**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
  **FORM
10-QSB**
  **(Mark
One)**
 [X]
    Quarterly
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the quarterly period ended September 30, 2005[
      ]
    Transition
      report under Section 13 or 15(d) of the Exchange ActFor
      the transition period fromtoCommission
      File Number: 0-1665


**DCAP
GROUP, INC.**
 (Exact
Name of Small Business Issuer as Specified in its Charter)
 
 ****Delaware**
      (State
      or Other Jurisdiction of
      Incorporation
      or Organization)
    **36-2476480**
      (I.R.S
      Employer
      Identification
      No.)

****
**1158
Broadway, Hewlett, NY 11557**
(Address
of Principal Executive Offices)

**(516)
374-7600**
(Issuer’s
Telephone Number, Including Area Code)
**________________________________________________**
(Former
Name, Former Address and Former Fiscal Year, if Changed
Since
Last Report)

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes_X__
No____

**APPLICABLE
ONLY TO ISSUERS INVOLVED IN**
**BANKRUPTCY
PROCEEDINGS DURING THE**
**PRECEDING
FIVE YEARS**

Check
whether the registrant filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes __No
__
****
**APPLICABLE
ONLY TO CORPORATE ISSUERS**

State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 2,728,524 shares as of October 31,
2005.

Transitional
Small Business Disclosure Format (check one): Yes __NoX
****
**INDEX**

**DCAP
GROUP, INC. AND SUBSIDIARIES**

**PART
      I.**
    **FINANCIAL
      INFORMATION****Item
      1.**
    **Financial
      Statements**Condensed
      Consolidated Balance Sheet - September 30, 2005 (Unaudited)Condensed
      Consolidated Statements of Income - Nine months ended September
      30,
      2005 and 2004 (Unaudited)Condensed
      Consolidated Statements of Income - Three months ended September
      30,
      2005 and 2004 (Unaudited)Condensed
      Consolidated Statements of Cash Flows - Nine months ended
      September
      30, 2005 and 2004 (Unaudited)Notes
      to Condensed Consolidated Financial Statements - Nine months ended
      September
      30, 2005 and 2004 (Unaudited)**Item
      2.**
    **Management's
      Discussion and Analysis or Plan of Operation****Item
      3.**
    **Controls
      and Procedures****PART
      II.**
    **OTHER
      INFORMATION****Item
      1.**
    **Legal
      Proceedings****Item
      2.**
    **Unregistered
      Sales of Equity Securities and Use of Proceeds****Item
      3.**
    **Defaults
      Upon Senior Securities****Item
      4.**
    **Submission
      of Matters to a Vote of Security Holders****Item
      5.**
    **Other
      Information****Item
      6.**
    **Exhibits****SIGNATURES**
2Explanatory
Note

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

Forward-Looking
Statements

This
Quarterly Report contains forward-looking statements as that term is defined in
the federal securities laws. The events described in forward-looking statements
contained in this Quarterly Report may not occur. Generally these statements
relate to business plans or strategies, projected or anticipated benefits or
other consequences of our plans or strategies, projected or anticipated benefits
from acquisitions to be made by us, or projections involving anticipated
revenues, earnings or other aspects of our operating results. The words "may,"
"will," "expect," "believe," "anticipate," "project," "plan," "intend,"
"estimate," and "continue," and their opposites and similar expressions are
intended to identify forward-looking statements. We caution you that these
statements are not guarantees of future performance or events and are subject to
a number of uncertainties, risks and other influences, many of which are beyond
our control, that may influence the accuracy of the statements and the
projections upon which the statements are based. Factors which may affect our
results include, but are not limited to, the risks and uncertainties discussed
in Item 6 of our Annual Report on Form 10-KSB for the year ended December 31,
2004 under “Factors That May Affect Future Results and Financial
Condition”.

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




3
**DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****Condensed
      Consolidated Balance Sheet (Unaudited)***September
      30, 2005***Assets**Current
      AssetsCash
      and cash equivalents
    
    
    
    
    $
    2,024,769Accounts
      receivable, net of allowance for
      doubtful accounts of $27,000
    
    
    
    
    
    1,724,796Finance
      contracts receivable
    
    $
    20,172,040Less: Deferred interest
    
    
    (1,581,700
    )Less: Allowance for finance receivable losses
    
    
    (25,997
    )
    
    18,564,343Prepaid
      expenses and other current assets
    
    
    
    
    
    232,256Deferred
      income taxes
    
    
    
    
    
    51,200Total
      Current Assets
    
    
    
    
    
    22,597,364Property
      and Equipment, net
    
    
    
    
    
    303,633Goodwill
    
    
    
    
    
    1,238,551Other
      Intangibles, net
    
    
    
    
    
    208,683Deferred
      Income Taxes
    
    
    
    
    
    3,600Deposits
      and Other Assets
    
    
    
    
    
    414,485Total
      Assets
    
    
    
    
    $
    24,766,316****
      **Liabilities
      and Stockholders’ Equity**Current
      Liabilities:Revolving
      credit line
    
    
    
    
    $
    11,489,685Accounts
      payable and accrued expenses
    
    
    
    
    
    831,921Premiums
      payable
    
    
    
    
    
    4,440,791Current
      portion of long-term debt
    
    
    
    
    
    235,000Income
      taxes payable
    
    
    
    
    
    150,251Other
      current liabilities
    
    
    
    
    
    169,553Total
      Current Liabilities
    
    
    
    
    
    17,317,201Long-Term
      Debt
    
    
    
    
    
    1,333,151Other
      Liabilities
    
    
    
    
    
    35,825Mandatorily
      Redeemable Preferred Stock
    
    
    
    
    
    780,000CommitmentsStockholders’
      Equity:Common
      stock, $.01 par value; authorized 10,000,000 shares
      issued 3,505,447
    
    
    
    
    
    35,055Preferred
      stock; $.01 par value; authorized
      1,000,000 shares; 0 shares issued and outstanding
    
    
    
    
    
    -Capital
      in excess of par
    
    
    
    
    
    11,334,279Deficit
    
    
    
    
    
    (4,890,640
    )6,478,694Treasury
      stock, at cost, 776,923 shares
    
    
    
    
    
    (1,178,555
    )Total
      Stockholders’ Equity
    
    5,300,139Total
      Liabilities and Stockholders’ Equity
    $
    24,766,316
**** *See
notes to condensed consolidated financial statements* .
 4
 **DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****Condensed
      Consolidated Statements of Income (Unaudited)***Nine
      Months Ended September 30,*
    
    *2005*
    
    *2004*Revenues:Commissions
      and fees
    
    $
    5,461,000
    
    $
    5,326,539Premium
      finance revenue
    
    
    5,359,499
    
    
    6,049,173Total
      Revenues
    
    
    10,820,499
    
    
    11,375,712Operating
      Expenses:General
      and administrative expenses
    
    
    6,720,444
    
    
    6,405,108Provision
      for finance receivable losses
    
    
    1,923,245
    
    
    1,939,932Depreciation
      and amortization
    
    
    338,861
    
    
    313,423Premium
      finance interest expense
    
    
    548,680
    
    
    556,641Total
      Operating Expenses
    
    
    9,531,230
    
    
    9,215,104Operating
      Income
    
    
    1,289,269
    
    
    2,160,608Other
      (Expense) Income:Interest
      income
    
    
    14,633
    
    
    7,212Interest
      expense
    
    
    (254,070
    )
    
    (400,470
    )Interest
      expense - mandatorily redeemable preferred stock
    
    
    (29,371
    )
    
    (33,900
    )Total
      Other Expense
    
    
    (268,808
    )
    
    (427,158
    )Income
      Before Provision for Income Taxes
    
    
    1,020,461
    
    
    1,733,450Provision
      for Income Taxes
    
    
    409,159
    
    
    637,578Net
      Income
    
    $
    611,302
    
    $
    1,095,872Net
      Income Per Common Share:Basic
    
    $
    0.22
    
    $
    0.44Diluted
    
    $
    0.20
    
    $
    0.35Weighted
      Average Number of Shares OutstandingBasic
    
    
    2,723,215
    
    
    2,491,333Diluted
    
    
    3,271,246
    
    
    3,244,947
  **
 *See
notes to condensed consolidated financial statements.*
 5
  **DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****Condensed
      Consolidated Statements of Income (Unaudited)***Three
      Months Ended September 30,*
    
    
    *2005*
    
    
    *2004*Revenues:Commissions
      and fees
    
    $
    1,822,832
    
    $
    1,853,700Premium
      finance revenue
    
    
    1,720,232
    
    
    2,094,087Total
      Revenues
    
    
    3,543,064
    
    
    3,947,787Operating
      Expenses:General
      and administrative expenses
    
    
    2,342,163
    
    
    2,229,858Provision
      for finance receivable losses
    
    
    682,955
    
    
    725,161Depreciation
      and amortization
    
    
    113,345
    
    
    102,957Premium
      finance interest expense
    
    
    195,477
    
    
    212,265Total
      Operating Expenses
    
    
    3,333,940
    
    
    3,270,241Operating
      Income
    
    
    209,124
    
    
    677,546Other
      (Expense) Income:Interest
      income
    
    
    6,537
    
    
    1,771Interest
      expense
    
    
    (78,773
    )
    
    (132,015
    )Interest
      expense - mandatorily redeemable preferred stock
    
    
    (9,750
    )
    
    (11,300
    )Total
      Other Expense
    
    
    (81,986
    )
    
    (141,544
    )Income
      Before Provision for Income Taxes
    
    
    127,138
    
    
    536,002Provision
      for Income Taxes
    
    
    51,850
    
    
    161,191Net
      Income
    
    $
    75,288
    
    $
    374,811Net
      Income Per Common Share:Basic
    
    $
    0.03
    
    $
    0.15Diluted
    
    $
    0.03
    
    $
    0.12Weighted
      Average Number of Shares OutstandingBasic
    
    
    2,727,533
    
    
    2,512,497Diluted
    
    
    3,268,981
    
    
    3,245,876
 
 **
 *See
notes to condensed consolidated financial statements.*
 6
  **DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****Condensed
      Consolidated Statements of Cash Flows (Unaudited)***Nine
      months ended September 30,*
    
    *2005*
    
    *2004*Cash
      Flows From Operating Activities:Net
      income
    
    $
    611,302
    
    $
    1,095,872Adjustments
      to reconcile net income to net cash
      provided by operating activities:Depreciation
      and amortization
    
    
    338,861
    
    
    313,423Amortization
      of warrants
    
    
    52,212
    
    
    44,100Changes
      in operating assets and liabilities:Decrease
      (increase) in assets:Accounts
      receivable
    
    
    1,186,444
    
    
    (176,721
    )Prepaid
      expenses and other current assets
    
    
    23,319
    
    
    (123,606
    )Deposits
      and other assets
    
    
    (171,141
    )
    
    (114,474
    )Increase
      (decrease) in liabilities:Premiums
      payable
    
    
    1,412
    
    
    (110,581
    )Accounts
      payable and accrued expenses
    
    
    (876,235
    )
    
    (419,670
    )Taxes
      payable
    
    
    (280,242
    )
    
    657,532Other
      current liabilities
    
    
    (17,799
    )
    
    152,849Net
      Cash Provided by Operating Activities
    
    
    868,133
    
    
    1,318,724Cash
      Flows from Investing Activities:Decrease
      (increase) in finance contracts receivable - net
    
    
    2,867,691
    
    
    (4,884,598
    )Decrease
      in notes and other receivables - net
    
    
    13,664
    
    
    12,493Purchase
      of property and equipment
    
    
    (15,093
    )
    
    (129,605
    )Net
      Cash Provided by (Used in) Investing Activities
    
    
    2,866,262
    
    
    (5,001,710
    )Cash
      Flows from Financing Activities:Principal
      payments on long-term debt
    
    
    (2,129,301
    )
    
    (158,263
    )Proceeds
      from revolving credit line
    
    
    46,052,834
    
    
    51,895,399Payments
      on revolving credit line
    
    
    (46,158,808
    )
    
    (47,351,288
    )Proceeds
      from exercise of stock options and warrants
    
    
    9,750
    
    
    194,997Net
      Cash (Used in) Provided by Financing Activities
    
    
    (2,225,525
    )
    
    4,580,845Net
      Increase in Cash and Cash Equivalents
    
    
    1,508,870
    
    
    897,859Cash
      and Cash Equivalents, beginning of period
    
    
    515,899
    
    
    1,349,304Cash
      and Cash Equivalents, end of period
    
    $
    2,024,769
    
    $
    2,247,163
  
 **
 *See
notes to condensed consolidated financial statements.*
 7
 **DCAP
GROUP, INC. AND SUBSIDIARIES**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **NINE
MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)**
 
 1.
    The
      Condensed Consolidated Balance Sheet as of September 30, 2005, the
      Condensed Consolidated Statements of Income for the three and nine months
      ended September 30, 2005 and 2004 and the Condensed Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2005 and
      2004 have been prepared by us without audit. In our opinion, the
      accompanying unaudited condensed consolidated financial statements contain
      all adjustments necessary to present fairly in all material respects our
      financial position as of September 30, 2005, results of operations for the
      three and nine months ended September 30, 2005 and 2004 and cash flows for
      the nine months ended September 30, 2005 and
2004.
  This
report should be read in conjunction with our Annual Report on Form 10-KSB for
the year ended December 31, 2004.
  The
results of operations and cash flows for the nine months ended September 30,
2005 are not necessarily indicative of the results to be expected for the full
year.
  2.
    Summary
      of Significant Accounting Policies:
  a.  Principles
of consolidation
  The
accompanying consolidated financial statements include the accounts of all
subsidiaries and joint ventures in which we have a majority voting interest or
voting control. All significant intercompany accounts and transactions have been
eliminated.
  b.  Revenue
recognition
  We
recognize commission revenue from insurance policies at the beginning of the
contract period, except for commissions that were received annually on a
contingent basis for 2004, for which we recognized the commission revenue
ratably during the fiscal year based on estimates of the contingent revenue to
be received. Refunds of commissions on the cancellation of insurance policies
are reflected at the time of cancellation. During the nine months ended
September 30, 2004, approximately $1,069,000 was recognized as contingent
commission revenue.  There has
been an industry-wide change in the method by which insurance brokers are
compensated by insurers, many of which no longer pay contingent commissions. As
a result, in 2005, our base commissions have increased, and no contingent
commission revenue has been recognized for the nine months ended September 30,
2005.
  Franchise
fee revenue on initial franchisee fees is recognized when substantially all of
our contractual requirements under the franchise agreement are completed.
Franchisees also pay a monthly franchise fee plus an applicable percentage of
co-op advertising expense. We are obligated to provide marketing and training
support to each franchisee.
  Automobile
club dues are recognized equally over the contract period.
   8
 For our
premium finance operations, we are using the interest method to recognize
interest income over the life of each loan in accordance with Statement of
Financial Accounting Standard No. 91, “Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.”
  Upon the
establishment of a premium finance contract, we record the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest is amortized to interest income using the interest method over
the life of each loan. The weighted average interest rate charged with respect
to financed insurance policies was approximately 26.5% and 26.1% per annum for
the nine months ended September 30, 2005 and 2004, respectively.
  Delinquency
fees are earned when collected. Upon completion of collection efforts, after
cancellation of the underlying insurance policies, any uncollected earned
interest or fees are charged off.
  c.  Website
Development Costs
  Technology
and content costs are generally expensed as incurred, except for certain costs
relating to the development of internal-use software, including those relating
to operating our website, that are capitalized and depreciated over two years. A
total of $0 and $12,945 in such costs was incurred during the nine months ended
September 30, 2005 and 2004, respectively.
  d.  Allowance
for finance receivable losses
  Customers
who purchase insurance policies are often unable to pay the premium in a lump
sum and, therefore, require extended payment terms. Premium finance involves
making a loan to the customer that is backed by the unearned portion of the
insurance premiums being financed. No credit checks are made prior to the
decision to extend credit to a customer. Losses on finance receivables include
an estimate of future credit losses on premium finance accounts. Credit losses
on premium finance accounts occur when the unearned premiums received from the
insurer upon cancellation of a financed policy are inadequate to pay the balance
of the premium finance account. After collection attempts are exhausted, the
remaining account balance, including unrealized interest, is written off. We
review historical trends of such losses relative to finance receivable balances
to develop estimates of future losses. However, actual write-offs may differ
materially from the write-off estimates that we used. For the nine months ended
September 30, 2005 and 2004, the provision for finance receivable losses was
approximately $2,148,606 (before estimated recoveries of $225,361 which reduced
the provision for finance receivable losses) and $1,939,932, respectively, and
actual write-offs for such periods (net of recoveries of previous write-offs)
were approximately $2,188,568 and $2,023,627, respectively.
   9
  e.  Reclassifications
  Certain
reclassifications (including reclassification of interest expense on long-term
debt from premium finance interest expense to other (expense) income-interest
expense) have been made to the consolidated financial statements for the nine
and three months ended September 30, 2004 to conform with the classifications
used for the nine and three months ended September 30, 2005.
  3.
    Business
      Segments:
  We
currently have two reportable business segments: Insurance and Premium Finance.
The Insurance segment sells retail auto, motorcycle, boat, life, business, and
homeowner's insurance and franchises. In addition, this segment offers tax
preparation services and automobile club services for roadside emergencies.
Insurance revenues are derived from activities within the United States, and all
long-lived assets are located within the United States. The Premium Finance
segment offers property and casualty policyholders loans to finance the policy
premiums.
  Summarized
financial information concerning our reportable segments is shown in the
following tables:
  Nine
      Months Ended
      September
      30, 2005
    
    
    Insurance
    
    
    Premium
      Finance
    
    
    Other
      (1)
    
    
    TotalRevenues
      from
      external customers
    
    $
    5,461,000
    
    $
    5,359,499
    
    $
    -
    
    $
    10,820,499Interest
      income
    
    
    2,820
    
    
    -
    
    
    11,813
    
    
    14,633Interest
      expense
    
    
    42,185
    
    
    548,680
    
    
    241,256
    
    
    832,121Depreciation
      and
      amortization
    
    
    122,886
    
    
    176,611
    
    
    39,364
    
    
    338,861Segment
      profit (loss)
      before income taxes
    
    
    1,259,965
    
    
    1,202,276
    
    
    (1,441,780
    )
    
    1,020,461Segment
      profit (loss)
    
    
    755,979
    
    
    721,365
    
    
    (866,042
    )
    
    611,302Segment
      assets
    
    
    3,469,241
    
    
    20,178,784
    
    
    1,118,291
    
    
    24,766,316
 _____________
  (1)
    Column
      represents corporate-related items and, as it relates to segment profit
      (loss), income, expense and assets not allocated to reportable
      segments.
 10
 Nine
      Months Ended
      September
      30, 2004
    
    
    Insurance
    
    
    Premium
      Finance
    
    
    Other
      (1)
    
    
    TotalRevenues
      from
      external customers
    
    $
    5,326,539
    
    $
    6,049,173
    
    $
    -
    
    $
    11,375,712Interest
      income
    
    
    7,212
    
    
    -
    
    
    -
    
    
    7,212Interest
      expense
    
    
    433,187
    
    
    556,641
    
    
    1,183
    
    
    991,011Depreciation
      and
      amortization
    
    
    128,458
    
    
    161,934
    
    
    23,031
    
    
    313,423Segment
      profit (loss)
      before income taxes
    
    
    1,284,412
    
    
    1,755,074
    
    
    (1,306,036
    )
    
    1,733,450Segment
      profit (loss)
    
    
    770,647
    
    
    1,053,044
    
    
    (727,819
    )
    
    1,095,872Segment
      assets
    
    
    3,915,060
    
    
    25,680,697
    
    
    1,025,004
    
    
    30,620,761
 (1)
    Column
      represents corporate-related items and, as it relates to segment profit
      (loss), income, expense and assets not allocated to reportable
      segments.
 4.
    Stock
      Options
      
      We
      have elected the disclosure only provisions of Statement of Financial
      Accounting Standard No. 123, “Accounting for Stock-Based Compensation”
      (“FASB 123”) in accounting for our employee stock options. Accordingly, no
      compensation expense has been recognized. Had we recorded compensation
      expense for the stock options based on the fair value at the grant date
      for awards in the nine and three months ended September 30, 2005 and 2004
      consistent with the provisions of SFAS 123, our net income and net income
      per share would have been adjusted as
follows:
 Nine
      Months Ended
      September
      30,
    Three
      Months Ended
      September
      30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net
      income, as reported
    
    $
    611,302
    
    $
    1,095,872
    
    $
    75,288
    
    $
    374,811Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method, net of related tax effects
    
    
    (124,000
    )
    
    (50,000
    )
    
    (41,000
    )
    
    (17,000
    )Pro
      forma net income
    
    $
    487,302
    
    $
    1,045,872
    
    $
    34,288
    
    $
    357,811Net
      income per common share:Basic
      - as reported
    
    $
    0.22
    
    $
    0.44
    
    $
    0.03
    
    $
    0.15Basic
      - pro forma
    
    $
    0.18
    
    $
    0.42
    
    $
    0.01
    
    $
    0.14Diluted
      - as reported
    
    $
    0.20
    
    $
    0.35
    
    $
    0.03
    
    $
    0.12Diluted
      - pro forma
    
    $
    0.16
    
    $
    0.33
    
    $
    0.01
    
    $
    0.11
  11
  5.
    Net
      Income Per Share
      
      Basic
      net income per share is computed by dividing income available to common
      shareholders by the weighted-average number of common shares outstanding.
      Diluted earnings per share reflect, in periods in which they have a
      dilutive effect, the impact of common shares issuable upon exercise of
      stock options and conversion of mandatorily redeemable preferred
      stock.
 
 The
reconciliation is as follows:
  Nine
      Months Ended
      September
      30,
    Three
      Months Ended
      September
      30,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted
      Average Number of Shares Outstanding
    
    
    2,723,215
    
    
    2,491,333
    
    
    2,727,533
    
    
    2,512,497Effect
      of Dilutive Securities, Common Stock
      Equivalents
    
    
    548,031
    
    
    753,614
    
    
    541,448
    
    
    733,379Weighted
      Average Number of Shares Outstanding,
      used for computing diluted earnings per share
    
    
    3,271,246
    
    
    3,244,947
    
    
    3,268,981
    
    
    3,245,876
 
 Net
income available to common shareholders for the computation of diluted earnings
per share is computed as follows:
  Nine
      Months Ended
      September
      30,
    Three
      Months Ended
      September
      30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net
      Income
    
    $
    611,302
    
    $
    1,095,872
    
    $
    75,288
    
    $
    374,811Interest
      Expense on Dilutive Convertible Preferred Stock
    
    
    29,371
    
    
    33,900
    
    
    9,750
    
    
    11,300Net
      Income Available to Common Shareholders for Diluted Earnings Per
      Share
    
    $
    640,673
    
    $
    1,129,772
    
    $
    85,038
    
    $
    386,111
  6.
    Conversion
      of Mandatorily Redeemable Preferred Stock
      
      On
      January 15, 2005, the preferred stockholder converted 124 Series A
      preferred shares into 49,600 of our common shares.
 7.
    Subordinated
      Debt and Warrants
      
      Effective
      May 25, 2005, the holders of $1,500,000 outstanding principal amount of
      our subordinated debt agreed to extend the maturity date of the debt from
      January 10, 2006 to September 30, 2007. This extension was given to
      satisfy a requirement of our premium finance lender that arose in
      connection with the increase in our revolving line of credit to
      $25,000,000 and the extension of the line to June 30, 2007. In
      consideration for the extension of the due date of our subordinated debt,
      we extended the expiration date of warrants held by the debtholders for
      the purchase of 97,500 shares of our common stock
 12
  from January 10, 2006 to September 30, 2007. The
extension of the warrants was valued at $160,260 and is being amortized as
additional interest expense over the extension period.
  **Item
2.** **MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION** **.**
  ***Overview***
  We
operate 25 storefronts, including 19 Barry Scott locations acquired through our
August 2002 acquisition of Barry Scott Companies, Inc., and five Atlantic
Insurance locations acquired through our May 2004 acquisition of substantially
all the assets of AIA Acquisition Corp. We also have 47 franchised DCAP
locations.
  Our
insurance storefronts serve as insurance agents or brokers and place various
types of insurance on behalf of customers. We focus on automobile, motorcycle
and homeowner’s insurance and our customer base is primarily individuals rather
than businesses.
  The
stores receive commissions from insurance companies for their services. We
receive fees from the franchised locations in connection with their use of the
DCAP name. Neither we nor the stores currently serve as an insurance company and
therefore do not assume underwriting risks. The stores also offer automobile
club services for roadside assistance and income tax preparation services.
  Payments
Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
offers premium financing to clients of DCAP, Barry Scott and Atlantic Insurance
offices, as well as non-affiliated insurance agencies. We currently operate
within the states of New York, Pennsylvania and New Jersey.
  ***Critical
Accounting Policies***
  Our
consolidated financial statements include accounts of DCAP Group, Inc. and all
majority-owned and controlled subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires our management to make estimates and assumptions in
certain circumstances that affect amounts reported in our consolidated financial
statements and related notes. In preparing these financial statements, our
management has utilized information available including our past history,
industry standards and the current economic environment, among other factors, in
forming its estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to materiality. It
is possible that the ultimate outcome as anticipated by our management in
formulating its estimates inherent in these financial statements might not
materialize. In addition, application of the critical accounting policies below
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. Further, other companies may utilize different estimates, which may
impact comparability of our results of operations to those of companies in
similar businesses.
  13
 *Commission
and fee income*
  We
recognize commission revenue from insurance policies at the beginning of the
contract period, except for commissions that were received annually on a
contingent basis for 2004, for which we recognized the commission revenue
ratably during the fiscal year based on estimates of the contingent revenue to
be received. Refunds of commissions on the cancellation of insurance policies
are reflected at the time of cancellation. During the nine months ended
September 30, 2004, approximately $1,069,000 was recognized as contingent
commission revenue.  There has
been an industry-wide change in the method by which insurance brokers are
compensated by insurers, many of which no longer pay contingent commissions. As
a result, in 2005, our base commissions have increased, and no contingent
commission revenue has been recognized for the nine months ended September 30
2005.
  Franchise
fee revenue from initial franchise fees is recognized when substantially all of
our contractual requirements under the franchise agreement are completed.
Franchisees also pay a monthly franchise fee plus an applicable percentage of
co-op advertising expense. We are obligated to provide marketing and training
support to each franchisee.
  Automobile
club dues are recognized equally over the contract period.
  *Finance
income, fees and receivables*
  For our
premium finance operations, we are using the interest method to recognize
interest income over the life of each loan in accordance with Statement of
Financial Accounting Standard No. 91, “Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.”
  Upon the
establishment of a premium finance contract, we record the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest is amortized to interest income using the interest method over
the life of each loan *.*
  Delinquency
fees are earned when collected. Upon completion of collection efforts, after
cancellation of the underlying insurance policies, any uncollected earned
interest or fees are charged off.
  *Allowance
for finance receivable losses*
  Customers
who purchase insurance policies are often unable to pay the premium in a lump
sum and, therefore, require extended payment terms. Premium finance involves
making a loan to the customer that is backed by the unearned portion of the
insurance premiums being financed. No credit checks are made prior to the
decision to extend credit to a customer. Losses on finance receivables include
an estimate of future credit losses on premium finance accounts. Credit losses
on premium finance accounts occur when the unearned premiums received from the
insurer upon cancellation of a financed policy are inadequate to pay the balance
of the premium finance account. After collection attempts are exhausted, the
remaining account balance, including unrealized interest, is written off. We
review historical trends of such losses relative to finance receivable balances
to develop estimates of future losses. However, actual write-offs may differ
materially from the write-off
 14
 estimates that we used. For the nine months ended
September 30, 2005 and 2004, the provision for finance receivable losses was
approximately $2,148,606 (before estimated recoveries of $225,361 which reduced
the provision for finance receivable losses) and $1,939,392, respectively, and
actual write-offs for such periods (net of recoveries of previous write-offs)
were approximately $2,188,568 and $2,023,627, respectively. If our provision for
finance receivable losses was understated by 5% because our actual write-offs
were greater than anticipated, the effect would have been a reduction in our
earnings per share by approximately $0.02 (basic) for the nine months ended
September 30, 2005 and 2004.
 
 *Goodwill
and intangible assets*
  The
carrying value of goodwill was initially reviewed for impairment as of
January 1, 2002, and is reviewed annually or whenever events or changes in
circumstances indicate that the carrying amount might not be recoverable. If the
fair value of the operations to which goodwill relates is less than the carrying
amount of those operations, including unamortized goodwill, the carrying amount
of goodwill is reduced accordingly with a charge to expense. Based on our most
recent analysis, we believe that no impairment of goodwill exists at September
30, 2005.
  *Stock-based
compensation*
  We apply
the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, to account for stock-based employee compensation plans
and report pro forma disclosures in our Form 10-QSB filings by estimating the
fair value of options issued and the related expense in accordance with SFAS No.
123. Under this method, compensation cost is recognized for awards of common
shares or stock options to our directors, officers and employees only if the
quoted market price of the stock at the grant date (or other measurement date,
if later) is greater than the amount the grantee must pay to acquire the
stock.
  ***Results
of Operations***
  Our
operating income for the nine months ended September 30, 2005 was $1,289,269 as
compared to $2,160,608 for the nine months ended September 30,
2004.
  During
the nine months ended September 30, 2005, revenues from our insurance-related
operations were $5,461,000 as compared to $5,326,539 for the nine months ended
September 30, 2004. The revenue increase of $134,461 was primarily attributable
to a change in underwriting in New York and the sale of three franchises in
2005. There is a greater availability for coverage in the voluntary marketplace,
thus reducing the need to place clients in the New York Auto Insurance Plan
(“NYAIP”), the involuntary or residual market. We are paid a higher commission
rate on the voluntary policies, both for new and renewal business.
  Premium
finance revenues decreased $689,674 during the nine months ended September 30,
2005 as compared to the nine months ended September 30, 2004. The total number
of policies that we financed during the first nine months of 2005 increased
slightly over the first nine months of 2004; however, the growth occurred
outside the New York City metropolitan area. This non-
  15
  New York City market generates lower premium levels
and, therefore, lower loan sizes. As a result, there was a decline in premium
finance revenue.
  Our
general and administrative expenses for the nine months ended September 30, 2005
were $314,336 more than for the nine months ended September 30, 2004. This
increase was primarily due to our increased advertising and marketing efforts in
2005, increased salaries (due to, among other things, the hiring of John J.
Willis as our Chief Operating Officer in October 2004) and increased consulting
fees. Mr. Willis resigned his position effective as of October 31,
2005.
  Our
provision for finance receivable losses for the first nine months of 2005 was
$16,687 less than for the first nine months of 2004. In early 2005, the NYAIP,
at the behest of the New York Department of Insurance (the “Department”),
notified all carriers that it has always been the Department’s position that
policy premiums were not to be increased without specific underwriting
information. Certain carriers had been increasing premiums, but without
documentation. This unwarranted increase resulted in an increase of earned
premiums by such carriers and thus, upon cancellation, an unwarranted reduction
in the return premium to the insured (or in the case of a policy which had been
premium financed, a reduction in the return premium to the finance company). One
large carrier acknowledged that it had followed this flawed underwriting, and
began making refunds late in the first quarter of 2005. We anticipate further
refunds from this carrier and are exploring our options regarding other
carriers, which, to date, have not offered refunds. Refunds on previously
charged-off accounts offset our provision for finance receivable
losses  in the
first nine months of 2005.
  Our
depreciation and amortization expense for the nine months ended September 30,
2005 was $25,438 more than for the nine months ended September 30, 2004. This
increase was primarily the result of the amortization of loan origination costs
incurred in connection with our revolving loan agreement entered into in
December 2004.
  Our
premium finance interest expense during the nine months ended September 30, 2005
was $7,961 less than for the nine months ended September 30, 2004. This decrease
was the result of the repayment of a portion of our subordinated loan with
proceeds of our revolving credit line and a lower floating interest rate on the
new revolving credit line entered into in December 2004.
  Our
interest expense for the nine months ended September 30, 2005 was $146,500 less
than for the nine months ended September 30, 2004. This decrease was the result
of our repaying a portion of our subordinated loan in 2005.
  During
the nine months ended September 30, 2005, our provision for income taxes was
$409,159 as opposed to $637,578 for the nine months ended September 30, 2004.
This was due to the lower income before income taxes in 2005 notwithstanding the
utilization of available net operating loss carryforwards in 2004.
  Our
insurance-related operations, on a stand-alone basis, generated a net profit
before income taxes of $1,259,965 during the nine months ended September 30,
2005 as compared to a net profit before income taxes of $1,284,412 during the
nine months ended September 30, 2004. This decrease was primarily due to
increased advertising expense in 2005. Our premium finance operations, on a
 16
 stand-alone basis, generated a net profit before
income taxes of $1,202,276 during the nine months ended September 30, 2005 as
compared to a net profit before income taxes of $1,755,074 during the nine
months ended September 30, 2004. The decrease was primarily due to reduced
premium finance revenue in 2005 as discussed above. Loss before income taxes
from corporate-related items not allocable to reportable segments was $1,441,780
during the nine months ended September 30, 2005 as compared to $1,306,036 during
the nine months ended September 30, 2004. This increase was primarily due to
increased executive compensation and consulting fees.
  ***Liquidity
and Capital Resources***
  As of
September 30, 2005, we had $2,024,769 in cash and cash equivalents and working
capital of $5,280,163. As of December 31, 2004, we had $515,899 in cash and cash
equivalents and working capital of $5,678,700.
  Cash and
cash equivalents increased by $1,508,870 between December 31, 2004 and September
30, 2005 primarily due to the following:
  ·
    Net
      cash provided by operating activities during the nine months ended
      September 30, 2005 was $868,133 primarily due to our net income for the
      period of $611,303, our depreciation and amortization of $338,861, a
      decrease in accounts receivable of $1,186,444 and a net increase in
      premiums payable of $1,412. The decrease in accounts receivable is
      primarily attributable to the collection in 2005 of contingent fees
      receivable. No such contingent fees were collectible in 2005 since
      payments of these fees was discontinued by the insurance carriers in 2005.
      Premiums payable represents the amount of insurance premiums due to
      insurance carriers on policies for which we provide premium financing.
      Upon the customer entering into a premium financing agreement with us, the
      customer makes a down payment to the insurance carrier generally equal to
      15% of the estimated premium. We agree to lend to the customer the
      remaining 85% of the estimated premium. We make a payment of 10% of the
      estimated premium to the carrier at the time of the application for
      insurance. The remaining balance of 75% of the estimated premium is our
      premium payable. Prior to October 2004, we remitted the balance of the
      unpaid premium upon receipt of the first periodic loan payment due from
      the customer. In order to better manage our credit risk, effective October
      2004, we strengthened our controls and began to remit the balance of the
      premium to the carrier only after receipt of the first periodic loan
      payment from the customer and confirmation from the carrier of the actual
      premium amount. If the actual premium is greater than the amount
      previously estimated by the carrier, we require that the customer remit
      the difference to the carrier or amend the financing agreement for the
      revised amount prior to paying the remaining amount due the carrier.
      Premiums payable fluctuate from period to period depending upon the volume
      of premium financing contracts entered into. At September 30, 2005,
      amounts released for payment to insurers but not cleared by our bank were
      classified as premiums payable. No such reclassification was made at
      December 31, 2004, resulting in an increase in premiums payable at
      September 30, 2005. The increase was offset by a decline in the dollar
      amount of premium finance contracts entered into in 2005. The cash
      provided by operating activities was offset by a decrease in accounts
      payable and accrued expenses of $876,235 resulting from payments to our
      franchisees of their portion of the contingent receivable discussed above
      and a decrease in income taxes payable of $280,242 resulting from payments
      of income taxes in 2005.
  17
  ·
    Though
      fluctuations in our premium finance business impact our cash position and
      daily operations, our cash flows from operating activities do not reflect
      changes in the premium finance contract receivables or borrowing under our
      revolving credit facility associated with that business. Changes in the
      premium finance contract receivables are considered investing activities
      as they include the making and collection of loans and borrowings under
      our revolving line of credit are considered financing
      activities.
  ·
    Net
      cash of $2,866,262 was provided by investing activities during the nine
      months ended September 30, 2005 primarily due to a decrease in our net
      finance contracts receivable of $2,867,691. This was the result of a
      reduction in the dollar amount of premium finance contracts entered into
      in 2005.
  ·
    Net
      cash used by financing activities during the nine months ended September
      30, 2005 was $2,225,525 primarily due to proceeds of $46,052,834 from our
      revolving loan from Manufacturers and Traders Trust Co. (“M&T”) to
      fund our growing premium finance business, offset by payments of
      $46,158,808 on the revolving loan and payments of a portion of our
      subordinated loan of $2,000,000.
  Our
premium finance operations are financed pursuant to a $25,000,000 revolving line
of credit from M&T. Subject to certain conditions, M&T has agreed to
arrange an additional $10,000,000 credit facility with other lenders on a “best
efforts” basis. The line of credit bears interest at either (i) M&T’s prime
rate or (ii) LIBOR plus 2.5%, matures on June 30, 2007 and is secured by
substantially all of our assets. We can borrow against the line to the extent of
85% of eligible premium finance receivables. As of September 30, 2005,
$11,489,685 was outstanding under the line. As of September 30, 2005, of the
$20,172,040 reflected on the Balance Sheet as “Finance contracts receivable,”
approximately $15,515,000 represents eligible receivables for purposes of our
finance credit agreement.
  We have
no current commitments for capital expenditures. However, we may, from time to
time, consider acquisitions of complementary businesses, products or
technologies.
  In
connection with our initial acquisition of the line of credit from M&T, we
obtained a $3,500,000 secured subordinated loan to support our premium finance
operations. In January 2005, we utilized the M&T line of credit to repay
$1,000,000 of the subordinated debt. Effective May 10, 2005, we utilized the
line of credit to repay an additional $1,000,000 of the subordinated debt. The
remaining balance of the loan was due in January 2006 and carries interest at
the rate of 12-5/8% per annum. Effective May 25, 2005, we obtained an extension
of the maturity date of the remaining subordinated debt to September 30, 2007.
We have the right to prepay the subordinated debt (subject to M&T’s consent)
without penalty.
  18
  ***Off-Balance
Sheet Arrangements***
  We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
  **Item
3.**   **CONTROLS
AND PROCEDURES**
  Our Chief
Executive Officer and Chief Financial Officer conducted an evaluation of the
effectiveness of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of September 30,
2005 in alerting him in a timely manner to material information required to be
included in our SEC reports. In addition, no change in our internal control over
financial reporting occurred during the fiscal quarter ended September 30, 2005
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
   19
  **PART
      II.**
    **OTHER
      INFORMATION****Item
      1.**
    **LEGAL
      PROCEEDINGS**None**Item
      2.**
    **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
  PROCEEDS**None**Item
      3.**
    **DEFAULTS
      UPON SENIOR SECURITIES**None**Item
      4.**
    **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**None**Item
      5.**
    **OTHER
      INFORMATION**None**Item
      6.**
    **EXHIBITS**3(a)
    Restated
      Certificate of Incorporation13(b)
    Certificate
      of Designation of Series A Preferred Stock23(c)
    By-laws,
      as amended331
    Rule
      13a-14(a)/15d-14(a) Certification as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232
    Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
   1
Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB for
the period ended September 30, 2004 and incorporated herein by
reference.
 2Denotes
document filed as an exhibit to our Current Report on Form 8-K for an event
dated May 28, 2003 and incorporated herein by
reference.
 3Denotes
documents filed as an exhibit to our Quarterly Report on Form 10-QSB for the
period ended June 30, 2004 and our Current Report on Form 8-K for an event dated
January 5, 2005 and incorporated herein by
reference.
  20
   **SIGNATURES**
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 **DCAP GROUP,
      INC.**Date: November 9,
    2005
    By:
    /s/ Barry B.
    GoldsteinBarry
      B. Goldstein,President (Principal Executive,
      Financial and Account
Officer)