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 March 31, 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





DCAP GROUP, INC.


(Exact
name of registrant as specified in its charter)


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


1158
Broadway


Hewlett,
NY 11557


(Address
of principal executive offices)





(516) 374-7600


(Registrant’s
telephone number, including area code)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o





Indicate
by check mark whether the registrant 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 May
14, 2009, there were 2,972,746 shares of the registrant’s common stock
outstanding.








DCAP GROUP, INC.
 INDEX
 PAGEPART
      I — FINANCIAL INFORMATION
              
              
              4Item 1
      —
              
              Financial
      Statements
              
              
              4Condensed
      Consolidated Balance Sheets at March 31, 2009 (Unaudited) and December 31,
      2008
              
              
              4Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2009 (Unaudited) and 2008 (Unaudited)
              
              
              5Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2009 (Unaudited) and 2008  (Unaudited)
              
              
              6Notes
      to Condensed Consolidated Financial
      Statements  (Unaudited)
              
              
              7Item 2
      —
              
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              20Item 3
      —
              
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              
              32Item 4T—
              
              Controls
      and Procedures
              
              
              32PART
      II — OTHER INFORMATION
              
              
              34Item 1
      —
              
              Legal
      Proceedings
              
              
              34Item 1A
      —
              
              Risk
      Factors
              
              
              34Item
      2 —
              
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              
              34Item
      3 —
              
              Defaults
      Upon Senior Securities
              
              
              34Item 4
      —
              
              Submission
      of Matters to a Vote of Security Holders
              
              
              34Item 5
      —
              
              Other
      Information
              
              
              34Item 6
      —
              
              Exhibits
              
              
              34Signatures
              
              
              36EXHIBIT
      31(a)EXHIBIT
      31(b)EXHIBIT
      32







Forward-Looking
Statements




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







PART
I.  FINANCIAL
INFORMATION




Item
1.                      Financial
Statements.




DCAP
      GROUP, INC. ANDSUBSIDIARIESCondensed
      Consolidated Balance SheetsMarch
      31,
                                                                                                          
                                                                                                          
                                                                                                          December
      31,2009
                                                                                                          
                                                                                                          
                                                                                                          2008(Unaudited)AssetsCurrent
      Assets:Cash
      and cash equivalents
                                                                                                          
                                                                                                          $
                                                                                                          154,882
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          142,949Accounts
      receivable, net of allowance for doubtful accounts
                                                                                                          
                                                                                                          
                                                                                                          72,653
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          67,265Prepaid
      expenses and other current assets
                                                                                                          
                                                                                                          
                                                                                                          34,751
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          28,778Assets
      from discontinued operations
                                                                                                          
                                                                                                          
                                                                                                          2,964,630
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          3,178,219Total
      current assets
                                                                                                          
                                                                                                          
                                                                                                          3,226,916
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          3,417,211Property
      and equipment, net
                                                                                                          
                                                                                                          
                                                                                                          78,181
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          82,617Notes
      receivable
                                                                                                          
                                                                                                          
                                                                                                          5,966,172
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          5,935,704Deposits
      and other assets
                                                                                                          
                                                                                                          
                                                                                                          1,100
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,100Total
      assets
                                                                                                          
                                                                                                          $
                                                                                                          9,272,369
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          9,436,632Liabilities
      and Stockholders' EquityCurrent
      Liabilities:Accounts
      payable and accrued expenses
                                                                                                          
                                                                                                          $
                                                                                                          889,283
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          812,541Current
      portion of long-term debt
                                                                                                          
                                                                                                          
                                                                                                          1,441,952
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,593,210Other
      current liabilities
                                                                                                          
                                                                                                          
                                                                                                          154,200
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          154,200Liabilities
      from discontinued operations
                                                                                                          
                                                                                                          
                                                                                                          259,008
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          223,493Mandatorily
      redeemable preferred stock
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          780,000Total
      current liabilities
                                                                                                          
                                                                                                          
                                                                                                          2,744,443
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          3,563,444Long-term
      debt
                                                                                                          
                                                                                                          
                                                                                                          549,078
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          415,618Deferred
      income taxes
                                                                                                          
                                                                                                          
                                                                                                          106,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          200,000Mandatorily
      redeemable preferred stock
                                                                                                          
                                                                                                          
                                                                                                          780,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -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
                                                                                                          
                                                                                                          
                                                                                                          11,969,304
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          11,962,512Deficit
                                                                                                          
                                                                                                          
                                                                                                          (5,693,962
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (5,522,448
                                                                                                          )6,313,230
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          6,477,952Treasury
      stock, at cost, 816,025 shares
                                                                                                          
                                                                                                          
                                                                                                          (1,220,382
                                                                                                          )
                                                                                                          
                                                                                                          
                                                                                                          (1,220,382
                                                                                                          )Total
      stockholders' equity
                                                                                                          
                                                                                                          
                                                                                                          5,092,848
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          5,257,570Total
      liabilities and stockholders' equity
                                                                                                          
                                                                                                          $
                                                                                                          9,272,369
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          9,436,632





See
notes to condensed consolidated financial statements.










DCAP
      GROUP, INC. ANDSUBSIDIARIESCondensed
      Consolidated Statements of Operations (Unaudited)Three
      Months Ended March 31,
                                                                                                        
                                                                                                        2009
                                                                                                        
                                                                                                        
                                                                                                        2008Fee
      revenue
                                                                                                        
                                                                                                        $
                                                                                                        112,037
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        99,184Operating
      expenses:General
      and administrative expenses
                                                                                                        
                                                                                                        
                                                                                                        281,913
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        321,039Depreciation
      and amortization
                                                                                                        
                                                                                                        
                                                                                                        4,436
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        5,155Total
      operating expenses
                                                                                                        
                                                                                                        
                                                                                                        286,349
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        326,194Operating
      loss
                                                                                                        
                                                                                                        
                                                                                                        (174,312
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (227,010
                                                                                                        )Other
      (expense) income:Interest
      income
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,598Interest
      income - notes receivable
                                                                                                        
                                                                                                        
                                                                                                        30,469
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        307,111Interest
      expense
                                                                                                        
                                                                                                        
                                                                                                        (80,267
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (71,769
                                                                                                        )Interest
      expense - mandatorily redeemable preferred stock
                                                                                                        
                                                                                                        
                                                                                                        (19,500
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (9,750
                                                                                                        )Total
      other (expense) income
                                                                                                        
                                                                                                        
                                                                                                        (69,298
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        227,190(Loss)
      income from continuing operations before benefit from income
      taxes
                                                                                                        
                                                                                                        
                                                                                                        (243,610
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        180Benefit
      from income taxes
                                                                                                        
                                                                                                        
                                                                                                        (87,775
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (187,901
                                                                                                        )(Loss)
      income from continuing operations
                                                                                                        
                                                                                                        
                                                                                                        (155,835
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        188,081Loss
      from discontinued operations, net of income taxes
                                                                                                        
                                                                                                        
                                                                                                        (15,679
                                                                                                        )
                                                                                                        
                                                                                                        
                                                                                                        (417,739
                                                                                                        )Net
      loss
                                                                                                        
                                                                                                        $
                                                                                                        (171,514
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        (229,658
                                                                                                        )Basic
      and Diluted Net (Loss) Income Per Common Share:(Loss)
      income from continuing operations
                                                                                                        
                                                                                                        $
                                                                                                        (0.05
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        0.06Loss
      from discontinued operations
                                                                                                        
                                                                                                        $
                                                                                                        (0.01
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        (0.14
                                                                                                        )Loss
      per common share
                                                                                                        
                                                                                                        $
                                                                                                        (0.06
                                                                                                        )
                                                                                                        
                                                                                                        $
                                                                                                        (0.08
                                                                                                        )Number
      of weighted average shares used in computationof
      basic and diluted loss per common share
                                                                                                        
                                                                                                        
                                                                                                        2,972,746
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        2,969,024







See
notes to condensed consolidated financial statements.




5




DCAP
      GROUP, INC. ANDSUBSIDIARIESCondensed
      Consolidated Statements of Cash Flows (Unaudited)Three
      Months Ended March 31,
                                                                                                                      
                                                                                                                      2009
                                                                                                                      
                                                                                                                      
                                                                                                                      2008Cash
      Flows from Operating Activities:Net
      loss
                                                                                                                      
                                                                                                                      $
                                                                                                                      (171,514
                                                                                                                      )
                                                                                                                      
                                                                                                                      $
                                                                                                                      (229,658
                                                                                                                      )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                                                                                                      
                                                                                                                      
                                                                                                                      4,436
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      5,155Accretion
      of discount on notes receivable
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (246,955
                                                                                                                      )Amortization
      of warrants
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      5,910Stock-based
      payments
                                                                                                                      
                                                                                                                      
                                                                                                                      6,792
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      37,499Deferred
      income taxes
                                                                                                                      
                                                                                                                      
                                                                                                                      (94,000
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (257,000
                                                                                                                      )Changes
      in operating assets and liabilities:Decrease
      (increase) in assets:Accounts
      receivable
                                                                                                                      
                                                                                                                      
                                                                                                                      (5,388
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (43,297
                                                                                                                      )Prepaid
      expenses and other current assets
                                                                                                                      
                                                                                                                      
                                                                                                                      (5,973
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (23,079
                                                                                                                      )Deposits
      and other assets
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      7,554Increase
      in liabilities:Accounts
      payable, accrued expenses and taxes payable
                                                                                                                      
                                                                                                                      
                                                                                                                      76,742
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      25,357Net
      cash used in operating activities of continuing operations
                                                                                                                      
                                                                                                                      
                                                                                                                      (188,905
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (718,514
                                                                                                                      )Operating
      activities of discontinued operations
                                                                                                                      
                                                                                                                      
                                                                                                                      249,849
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (390,022
                                                                                                                      )Net
      Cash Provided by (Used in) Operating Activities
                                                                                                                      
                                                                                                                      
                                                                                                                      60,944
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (1,108,536
                                                                                                                      )Cash
      Flows from Investing Activities:Increase
      in notes and other receivables - net
                                                                                                                      
                                                                                                                      
                                                                                                                      (30,468
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (60,156
                                                                                                                      )Net
      cash used in investing activities of continuing operations
                                                                                                                      
                                                                                                                      
                                                                                                                      (30,468
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (60,156
                                                                                                                      )Investing
      activities of discontinued operations
                                                                                                                      
                                                                                                                      
                                                                                                                      (745
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      1,166,718Net
      Cash (Used in) Provided by Investing Activities
                                                                                                                      
                                                                                                                      
                                                                                                                      (31,213
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      1,106,562Cash
      Flows from Financing Activities:Principal
      payments on long-term debt
                                                                                                                      
                                                                                                                      
                                                                                                                      (17,798
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (153,532
                                                                                                                      )Net
      cash used in financing activities of continuing operations
                                                                                                                      
                                                                                                                      
                                                                                                                      (17,798
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (153,532
                                                                                                                      )Financing
      activities of discontinued operations
                                                                                                                      
                                                                                                                      
                                                                                                                      -
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (562,177
                                                                                                                      )Net
      Cash Used in Financing Activities
                                                                                                                      
                                                                                                                      
                                                                                                                      (17,798
                                                                                                                      )
                                                                                                                      
                                                                                                                      
                                                                                                                      (715,709
                                                                                                                      )Net
      Increase (Decrease) in Cash and Cash Equivalents
                                                                                                                      
                                                                                                                      
                                                                                                                      11,933
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      (717,683
                                                                                                                      )Cash
      and Cash Equivalents, beginning of period
                                                                                                                      
                                                                                                                      
                                                                                                                      142,949
                                                                                                                      
                                                                                                                      
                                                                                                                      
                                                                                                                      1,030,822Cash
      and Cash Equivalents, end of period
                                                                                                                      
                                                                                                                      $
                                                                                                                      154,882
                                                                                                                      
                                                                                                                      
                                                                                                                      $
                                                                                                                      313,139Supplemental
      Schedule of Non-Cash Investing and Financing Activities: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.




6


DCAP
GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


THREE
MONTHS ENDED MARCH 31, 2009 AND 2008





1.
Basis of Presentation




The
Condensed Consolidated Balance Sheet as of March 31, 2009, Condensed
Consolidated Statements of Operations for the three months ended March 31, 2009
and 2008 and Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2009 and 2008 have been prepared by us without
audit.  In our opinion, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly in all material respects our financial position as of March 31, 2009,
results of operations for the three months ended March 31, 2009 and 2008 and
cash flows for the three months ended March 31, 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 three months ended March 31, 2009
are not necessarily indicative of the results to be expected for the full
year.




Organization and Nature of
Business




Until
December 2008, the continuing operations of DCAP Group, Inc. and Subsidiaries
(referred to herein as "we" or "us") 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 March 30, 2009, an asset
purchase agreement (the “APA”) was fully executed pursuant to which we agreed to
sell substantially all of the assets, including the book of business, of our 16
remaining Retail Business locations (the “Assets”) that we owned in New York
State (see Notes 9 and 10). The closing of the sale of the Assets was completed
on April 17, 2009. As a result of the restructuring in December 2008, the APA on
March 30, 2009 and the closing of the sale of the Assets on April 17, 2009, our
Retail Business has been reclassified as discontinued operations and prior
periods have been restated.




Until May
2009, we operated a DCAP franchise business.  On May 6, 2009, we sold
all of the outstanding stock of the subsidiaries that operated such DCAP
franchise business (see Notes 9 and 10).  The sale was effective as of
May 1, 2009. As a result of the sale, our franchise business has been
reclassified as discontinued operations and prior periods have been
restated.




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 9). 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.




7


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 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.




Revenue
recognition




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




3.
Notes Receivable




Purchase of Notes
Receivable




On
January 31, 2006, we purchased from Eagle Insurance Company (“Eagle”) two
surplus notes issued by Commercial Mutual Insurance Company (“CMIC”) in the
aggregate principal amount of $3,750,000 (the “Surplus Notes”), plus accrued
interest of $1,794,688. The aggregate purchase price for the Surplus Notes was
$3,075,141, of which $1,303,434 was paid to Eagle by delivery of a six month
promissory note which provided for interest at the rate of 7.5% per
annum.  The promissory note was paid in full on July 28,
2006.  CMIC is a New York property and casualty insurer. The Surplus
Notes acquired by us are past due and provide for interest at the prime rate or
8.5% per annum, whichever is less.  Payments of principal and interest
on the Surplus Notes may only be made out of the surplus of CMIC and require the
approval of the New York State Department of Insurance.  We did not
receive any interest payments during the three months ended March 31, 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 three months ended March 31, 2009 and 2008
are included in our consolidated statement of operations as “Interest
income-notes receivable.”




Possible Future Conversion
of Notes Receivable




In March
2007, CMIC’s Board of Directors adopted a resolution to convert CMIC from an
advance premium cooperative insurance company to a stock property and casualty
insurance company.




8


The
conversion by CMIC to a stock property and casualty insurance company is subject
to a number of conditions, including the approval by the Superintendent of
Insurance of the State of New York (the “Superintendent”) of the plan of
conversion, which was filed with the Superintendent on April 25, 2008. The
Superintendent approved the plan of conversion on April 15, 2009. Prior to the
plan of conversion’s implementation, the plan must be approved by two-thirds of
all votes cast by eligible CMIC policyholders at a special meeting of
policyholders scheduled to be held on June 8, 2009.  As part of the
approval process, the Superintendent had an appraisal performed with respect to
the fair market value of CMIC as of December 31, 2006.  In addition,
the Insurance Department conducted a five year examination of CMIC as of
December 31, 2006 and held a public hearing in October 2008 to consider the
conversion plan. We, as a holder of the CMIC Surplus Notes, at our option, would
be able to exchange the Surplus Notes for an equitable share of the securities
or other consideration, or both, of the corporation into which CMIC would be
converted.  Based upon the amount payable on the Surplus Notes and the
statutory surplus of CMIC, the plan of conversion provides that, in the event of
a conversion by CMIC into a stock corporation, in exchange for our relinquishing
our rights to any unpaid principal and interest under the Surplus Notes, we
would receive 100% of the stock of CMIC. Upon the effectiveness of the
conversion, CMIC’s name will change to “Kingstone Insurance
Company.”  We obtained stockholder approval of an amendment to our
certificate of incorporation to change our name to “Kingstone Companies,
Inc.”  Such name change would only take place in the event that the
conversion occurs and we obtain a controlling interest in Kingstone Insurance
Company.  No assurances can be given that the conversion will occur or
as to the terms of the conversion.




Our
Chairman is also Chairman of the Board and Chief Investment Officer of CMIC. One
of our other directors and our Chief Accounting Officer are also directors of
CMIC.




4.
Employee Stock Compensation




In
November 1998, we adopted the 1998 Stock Option Plan (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.




9


Our
results of continuing operations for the three months ended March 31, 2009 and
2008 include share-based compensation expense totaling approximately $7,000 and
$24,000, respectively.  Such compensation 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 three months ended March 31, 2009 and 2008.




A summary
of option activity under the Plans as of March 31, 2009, and changes during the
three months then ended, is as follows:




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
                                                                                                            
                                                                                                            
                                                                                                            (400
                                                                                                            )
                                                                                                            
                                                                                                            $
                                                                                                            7.39
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            -Outstanding
      at March 31, 2009
                                                                                                            
                                                                                                            
                                                                                                            177,000
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            2.39
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            3.11
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -Vested
      and Exercisable at March 31, 2009
                                                                                                            
                                                                                                            
                                                                                                            121,740
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            2.54
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            2.92
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            -




The
aggregate intrinsic value of options outstanding and options exercisable at
March 31, 2009 is calculated as the difference between the exercise price of the
underlying options and the market price of our Common Stock for the shares that
had exercise prices that were lower than the $0.36 closing price of our Common
Stock on March 31, 2009. No options were exercised in the three months
ended March 31, 2009 and 2008.




As of
March 31, 2009, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $23,000. Unamortized compensation
cost as of March 31, 2009 is expected to be recognized over a remaining
weighted-average vesting period of 1.5 years.




10


5.
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 three months
ended March 31, 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 489,000 potential common shares from
unexercised stock options and the conversion of convertible preferred shares,
which were anti-dilutive for such period. During the three months ended March
31, 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 670,074 potential common shares from unexercised stock options
and warrants, and the conversion of convertible preferred shares, which were
anti-dilutive for such period.




6.
Long-Term Debt




Long-term
debt and capital lease obligations consist of:




March
      31, 2009
                                                                                                        
                                                                                                        
                                                                                                        December
      31, 2008Less
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        LessTotal
                                                                                                        
                                                                                                        
                                                                                                        Current
                                                                                                        
                                                                                                        
                                                                                                        Long-Term
                                                                                                        
                                                                                                        
                                                                                                        Total
                                                                                                        
                                                                                                        
                                                                                                        Current
                                                                                                        
                                                                                                        
                                                                                                        Long-TermDebt
                                                                                                        
                                                                                                        
                                                                                                        Maturities
                                                                                                        
                                                                                                        
                                                                                                        Debt
                                                                                                        
                                                                                                        
                                                                                                        Debt
                                                                                                        
                                                                                                        
                                                                                                        Maturities
                                                                                                        
                                                                                                        
                                                                                                        DebtCapitalized
      lease
                                                                                                        
                                                                                                        $
                                                                                                        52,699
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        22,852
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        29,847
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        58,133
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        22,338
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        35,795Note
      payable,Accurate
      acquisition
                                                                                                        
                                                                                                        
                                                                                                        438,331
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        438,331
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        450,695
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        70,872
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        379,823Notes
      payable
                                                                                                        
                                                                                                        
                                                                                                        1,500,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        980,769
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        519,231
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,500,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        1,500,000
                                                                                                        
                                                                                                        
                                                                                                        
                                                                                                        -$
                                                                                                        1,991,030
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        1,441,952
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        549,078
                                                                                                        
                                                                                                        
                                                                                                        $
                                                                                                        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
March 31, 2009 and 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
Payable 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 7). 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. Jack Seibald, one of our
directors and a principal stockholder, indirectly holds approximately $288,000
of the principal amount of the exchanged notes.  In addition, a
limited liability company of which Barry Goldstein, our Chief Executive Officer,
is a minority member holds $115,000 of the principal amount of the exchanged
notes.




11


On May
12, 2009, we prepaid $686,539 in principal of the Notes Payable (or 70% of the
balance of the Notes Payable to the remaining five holders), together with
$81,200, which amount represents accrued and unpaid interest and incentive
payments on such prepayment. After giving effect to the above transactions on
May 12, 2009, the remaining outstanding principal balance of Notes Payable was
$294,230.




7.
Exchange 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 the
family of Barry B. Goldstein, our Chief Executive Officer, 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 6).





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.





12


8.
Employment Agreement




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





9.
Discontinued Operations




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 three months ended March 31, 2009 and 2008, Payments
received approximately $18,000 and $33,000 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 three months ended
March 31, 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 March 31, 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 three months ended March 31, 2009 and 2008 follows
(unaudited):




13
 
 Three
      Months ended March 31,
                                                      
                                                      2009
                                                      
                                                      
                                                      2008Premium
      finance revenue
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      225,322Operating
      Expenses:General
      and administrative expenses
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      179,028Provision
      for finance receivable losses
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      89,316Depreciation
      and amortization
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      46,556Interest
      expense
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      45,181Total
      operating expenses
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      360,081Loss
      from operations
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (134,759
                                                      )Loss
      on sale of premim financing portfolio
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      83,623Loss
      before provision for income taxes
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (218,382
                                                      )Provision
      for income taxes
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Loss
      from discontinued operations,net
      of income taxes
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      (218,382
                                                      )




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




March
      31,
                                            
                                            
                                            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 March
30, 2009, an asset purchase agreement (the “APA”) was fully executed pursuant to
which our wholly-owned subsidiaries, Barry Scott Agency Inc., and DCAP Accurate,
Inc., agreed to sell substantially all of their assets, including the book of
business of our 16 remaining Retail Business locations that we owned in New York
State (the “Assets”) to NII BSA LLC.  The closing of the sale of the
Assets was completed on April 17, 2009.  As part of the purchase
price, 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. As a result of the
restructuring in December 2008, the APA on March 30, 2009 and the sale of the
Assets on April 17, 2009, the operating results of the Retail Business
operations for the three months ended March 31, 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 March 31, 2009 and December 31,
2008.





14


In March
2009, we commenced negotiations to sell the remaining three Retail Business
locations, which are located in Pennsylvania.





Summarized
financial information of the Retail Business as discontinued operations for the
three months ended March 31, 2009 and 2008 follows (unaudited):




Three
      Months ended March 31,
                                              
                                              2009
                                              
                                              
                                              2008Commissions
      and fee revenue
                                              
                                              $
                                              781,131
                                              
                                              
                                              $
                                              1,084,871Operating
      Expenses:General
      and administrative expenses
                                              
                                              
                                              740,631
                                              
                                              
                                              
                                              1,002,262Depreciation
      and amortization
                                              
                                              
                                              44,670
                                              
                                              
                                              
                                              56,368Interest
      expense
                                              
                                              
                                              9,322
                                              
                                              
                                              
                                              10,952Total
      operating expenses
                                              
                                              
                                              794,623
                                              
                                              
                                              
                                              1,069,582(Loss)
      income before provision for income taxes
                                              
                                              
                                              (13,492
                                              )
                                              
                                              
                                              15,289Provision
      for income taxes
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -(Loss)
      income from discontinued operations,net
      of income taxes
                                              
                                              $
                                              (13,492
                                              )
                                              
                                              $
                                              15,289




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




March
      31,
                                                    
                                                    
                                                    December
      31,2009
                                                    
                                                    
                                                    2008(Unaudited)Accounts
      receivable
                                                    
                                                    $
                                                    356,272
                                                    
                                                    
                                                    $
                                                    404,180Other
      current assets
                                                    
                                                    
                                                    33,871
                                                    
                                                    
                                                    
                                                    32,325Property
      and equipment, net
                                                    
                                                    
                                                    119,636
                                                    
                                                    
                                                    
                                                    144,750Goodwill
                                                    
                                                    
                                                    2,207,658
                                                    
                                                    
                                                    
                                                    2,207,658Other
      intangibles, net
                                                    
                                                    
                                                    56,855
                                                    
                                                    
                                                    
                                                    75,666Other
      assets
                                                    
                                                    
                                                    30,277
                                                    
                                                    
                                                    
                                                    30,277Total
      assets
                                                    
                                                    $
                                                    2,804,569
                                                    
                                                    
                                                    $
                                                    2,894,856Accounts
      payable and accrued expenses
                                                    
                                                    $
                                                    145,548
                                                    
                                                    
                                                    $
                                                    136,685Deferred
      income taxes
                                                    
                                                    
                                                    77,000
                                                    
                                                    
                                                    
                                                    77,000Total
      liabilities
                                                    
                                                    $
                                                    222,548
                                                    
                                                    
                                                    $
                                                    213,685




Franchise
Business




On May 6,
2009, we sold all of the outstanding stock of the subsidiaries that operated our
DCAP franchise business. The sale was effective as of May 1, 2009. As a result
of the sale, the operating results of the franchise business operations for the
three months ended March 31, 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 March 31, 2009 and December 31,
2008.




15


Summarized
financial information of the franchise business as discontinued operations for
the three months ended March 31, 2009 and 2008 follows (unaudited):




Three
      Months ended March 31,
                                                  
                                                  2009
                                                  
                                                  
                                                  2008Commissions
      and fee revenue
                                                  
                                                  $
                                                  155,582
                                                  
                                                  
                                                  $
                                                  132,636Operating
      Expenses:General
      and administrative expenses
                                                  
                                                  
                                                  154,504
                                                  
                                                  
                                                  
                                                  337,017Depreciation
      and amortization
                                                  
                                                  
                                                  3,265
                                                  
                                                  
                                                  
                                                  10,265Total
      operating expenses
                                                  
                                                  
                                                  157,769
                                                  
                                                  
                                                  
                                                  347,282Loss
      before provision for income taxes
                                                  
                                                  
                                                  (2,187
                                                  )
                                                  
                                                  
                                                  (214,646
                                                  )Provision
      for income taxes
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Loss
      from discontinued operations,net
      of income taxes
                                                  
                                                  $
                                                  (2,187
                                                  )
                                                  
                                                  $
                                                  (214,646
                                                  )




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




March
      31,
                                              
                                              
                                              December
      31,2009
                                              
                                              
                                              2008(Unaudited)Accounts
      receivable
                                              
                                              $
                                              40,249
                                              
                                              
                                              $
                                              134,522Other
      current assets
                                              
                                              
                                              99,201
                                              
                                              
                                              
                                              101,678Deferred
      income taxes
                                              
                                              
                                              16,000
                                              
                                              
                                              
                                              16,000Property
      and equipment, net
                                              
                                              
                                              4,611
                                              
                                              
                                              
                                              7,876Other
      assets
                                              
                                              
                                              -
                                              
                                              
                                              
                                              4,996Total
      assets
                                              
                                              $
                                              160,061
                                              
                                              
                                              $
                                              265,072Accounts
      payable and accrued expenses
                                              
                                              $
                                              36,460
                                              
                                              
                                              $
                                              9,809Total
      liabilities
                                              
                                              $
                                              36,460
                                              
                                              
                                              $
                                              9,809




Summarized Financial
Information of Discontinued Operations




Summarized
financial information of consolidated discontinued operations for the three
months ended March 31, 2009 and 2008 follows (unaudited):




16


Three
      Months ended March 31,
                                                        
                                                        2009
                                                        
                                                        
                                                        2008Commissions
      and fee revenue
                                                        
                                                        $
                                                        936,713
                                                        
                                                        
                                                        $
                                                        1,217,507Premium
      finance revenue
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        225,322Total
      revenue
                                                        
                                                        
                                                        936,713
                                                        
                                                        
                                                        
                                                        1,442,829Operating
      Expenses:General
      and administrative expenses
                                                        
                                                        
                                                        895,135
                                                        
                                                        
                                                        
                                                        1,518,307Provision
      for finance receivable losses
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        89,316Depreciation
      and amortization
                                                        
                                                        
                                                        47,935
                                                        
                                                        
                                                        
                                                        113,189Interest
      expense
                                                        
                                                        
                                                        9,322
                                                        
                                                        
                                                        
                                                        56,133Total
      operating expenses
                                                        
                                                        
                                                        952,392
                                                        
                                                        
                                                        
                                                        1,776,945Loss
      from operations
                                                        
                                                        
                                                        (15,679
                                                        )
                                                        
                                                        
                                                        (334,116
                                                        )Loss
      on sale of premim financing portfolio
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        83,623Loss
      before provision for income taxes
                                                        
                                                        
                                                        (15,679
                                                        )
                                                        
                                                        
                                                        (417,739
                                                        )Provision
      for income taxes
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Loss
      from discontinued operations,net
      of income taxes
                                                        
                                                        $
                                                        (15,679
                                                        )
                                                        
                                                        $
                                                        (417,739
                                                        )




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




March
      31,
                                                
                                                
                                                December
      31,2009
                                                
                                                
                                                2008(Unaudited)Accounts
      receivable
                                                
                                                $
                                                396,521
                                                
                                                
                                                $
                                                538,702Due
      from purchaser of premium finance portfolio
                                                
                                                
                                                -
                                                
                                                
                                                
                                                18,291Other
      current assets
                                                
                                                
                                                133,072
                                                
                                                
                                                
                                                134,003Deferred
      income taxes
                                                
                                                
                                                16,000
                                                
                                                
                                                
                                                16,000Property
      and equipment, net
                                                
                                                
                                                124,247
                                                
                                                
                                                
                                                152,626Goodwill
                                                
                                                
                                                2,207,658
                                                
                                                
                                                
                                                2,207,658Other
      intangibles, net
                                                
                                                
                                                56,855
                                                
                                                
                                                
                                                75,666Other
      assets
                                                
                                                
                                                30,277
                                                
                                                
                                                
                                                35,273Total
      assets
                                                
                                                $
                                                2,964,630
                                                
                                                
                                                $
                                                3,178,219Accounts
      payable and accrued expenses
                                                
                                                $
                                                182,008
                                                
                                                
                                                $
                                                146,494Deferred
      income taxes
                                                
                                                
                                                77,000
                                                
                                                
                                                
                                                77,000Total
      liabilities
                                                
                                                $
                                                259,008
                                                
                                                
                                                $
                                                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 three months ended March 31, 2008. Upon
completion of collection efforts, after cancellation of the underlying insurance
policies, any uncollected earned interest or fees were charged off.




17


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.




10.
Subsequent Events




Sale of Retail
Business




On April
17, 2009, our wholly-owned subsidiaries, Barry Scott Agency Inc., and DCAP
Accurate, Inc. (collectively, “Seller”), completed the sale of substantially all
of their assets,  including the book of business of the 16 Retail
Business locations that we owned in New York State (the “Assets”) to NII BSA
LLC.




The
purchase price for the Assets was approximately $2,337,000, of which
approximately $1,786,000 was paid at closing.  Promissory notes in the
aggregate principal amount of $551,000 (the “Notes”) were also delivered at the
closing.  The Notes are payable in installments of $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.




As a
result of our December 2008 plan of restructuring to close or sell our Retail
Business locations, the agreement to sell the Assets, which was fully executed
on March 30, 2009, and the sale of the Assets on April 17, 2009, our Retail
Business has been presented as discontinued operations.




Sale of Franchise
Business




On May 6,
2009, we sold all of the outstanding stock of the subsidiaries that operated our
DCAP franchise business.  The sale was effective as of May 1,
2009.  The purchase price for the stock was $200,000 which was paid by
delivery of a promissory note in such principal amount (the
“Note”).  The 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 (see
Note 9).




18


Notes Payable and Preferred
Stock




See Notes
6 and 7 for a discussion of certain exchanges made on May 12, 2009 of certain
Notes Payable and our Series D Preferred Stock for a new Series E Preferred
Stock and the prepayment of certain other Notes Payable.









19


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 March 30, 2009, an asset
purchase agreement (the “Purchase Agreement”) was fully executed pursuant to
which we agreed to sell 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 “Assets”). The closing of the sale of the Assets was completed
on April 17, 2009. As a result of the restructuring in December 2008, the
Purchase Agreement on March 30, 2009 and the sale of the Assets on April 17,
2009, our Retail Business has been reclassified 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. On May 6, 2009, we sold all of the outstanding stock
of the subsidiaries that operated our DCAP franchise business.  The
sale was effective as of May 1, 2009. As a result of the sale, our franchise
business has been reclassified 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 reclassified 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 serve as
insurance agents or brokers and place various types of insurance on behalf of
customers.  Our Retail Business focuses on automobile, motorcycle and
homeowner’s insurance and our customer base is 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 receive commissions from
insurance companies for their services.  Neither we nor the stores
have served as an insurance company and therefore we have not assumed
underwriting risks; however, as discussed below, in March 2007, the Board of
Directors of Commercial Mutual Insurance Company (“Commercial Mutual”) adopted a
resolution to convert Commercial Mutual from an advance premium insurance
company to a stock property and casualty insurance company.  We hold
surplus notes of Commercial Mutual in the aggregate principal amount of
$3,750,000.  Based upon the amount payable on the surplus notes and
the statutory surplus of Commercial Mutual, the plan of conversion provides
that, in the event of a conversion by Commercial Mutual into a stock
corporation, in exchange for our relinquishing our rights to any unpaid
principal and interest under the surplus notes, we would receive 100% of the
stock of Commercial Mutual.




20


Critical
Accounting Policies




Our
consolidated financial statements include accounts of DCAP Group, Inc. and all
majority-owned and controlled subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires our management to make estimates and assumptions in
certain circumstances that affect amounts reported in our consolidated financial
statements and related notes. In preparing these financial statements, our
management has utilized information available including our past history,
industry standards and the current economic environment, among other factors, in
forming its estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to materiality. It
is possible that the ultimate outcome as anticipated by our management in
formulating its estimates inherent in these financial statements might not
materialize. However, application of the critical accounting policies below
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. In addition, other companies may utilize different estimates, which
may impact comparability of our results of operations to those of companies in
similar businesses.




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.”




21


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 three months ended March 31, 2008.




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 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 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, we believe that no impairment of
goodwill exists at March 31, 2009.




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.




22


Recent
Accounting Pronouncements




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141R “Business
Combinations” (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. SFAS 141R also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R is effective for our fiscal year
beginning January 1, 2009.  The adoption of SFAS 141R did not have a
material effect on our results of operations, financial position or
liquidity.




In April
2009, the FASB issued FASB Staff Position (“FSP”) FAS 141R-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies” (“FSP 141R-1”).  FSP 141R-1 amends the guidance
in SFAS 141R and is effective for the first annual reporting period beginning on
or after December 15, 2008.  The adoption of FSP 141R-1 did not have a
material effect on our results of operations, financial position or
liquidity.




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




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




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




23


In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets” ("FSP 142-3"). FSP 142-3 removes the requirement under
SFAS 142 to consider whether an intangible asset can be renewed without
substantial cost of material modifications to the existing terms and conditions,
and replaces it with a requirement that an entity consider its own historical
experience in renewing similar arrangements, or a consideration of market
participant assumptions in the absence of historical experience. FSP 142-3 also
requires entities to disclose information that enables users of financial
statements to assess the extent to which the expected future cash flows
associated with the asset are affected by the entity's intent and/or ability to
renew or extend the arrangement. The guidance became effective as of the
beginning of our fiscal year beginning after December 15, 2008. The adoption of
FSP 142-3 did not have a material effect on our results of operations, financial
position or liquidity.




In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock” ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
application is not permitted. The adoption of EITF 07-05 did not have a material
effect on our results of operations, financial position or
liquidity.




In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“EITF 03-6-1”).  EITF 03-6-1 clarifies that all outstanding unvested
share-based payment awards that contain rights to non-forfeitable dividends
participate in undistributed earnings with common shareholders. Awards of this
nature are considered participating securities and the two-class method of
computing basic and diluted earnings per share must be applied. EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008. The adoption of
EITF 03-6-1 did not have a material effect on our results of operations,
financial position or liquidity.




In
October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Is Asset Not Active” (“FSP
157-3”) with an immediate effective date, including prior periods for which
financial statements have not been issued. FSP 157-3 clarifies the application
of fair value in inactive markets and allows for the use of management's
internal assumptions about future cash flows with appropriately risk-adjusted
discount rates when relevant observable market data does not exist. The
objective of SFAS 157 has not changed and continues to be the determination of
the price that would be received in an orderly transaction that is not a forced
liquidation or distressed sale at the measurement date. The adoption of FSP
157-3 did not have a material effect on our results of operations, financial
position or liquidity.


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.
  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 will adopt the provisions of FSP 157-4 as of April 1,
2009. Quantification of the estimated effects of the application of the FSP
157-4 requirements will be based on the market conditions and portfolio holdings
at the time of adoption and are therefore not yet reliably estimable; however,
we do not expect a material impact to our results of operations or financial
position upon adoption.




24


Results
of Operations




Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008





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 March 30, 2009, an asset purchase agreement (the “Purchase Agreement”) was
fully executed pursuant to which we agreed to sell 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 “Assets”). The closing of the
sale of the Assets was completed on April 17, 2009. As a result of the
restructuring in December 2008, the Purchase Agreement on March 30, 2009 and the
sale of the Assets on April 17, 2009, our Retail Business has been reclassified
as discontinued operations and prior periods have been restated.




On May 6,
2009, we sold all of the outstanding stock of the subsidiaries that operated our
DCAP franchise business.  The sale was effective as of May 1, 2009. As
a result of the sale, our franchise business has been reclassified 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 reclassified as
discontinued operations.




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




Continuing
Operations




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




Three
      months endedMarch
      31,Change2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      $
                                                      
                                                      
                                                      
                                                      %Fee
      revenue
                                                      
                                                      $
                                                      112
                                                      
                                                      
                                                      $
                                                      99
                                                      
                                                      
                                                      $
                                                      13
                                                      
                                                      
                                                      
                                                      13
                                                      %General
      and administrative expenses
                                                      
                                                      
                                                      282
                                                      
                                                      
                                                      
                                                      321
                                                      
                                                      
                                                      
                                                      (39
                                                      )
                                                      
                                                      
                                                      (12
                                                      )
      %Interest
      income - notes receivable
                                                      
                                                      
                                                      30
                                                      
                                                      
                                                      
                                                      307
                                                      
                                                      
                                                      
                                                      (277
                                                      )
                                                      
                                                      
                                                      (90
                                                      )
      %Interest
      expense - mandatorily redeemable preferred stock
                                                      
                                                      
                                                      20
                                                      
                                                      
                                                      
                                                      10
                                                      
                                                      
                                                      
                                                      10
                                                      
                                                      
                                                      
                                                      100
                                                      %Loss
      from continuing operations before taxes
                                                      
                                                      
                                                      (244
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (244
                                                      )
                                                      
                                                      
                                                      n/aBenefit
      from income taxes
                                                      
                                                      
                                                      (88
                                                      )
                                                      
                                                      
                                                      (188
                                                      )
                                                      
                                                      
                                                      100
                                                      
                                                      
                                                      
                                                      53
                                                      %(Loss)
      income from continuing operations
                                                      
                                                      
                                                      (156
                                                      )
                                                      
                                                      
                                                      188
                                                      
                                                      
                                                      
                                                      (344
                                                      )
                                                      
                                                      
                                                      (183
                                                      )
      %


25


During
the three months ended March 31, 2009 (“Q1 2009”), revenues from continuing
operations were $112,000, as compared to $99,000 for the three months ended
March 31, 2008 (“Q1 2008”).  The 13% increase of $13,000 in
commissions and fees was a result of three months of premium finance placement
fees earned in 2009, compared to two months in 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 Q1 2009 were $282,000, as compared to
$321,000 in Q1 2008. The 12% decrease of $39,000 was primarily attributable to a
decrease in executive compensation.




Our
interest income from notes receivable in Q1 2009 was $30,000, as compared to
$307,000 in Q1 2008. The 90% decrease of $277,000 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 Q1 2009 was
$20,000, as compared to $10,000 in Q1 2008. The 100% increase of $10,000 was
primarily due the increase in the interest rate from 5% to 10% on April 16,
2008.




Our
continuing operations generated a net loss before income taxes of $244,000 in Q1
2009 as compared to break even in Q1 2008.  The change of
$244,000 was primarily due to the decrease in interest income from our surplus
notes.




Our
continuing operations generated a net loss of $156,000 in Q1 2009 as compared to
net income of $188,000 in Q1 2008.  The change of $344,000 was
primarily due to the decrease in interest income from our surplus notes and a
greater benefit from income taxes in Q1 2008.




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:




26




Three
      months endedMarch
      31,Change2009
                                                                                                    
                                                                                                    
                                                                                                    2008
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    %Commissions
      and fee revenue
                                                                                                    
                                                                                                    $
                                                                                                    782
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    1,084
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (302
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (28
                                                                                                    )
      %Operating
      Expenses:General
      and administrative expenses
                                                                                                    
                                                                                                    
                                                                                                    741
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,002
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (261
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (26
                                                                                                    )
      %Depreciation
      and amortization
                                                                                                    
                                                                                                    
                                                                                                    45
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    56
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (11
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (20
                                                                                                    )
      %Interest
      expense
                                                                                                    
                                                                                                    
                                                                                                    9
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    11
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (2
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (18
                                                                                                    )
      %Total
      operating expenses
                                                                                                    
                                                                                                    
                                                                                                    795
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,069
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (274
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (26
                                                                                                    )
      %(Loss)
      income before provision for income taxes
                                                                                                    
                                                                                                    
                                                                                                    (13
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    15
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (28
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (187
                                                                                                    )
      %Provision
      for income taxes
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    n/a(Loss)
      income from discontinued operations
                                                                                                    
                                                                                                    $
                                                                                                    (13
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    15
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    (28
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (187
                                                                                                    )
      %




Our
discontinued Retail Business revenue was $782,000 in Q1 2009, as compared to
$1,084,000 in Q1 2008. The 28% revenue decrease of $302,000 was primarily
attributable to a reduction in commissions and fees earned due to 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 Q1 2009 were
$741,000, as compared to $1,002,000 in Q1 2008. The 26% net decrease of $261,000
was primarily attributable to a $180,000 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 operations, on a stand-alone basis, generated a net
loss before income taxes of $13,000 in Q1 2009, as compared to a net profit
before income taxes of $15,000 in Q1 2008.  The decrease in profit of
$28,000 in 2009 was primarily due to the $302,000 decrease in revenues, offset
by a $261,000 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:




27




Three
      months endedMarch
      31,Change2009
                                                                                                    
                                                                                                    
                                                                                                    2008
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    %Commissions
      and fee revenue
                                                                                                    
                                                                                                    $
                                                                                                    156
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    133
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    23
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    17
                                                                                                    %Operating
      Expenses:General
      and administrative expenses
                                                                                                    
                                                                                                    
                                                                                                    155
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    337
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (182
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (54
                                                                                                    )
      %Depreciation
      and amortization
                                                                                                    
                                                                                                    
                                                                                                    3
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    10
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (7
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (70
                                                                                                    )
      %Total
      operating expenses
                                                                                                    
                                                                                                    
                                                                                                    158
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    347
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (189
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (54
                                                                                                    )
      %Loss
      before provision for income taxes
                                                                                                    
                                                                                                    
                                                                                                    (2
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (214
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    212
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    99
                                                                                                    %Provision
      for income taxes
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    n/aLoss
      from discontinued operations
                                                                                                    
                                                                                                    $
                                                                                                    (2
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (214
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    212
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    99
                                                                                                    %




Our
discontinued franchise business general and administrative expenses in Q1 2009
were $155,000, as compared to $337,000 in Q1 2008. The 54% net decrease of
$182,000 was primarily attributable to reductions in advertising campaigns and
executive employment costs.




Our
discontinued franchise business, on a stand-alone basis, generated a net loss of
$2,000 in Q1 2009 as compared to a net loss of $214,000 in Q1
2008.  The decrease in net loss of $212,000 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:




Three
      months endedMarch
      31,Change2009
                                                                                                  
                                                                                                  
                                                                                                  2008
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  %Premium
      finance revenue
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  225
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (225
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Operating
      Expenses:General
      and administrative expenses
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  179
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (179
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Provision
      for finance receivable losses
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  89
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (89
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Depreciation
      and amortization
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  47
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (47
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Interest
      expense
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  45
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (45
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Total
      operating expenses
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  360
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (360
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Loss
      from operations
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (135
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  135
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Loss
      on sale of premium financing portfolio
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (83
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  83
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Loss
      before benefit fromincome
      taxes
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (218
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  218
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %Provision
      for income taxes
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  n/aLoss
      from discontinued operations
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (218
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  218
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (100
                                                                                                  )
      %
  28


There was
no activity in our discontinued premium finance business in Q1 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) income (in thousands) for
the periods indicated:




Three
      months endedMarch
      31,Change2009
                                                                          
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          $
                                                                          
                                                                          
                                                                          
                                                                          %(Loss)
      income from continuing operations
                                                                          
                                                                          $
                                                                          (156
                                                                          )
                                                                          
                                                                          $
                                                                          188
                                                                          
                                                                          
                                                                          $
                                                                          (344
                                                                          )
                                                                          
                                                                          
                                                                          (183
                                                                          )
      %Loss
      from discontinued operations, net of taxes
                                                                          
                                                                          
                                                                          (16
                                                                          )
                                                                          
                                                                          
                                                                          (418
                                                                          )
                                                                          
                                                                          
                                                                          402
                                                                          
                                                                          
                                                                          
                                                                          96
                                                                          %Net
      loss
                                                                          
                                                                          $
                                                                          (172
                                                                          )
                                                                          
                                                                          $
                                                                          (230
                                                                          )
                                                                          
                                                                          $
                                                                          58
                                                                          
                                                                          
                                                                          
                                                                          25
                                                                          %




Our net
loss for Q1 2009 was $172,000 as compared to a net loss of $230,000 for Q1
2008.




Liquidity
and Capital Resources




As of
March 31, 2009, we had $154,882 in cash and cash equivalents and working capital
of $482,473. As of December 31, 2008, we had $142,949 in cash and cash
equivalents and a working capital deficit of $146,233.




Subsequent
Sale of Businesses




On April
17, 2009, our wholly-owned subsidiaries, Barry Scott Agency Inc., and DCAP
Accurate, Inc., completed the sale of substantially all of their assets,
including the book of business of the 16 Retail Business locations that we owned
in New York State (the “Assets”). The purchase price for the Assets was
approximately $2,337,000, of which approximately $1,786,000 was paid at
closing.  Promissory notes in the principal aggregate amount of
$551,000 (the “Notes”) were also delivered at the closing. The Notes are payable
in installments of $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.
  On May 6,
2009, we sold all of the outstanding stock of the subsidiaries that operated our
DCAP franchise business.  The sale was effective as of May 1,
2009.  The purchase price for the stock was $200,000 which was paid by
delivery of a promissory note in such principal amount (the
“Note”).  The 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.




29


Subsequent
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 Accurate.




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 to a stock property and casualty insurance
company and the issuance to us of a controlling interest in Commercial Mutual
(subject to acceleration under certain circumstances).  In exchange
for this extension, the holders are entitled to receive an aggregate incentive
payment equal to $10,000 times the number of months (or partial months) the debt
is outstanding after September 30, 2008 through the maturity date. 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.


On May
12, 2009, three of the holders 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 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 (or 70% of the balance of the Notes Payable to the remaining five
holders), together with $81,200, which amount represents accrued and unpaid
interest and incentive payments on such prepayment. As of May 12, 2009, after
giving affect to the above transactions, the remaining outstanding principal
balance of Notes Payable was $294,230. The $519,231 principal balance of Notes
Payable that was exchanged for Series E Preferred Stock is included in our March
31, 2009 balance sheet under “Long-term debt”. The remaining $980,769 principal
balance of the Notes Payable is included in our March 31, 2009 balance sheet
under “Current portion of long-term debt.”




Subsequent
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.  The
mandatorily redeemable balance of $780,000 is included in our March 31, 2009
balance sheet as a non-current liability.




We
believe that, based on our present cash resources, including the collection of
the  promissory notes discussed above under “Subsequent Sale of
Business” in accordance with their terms, we will have sufficient cash on a
short-term basis and over the next 12 months to fund our working capital
needs.




During Q1
2009, cash and cash equivalents increased by $12,000 primarily due to the
following:




30


·
            Net
      cash provided by operating activities during Q1 2009 was $61,000, which
      was due to an increase in accounts payable and accrued expenses of
      $77,000, and cash provided from the operating activities of our
      discontinued operations of $250,000. The increase in cash was offset by a
      net loss of $172,000 and non-cash items totaling $83,000. These non-cash
      items included an increase in deferred tax benefits, offset by
      depreciation and amortization, and stock-based
  payments.




·
            Net
      cash used in investing activities during Q1 2009 was $31,000 primarily due
      to the increase in accrued interest on notes
  receivable.




·
            Net
      cash used in financing activities during Q1 2009 was $18,000 due to
      principal payments on long-term debt and lease
  obligations.




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





Commercial
Mutual Insurance Company




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




We hold
two surplus notes issued by Commercial Mutual in the aggregate principal amount
of $3,750,000.  Previously earned but unpaid interest on the notes as
of March 31, 2009 was approximately $2,216,000.  The surplus notes are
past due and provide for interest at the prime rate or 8.5% per annum, whichever
is less.  Payments of principal and interest on the surplus notes may
only be made out of the surplus of Commercial Mutual and require the approval of
the Insurance Department of the State of New York (the “Insurance
Department”).  As of December 31, 2008, the statutory surplus of
Commercial Mutual, as reported to the Insurance Department, was approximately
$7,748,000.




The
conversion by Commercial Mutual to a stock property and casualty insurance
company is 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. Prior to the plan of conversion’s
implementation, the plan must be approved by two-thirds of all votes cast by
eligible Commercial Mutual policyholders at a special meeting of policyholders
scheduled to be held on June 8, 2009.  As part of the approval
process, the Superintendent of Insurance conducted a five year examination of
Commercial Mutual as of December 31, 2006 and had an appraisal performed with
respect to the fair market value of Commercial Mutual as of such date. We, as
the holder of the Commercial Mutual surplus notes, at our option, would be able
to exchange the surplus notes for an equitable share of the securities or other
consideration, or both, of the corporation into which Commercial Mutual would be
converted.  Based upon the amount payable on the surplus notes and the
statutory surplus of Commercial Mutual, the plan of conversion provides that, in
the event of a conversion by Commercial Mutual into a stock corporation, in
exchange for our relinquishing our rights to any unpaid principal and interest
under the surplus notes, we would receive 100% of the stock of Commercial
Mutual.  Upon the effectiveness of the conversion, Commercial Mutual’s
name will change to “Kingstone Insurance Company.”  We have obtained
stockholder approval of an amendment to our certificate of incorporation to
change our name to “Kingstone Companies, Inc.”  Such name change would
only take place in the event that the conversion occurs and we obtain a
controlling interest in Kingstone Insurance Company.  No assurances
can be given that the conversion will occur or as to the timing or the terms of
the conversion.




31


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 March
31, 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.




32


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.









33


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
ourCurrent Report on Form
8-K for an event dated May 6, 2009 and incorporated herein by
reference.
  34


3(a)
                  Restated
      Certificate of Incorporation43(b)
                  Certificate
      of Designation of Series A Preferred Stock53(c)
                  Certificate
      of Designation of Series B Preferred Stock63(d)
                  Certificate
      of Designation of Series C Preferred Stock73(e)
                  Certificate
      of Designation of Series D Preferred Stock83(f)
                  Certificate
      of Designation of Series E Preferred Stock93(g)
                  By-laws,
      as amended1031(a)
                  Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive Officer as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231(b)
                  Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial Officer as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232
                  Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of
2002





4 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.


5 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.


6Denotes 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.


7Denotes 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.


8Denotes 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.


9Denotes 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.


10Denotes
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.


35


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:
      May 15, 2009
                      By:
                      /s/ Barry
      B. GoldsteinBarry
      B. GoldsteinPresidentBy:
                      /s/ Victor
      BrodskyVictor
      BrodskyChief
      Accounting Officer