. These non-cash items included an increase in deferred tax
      benefits, offset by depreciation and amortization, and stock-based
      payments. In addition,  accounts payable and accrued expenses
      was reduced by $283,000. The decrease in cash was offset by cash provided
      from the operating activities of our discontinued operations of
      $110,000.




·
            Net
      cash provided by investing activities during 2009 was $1,751,000 primarily
      due to $1,866,000 of proceeds from the sale of assets on April 17, 2009
      included in investing activities of discontinued
    operations.




·
            Net
      cash used in financing activities during 2009 was $943,000 due to
      $1,442,000 of principal payments on long-term debt and lease obligations,
      offset by $500,000 of proceeds from newly issued long-term
      debt.




Capital
Expenditures





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





Kingstone
Insurance Company, Formerly Known as Commercial Mutual Insurance
Company




In March
2007, the Board of Directors of CMIC approved a resolution to convert CMIC from
an advance premium insurance company to a stock property and casualty insurance
company pursuant to Section 7307 of the New York Insurance Law.




As of
June 30, 2009, we held two surplus notes issued by CMIC in the aggregate
principal amount of $3,750,000.  Previously earned but unpaid interest
on the notes as of June 30, 2009 was approximately $2,246,000.  The
surplus notes were past due and provided for interest at the prime rate or 8.5%
per annum, whichever is less.  Payments of principal and interest on
the surplus notes could only be made out of the surplus of CMIC and required the
approval of the Insurance Department of the State of New York (the “Insurance
Department”).  As of March 31, 2009, the statutory surplus of CMIC, as
reported to the Insurance Department, was approximately $7,707,000.




The
conversion by CMIC to a stock property and casualty insurance company was
subject to a number of conditions, including the approval by the Superintendent
of Insurance of the State of New York (the “Superintendent of Insurance”) of the
plan of conversion, which was filed with the Superintendent of Insurance on
April 25, 2008. The Superintendent of Insurance approved the plan of
conversion on April 15, 2009. The plan of conversion was approved by the
required two-thirds of all votes cast by eligible CMIC policyholders at a
special meeting of policyholders held on June 8, 2009.




Effective
July 1, 2009, CMIC completed its conversion from an advance premium cooperative
to a stock property and casualty insurance company. Upon the effectiveness of
the conversion, CMIC’s name was changed to Kingstone Insurance Company (“KICO”).
Pursuant to the plan of conversion, we acquired a 100% equity interest in KICO
in consideration of the exchange of our $3,750,000 principal amount of surplus
notes of CMIC.  In addition, we forgave all accrued and unpaid
interest of $2,246,000 on the surplus notes as of the date of
conversion.




39


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.





Not
applicable





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 SEC’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 June
30, 2009.




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.




As
previously reported in our Annual Report on Form 10-K for the year ended
December 31, 2008, we determined that, as of that date, there were material
weaknesses in our internal control over financial reporting relating
to information technology applications and infrastructure.




In
January 2009, we effectively implemented controls to rectify the weaknesses
discussed above. These controls have been tested by an independent consulting
firm and, based on the favorable results, management believes that these issues
have been successfully remediated.




40


PART
II.  OTHER
INFORMATION




Item  1.Legal
Proceedings.





None





Item 1A.Risk
Factors.





Not
applicable





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




None





Item 3.Defaults
Upon Senior Securities.





None





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





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(a)
                                                                      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.12(b)
                                                                      Asset
      Purchase Agreement, dated as of March 27, 2009, by and among NII BSA LLC,
      Barry Scott Agency, Inc., DCAP Accurate, Inc. and DCAP Group, Inc.22(c)
                                                                      Stock
      Purchase Agreement, dated as of May 1, 2009, by and between Stuart
      Greenvald and Abraham Weinzimer and DCAP Group, Inc.3





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.


2Denotes document filed as
an exhibit to our Annual Report on Form 10-K for the year ended December 31,
2008 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 6, 2009 and incorporated
herein by reference.






41




2(d)
                    Stock
      Purchase Agreement, dated as of June 30, 2009, between Barry Lefkowitz and
      Blast Acquisition Corp.43(a)
                    Restated
      Certificate of Incorporation53(b)
                    Certificate
      of Amendment of Certificate of Incorporation filed July 1,
      20093(c)
                    Certificate
      of Designation of Series A Preferred Stock63(d)
                    Certificate
      of Designation of Series B Preferred Stock73(e)
                    Certificate
      of Designation of Series C Preferred Stock83(f)
                    Certificate
      of Designation of Series D Preferred Stock93(g)
                    Certificate
      of Designation of Series E Preferred Stock103(h)
                    By-laws,
      as amended1131(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
      2002


4Denotes document filed as
an exhibit to our Current Report on Form 8-K for an event dated June 30, 2009
and incorporated herein by reference.


5 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.


6 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.


7Denotes 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.


8Denotes document filed as
an exhibit to our Quarterly Report on Form 10-QSB for the period ended March 31,
2008 and incorporated herein by reference.


9Denotes document
filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended
September 30, 2008 and incorporated herein by reference.


10Denotes document filed as
an exhibit to our Current Report on Form 8-K for an event dated May 12, 2009 and
incorporated herein by reference.


11Denotes
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.


42




31(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






43





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.




KINGSTONE
      COMPANIES, INC.Dated:  August
      14, 2009
                  By:
                  /s/ Barry
      B. GoldsteinBarry
      B. Goldstein
                    PresidentBy:
                  /s/
      Victor BrodskyVictor
      Brodsky
                    Chief
      Financial Officer