**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-QSB**


**(Mark
      One)**


[X]
            Quarterly
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934For
                the quarterly period endedSeptember
                30, 2006[
                ]
            Transition
                report under Section 13 or 15(d) of the Exchange ActFor
                the transition period fromtoCommission
                File Number:0-1665





**DCAP
      GROUP, INC.**


(Exact
      Name of Small Business Issuer as Specified in its Charter)





**Delaware**
              (State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            **36-2476480**
              (I.R.S.
                Employer
              Identification
                No.)




**1158
      Broadway, Hewlett, NY 11557**


(Address
      of Principal Executive Offices)





**(516)
      374-7600**


(Issuer’s
      Telephone Number, Including Area Code)


**________________________________________________**


(Former
      Name, Former Address and Former Fiscal Year, if Changed


Since
      Last Report)





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





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





**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN**


**BANKRUPTCY
      PROCEEDINGS DURING THE**


**PRECEDING
      FIVE YEARS**





Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court. Yes  No




APPLICABLE
      ONLY TO CORPORATE
      ISSUERS




State
        the
        number of shares outstanding of each of the issuer's classes of common equity,
        as of the latest practicable date: 2,896,024 shares as of October 31,
        2006.
 
 Transitional
        Small Business Disclosure Format (check one): Yes  No X







**INDEX**




**DCAP
      GROUP, INC. AND SUBSIDIARIES**





**PART
                I****.**
            **FINANCIAL
                INFORMATION****Item
                1.**
            **Financial
                Statements**Condensed
                Consolidated Balance Sheet - September 30, 2006 (Unaudited)Condensed
                Consolidated Statements of Income - Nine months ended September 30,
                2006
                and 2005 (Unaudited)Condensed
                Consolidated Statements of Income - Three months ended September
                30, 2006
                and 2005 (Unaudited)Condensed
                Consolidated Statements of Cash Flows - Nine months ended September
                30,
                2006 and 2005 (Unaudited)Notes
                to Condensed Consolidated Financial Statements - Nine months ended
                September 30, 2006 and 2005 (Unaudited)**Item
                2.**
            **Management's
                Discussion and Analysis or Plan of Operation****Item
                3.**
            **Controls
                and Procedures****PART
                II****.**
            **OTHER
                INFORMATION****Item
                1.**
            **Legal
                Proceedings****Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of Proceeds****Item
                3.**
            **Defaults
                Upon Senior Securities****Item
                4.**
            **Submission
                of Matters to a Vote of Security Holders****Item
                5.**
            **Other
                Information****Item
                6.**
            **Exhibits****SIGNATURES**







2


Forward-Looking
      Statements




This
      Quarterly Report contains forward-looking statements as that term is defined
      in
      the federal securities laws. The events described in forward-looking statements
      contained in this Quarterly Report may not occur. Generally these statements
      relate to business plans or strategies, projected or anticipated benefits or
      other consequences of our plans or strategies, projected or anticipated benefits
      from acquisitions to be made by us, or projections involving anticipated
      revenues, earnings or other aspects of our operating results. The words "may,"
      "will," "expect," "believe," "anticipate," "project," "plan," "intend,"
      "estimate," and "continue," and their opposites and similar expressions are
      intended to identify forward-looking statements. We caution you that these
      statements are not guarantees of future performance or events and are subject
      to
      a number of uncertainties, risks and other influences, many of which are beyond
      our control, that may influence the accuracy of the statements and the
      projections upon which the statements are based. Factors which may affect our
      results include, but are not limited to, the risks and uncertainties discussed
      in Item 6 of our Annual Report on Form 10-KSB for the year ended December 31,
      2005 under “Factors That May Affect Future Results and Financial
      Condition”.




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













3


**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Balance Sheet (Unaudited)***September
                30, 2006***Assets**Current
                AssetsCash
                and cash equivalents
            
            
            
            
            $
            1,214,924Accounts
                receivable, net of allowance for
              doubtful
                accounts of $58,700
            
            
            
            
            
            1,307,564Finance
                contracts receivable
            
            $
            17,866,052Less:
                Deferred interest
            
            
            (1,367,585
            )Less:
                Allowance for finance receivable losses
            
            
            (226,029
            )
            
            16,272,438Prepaid
                expenses and other current assets
            
            
            
            
            
            299,452Deferred
                income taxes
            
            
            
            
            
            77,000Total
                Current Assets
            
            
            
            
            
            19,171,378Property
                and Equipment, net
            
            
            
            
            
            331,406Goodwill
            
            
            
            
            
            2,513,978Other
                Intangibles, net
            
            
            
            
            
            373,006Notes
                Receivable, net
            
            
            
            
            
            3,788,730Deposits
                and Other Assets
            
            
            
            
            
            154,125Total
                Assets
            
            
            
            
            $
            26,332,623**Liabilities
                and Stockholders’ Equity**Current
                Liabilities:Revolving
                credit line
            
            
            
            
            $
            11,852,707Accounts
                payable and accrued expenses
            
            
            
            
            
            893,954Premiums
                payable
            
            
            
            
            
            3,458,743Current
                portion of long-term debt
            
            
            
            
            
            2,010,947Income
                tax payable
            
            
            
            
            
            29,066Other
                current liabilities
            
            
            
            
            
            165,249Total
                Current Liabilities
            
            
            
            
            
            18,410,666Long-Term
                Debt
            
            
            
            
            
            1,101,163Deferred
                Income Tax
            
            
            
            
            
            37,000Other
                Liabilities
            
            
            
            
            
            1,845Mandatorily
                Redeemable Preferred Stock
            
            
            
            
            
            780,000CommitmentsStockholders’
                Equity:Common
                stock, $.01 par value; authorized 10,000,000 shares
              issued
                3,672,947
            
            
            
            
            
            36,730Preferred
                stock; $.01 par value; authorized
              1,000,000
                shares; 0 shares issued and outstanding
            
            
            
            
            
            -Capital
                in excess of par
            
            
            
            
            
            11,636,254Deficit
            
            
            
            
            
            (4,492,480
            )7,180,504Treasury
                stock, at cost, 776,923 shares
            
            
            
            
            
            (1,178,555
            )Total
                Stockholders’ Equity
            
            6,001,949Total
                Liabilities and Stockholders’ Equity
            $
            26,332,623








*See
      notes to condensed consolidated financial statements* .





4


**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Statements of Income (Unaudited)***Nine
                Months Ended September 30,*
            
            *2006*
            
            *2005*Revenues:Commissions
                and fees
            
            $
            5,390,085
            
            $
            5,461,000Premium
                finance revenue
            
            
            3,085,956
            
            
            3,951,434Total
                Revenues
            
            
            8,476,041
            
            
            9,412,434Operating
                Expenses:General
                and administrative expenses
            
            
            6,724,954
            
            
            6,720,444Provision
                for finance receivable losses
            
            
            496,456
            
            
            515,180Depreciation
                and amortization
            
            
            319,302
            
            
            338,861Premium
                finance interest expense
            
            
            604,219
            
            
            548,680Total
                Operating Expenses
            
            
            8,144,931
            
            
            8,123,165Operating
                Income
            
            
            331,110
            
            
            1,289,269Other
                Income (Expense):Interest
                income
            
            
            3,531
            
            
            14,633Interest
                income - notes receivable
            
            
            858,546
            
            
            -Interest
                expense
            
            
            (388,872
            )
            
            (254,070
            )Interest
                expense - mandatorily redeemable preferred stock
            
            
            (29,250
            )
            
            (29,371
            )Gain
                on sale of store
            
            
            81,105
            
            
            -Total
                Other Income (Expense)
            
            
            525,060
            
            
            (268,808
            )Income
                Before Provision for Income Taxes
            
            
            856,170
            
            
            1,020,461Provision
                for Income Taxes
            
            
            342,468
            
            
            409,159Net
                Income
            
            $
            513,702
            
            $
            611,302Net
                Income Per Common Share:Basic
            
            $
            0.18
            
            $
            0.22Diluted
            
            $
            0.17
            
            $
            0.20Weighted
                Average Number of Shares OutstandingBasic
            
            
            2,886,372
            
            
            2,723,215Diluted
            
            
            3,243,030
            
            
            3,271,246







*See
      notes to condensed consolidated financial statements.*


5




**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Statements of Income (Unaudited)***Three
                Months Ended September 30,*
            
            
            *2006*
            
            
            *2005*Revenues:Commissions
                and fees
            
            $
            1,636,855
            
            $
            1,822,832Premium
                finance revenue
            
            
            939,255
            
            
            1,196,267Total
                Revenues
            
            
            2,576,110
            
            
            3,019,099Operating
                Expenses:General
                and administrative expenses
            
            
            2,120,989
            
            
            2,342,163Provision
                for finance receivable losses
            
            
            168,514
            
            
            158,990Depreciation
                and amortization
            
            
            94,681
            
            
            113,345Premium
                finance interest expense
            
            
            196,669
            
            
            195,477Total
                Operating Expenses
            
            
            2,580,853
            
            
            2,809,975Operating
                Income (Loss)
            
            
            (4,743
            )
            
            209,124Other
                Income (Expense):Interest
                income
            
            
            1,250
            
            
            6,537Interest
                income - notes receivable
            
            
            324,298
            
            
            -Interest
                expense
            
            
            (134,208
            )
            
            (78,773
            )Interest
                expense - mandatorily redeemable preferred stock
            
            
            (9,750
            )
            
            (9,750
            )Total
                Other Income (Expense)
            
            
            181,590
            
            
            (81,986
            )Income
                Before Provision for Income Taxes
            
            
            176,847
            
            
            127,138Provision
                for Income Taxes
            
            
            70,739
            
            
            51,850Net
                Income
            
            $
            106,108
            
            $
            75,288Net
                Income Per Common Share:Basic
            
            $
            0.04
            
            $
            0.03Diluted
            
            $
            0.04
            
            $
            0.03Weighted
                Average Number of Shares OutstandingBasic
            
            
            2,896,024
            
            
            2,727,533Diluted
            
            
            3,241,240
            
            
            3,268,981








*See
      notes to condensed consolidated financial statements.*


6





**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Statements of Cash Flows
                (Unaudited)***Nine
                months ended September 30,*
            
            
            *2006*
            
            
            *2005*Cash
                Flows From Operating Activities:Net
                income
            
            $
            513,702
            
            $
            611,302Adjustments
                to reconcile net income to net cash (used in)
              provided
                by operating activities:Depreciation
                and amortization
            
            
            319,302
            
            
            338,861Bad
                debt expense
            
            
            1,200
            
            
            -Accretion
                of discount on notes receivable
            
            
            (658,546
            )
            
            -Amortization
                of warrants
            
            
            58,221
            
            
            52,212Gain
                on sale of store
            
            
            (81,105
            )
            
            -Changes
                in operating assets and liabilities:Decrease
                (increase) in assets:Accounts
                receivable
            
            
            390,739
            
            
            1,186,444Prepaid
                expenses and other current assets
            
            
            (67,001
            )
            
            23,319Deposits
                and other assets
            
            
            (137,797
            )
            
            (171,141
            )Increase
                (decrease) in liabilities:Premiums
                payable
            
            
            (702,218
            )
            
            1,412Accounts
                payable and accrued expenses
            
            
            228,375
            
            
            (876,235
            )Taxes
                payable
            
            
            (39,793
            )
            
            (280,242
            )Other
                current liabilities
            
            
            (31,850
            )
            
            (17,799
            )Net
                Cash (Used in) Provided by Operating Activities
            
            
            (206,771
            )
            
            868,133Cash
                Flows from Investing Activities:Decrease
                in finance contracts receivable - net
            
            
            242,585
            
            
            2,867,691Decrease
                in notes and other receivables - net
            
            
            9,852
            
            
            13,664Purchase
                of notes
            
            
            (1,771,707
            )
            
            -Purchase
                of agencies
            
            
            (832,654
            )
            
            -Purchase
                of property and equipment
            
            
            (86,869
            )
            
            (15,093
            )Net
                Cash (Used in) Provided by Investing Activities
            
            
            (2,438,793
            )
            
            2,866,262Cash
                Flows from Financing Activities:Principal
                payments on long-term debt
            
            
            (235,000
            )
            
            (2,129,301
            )Proceeds
                from revolving credit line
            
            
            41,785,558
            
            
            46,052,834Payments
                on revolving credit line
            
            
            (38,539,375
            )
            
            (46,158,808
            )Proceeds
                from exercise of stock options
            
            
            191,250
            
            
            9,750Payments
                on note payable-related party
            
            
            (1,303,434
            )
            
            -Net
                Cash Provided by (Used in) Financing Activities
            
            
            1,898,999
            
            
            (2,225,525
            )Net
                (Decrease) Increase in Cash and Cash Equivalents
            
            
            (746,565
            )
            
            1,508,870Cash
                and Cash Equivalents, beginning of period
            
            
            1,961,489
            
            
            515,899Cash
                and Cash Equivalents, end of period
            
            $
            1,214,924
            
            $
            2,024,769Supplemental
                Schedule of Non-Cash Investing
              and
                Financing Activities:Note
                payable issued for purchase of notes receivable
            
            $
            1,303,434
            
            $
            -Note
                payable issued for purchase of agencies
            
            $
            522,949
            
            $
            -








*See
      notes to condensed consolidated financial statements.*




7


**DCAP
      GROUP, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**NINE
      MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)**





1.
            The
                Condensed Consolidated Balance Sheet as of September 30, 2006, the
                Condensed Consolidated Statements of Income for the three and nine
                months
                ended September 30, 2006 and 2005 and the Condensed Consolidated
                Statements of Cash Flows for the nine months ended September 30,
                2006 and
                2005 have been prepared by us without audit. In our opinion, the
                accompanying unaudited condensed consolidated financial statements
                contain
                all adjustments necessary to present fairly in all material respects
                our
                financial position as of September 30, 2006, results of operations
                for the
                three and nine months ended September 30, 2006 and 2005 and cash
                flows for
                the nine months ended September 30, 2006 and
                2005.




This
      report should be read in conjunction with our Annual Report on Form 10-KSB
      for
      the year ended December 31, 2005.




The
      results of operations and cash flows for the nine months ended September 30,
      2006 are not necessarily indicative of the results to be expected for the full
      year.




2.
            Summary
                of Significant Accounting Policies:




a.  Principles
      of consolidation




The
      accompanying consolidated financial statements include the accounts of all
      subsidiaries and joint ventures in which we have a majority voting interest
      or
      voting control. All significant intercompany accounts and transactions have
      been
      eliminated.




b.  Revenue
      recognition




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




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




Automobile
      club dues are recognized equally over the contract period.




For
      our
      premium finance operations, we are using the interest method to recognize
      interest income over the life of each loan in accordance with Statement of
      Financial Accounting Standard No. 91, “Accounting for Nonrefundable Fees and
      Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
      of
      Leases.”




Upon
      the
      establishment of a premium finance contract, we record the gross loan payments
      as a receivable with a corresponding reduction for deferred interest. The
      deferred interest is amortized to interest income using the interest method
      over
      the life of each loan. The weighted average interest rate charged with respect
      to financed insurance policies was approximately 26.5% per annum for the nine
      months ended September 30, 2006 and 2005.




8


Delinquency
      fees are recognized when collected. Upon completion of collection efforts,
      after
      cancellation of the underlying insurance policies, any uncollected earned
      interest or fees are charged off.




c.  Allowance
      for finance receivable losses




Customers
      who purchase insurance policies are often unable to pay the premium in a lump
      sum and, therefore, require extended payment terms. Premium finance involves
      making a loan to the customer that is backed by the unearned portion of the
      insurance premiums being financed. No credit checks are made prior to the
      decision to extend credit to a customer. Losses on finance receivables include
      an estimate of future credit losses on premium finance accounts. Credit losses
      on premium finance accounts occur when the unearned premiums received from
      the
      insurer upon cancellation of a financed policy are inadequate to pay the balance
      of the premium finance account. After collection attempts are exhausted, the
      remaining principal balance is written off against the allowance for finance
      receivable losses and the unrealized actual interest and late fees are charged
      against the premium finance revenue. We review historical trends of such losses
      relative to finance receivable balances to develop estimates of future losses.
      However, actual write-offs may differ materially from the write-off estimates
      that we used. For the nine months ended September 30, 2006 and 2005, the
      provision for finance receivable losses was $496,456 and $580,683 (before
      estimated recoveries of $65,503 for the 2005 period which reduced the provision
      for finance receivable losses), respectively, and actual principal write-offs
      for such periods (net of recoveries of previous write-offs) were $477,293 and
      $617,099, respectively.




d.  Reclassifications




Certain
      reclassifications (including the reclassification of the premium finance revenue
      (interest and late fees) write-offs from the “Provision for finance receivable
      losses” to “Premium finance revenue” (see below)) have been made to the
      consolidated financial statements for the nine and three months ended September
      30, 2005 to conform to the classifications used for the nine and three months
      ended September 30, 2006. Beginning in 2005, we were able to obtain a complete
      detail of the interest and fee write-offs for the premium finance
      receivables.  Effective January 1, 2006, we began reporting the premium
      finance revenue, net of the interest and fee write-offs as illustrated
      below.




Nine
      Months Ended September 30, 2005




Statement
                of Income Accounts
            
            Originally
                Reported
            
            Reclassifications
            
            As
                RestatedPremium
                finance revenue
            
            $
            5,359,499
            
            $
            1,408,065
            
            $
            3,951,434Provision
                for finance receivable losses
            
            
            1,923,245
            
            
            (1,408,065
            )
            
            515,180Net
            
            $
            3,436,254
            
            $
            0
            
            $
            3,436,254


9


Three
      Months Ended September 30, 2005




Statement
                of Income Accounts
            
            
            Originally
                Reported
            
            
            Reclassifications
            
            
            As
                RestatedPremium
                finance revenue
            
            $
            1,720,232
            
            $
            523,965
            
            $
            1,196,267Provision
                for finance receivable losses
            
            
            682,955
            
            
            (523,965
            )
            
            158,990Net
            
            $
            1,037,277
            
            $
            0
            
            $
            1,037,277







3.
            Business
                Segments:




We
      currently have two reportable business segments: Insurance and Premium Finance.
      The Insurance segment sells retail auto, motorcycle, boat, life, business,
      and
      homeowner's insurance and franchises. In addition, this segment offers tax
      preparation services and automobile club services for roadside emergencies.
      Insurance revenues are derived from activities within the United States, and
      all
      long-lived assets are located within the United States. The Premium Finance
      segment offers property and casualty policyholders loans to finance the policy
      premiums.





Summarized
      financial information concerning our reportable segments for the nine months
      ended September 30, 2006 and 2005 is shown in the following tables:




Nine
                Months Ended
              September
                30, 2006
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            5,390,085
            
            $
            3,085,956
            
            $
            -
            
            $
            8,476,041Interest
                income
            
            
            3,388
            
            
            -
            
            
            143
            
            
            3,531Interest
                income -notes receivable
            
            
            -
            
            
            -
            
            
            858,546
            
            
            858,546Interest
                expense
            
            
            70,650
            
            
            604,219
            
            
            347,472
            
            
            1,022,341Depreciation
                and
              Amortization
            
            
            168,806
            
            
            118,446
            
            
            32,050
            
            
            319,302Segment
                profit (loss)
              before
                income taxes
            
            
            986,205
            
            
            618,073
            
            
            (748,108
            )
            
            856,170Segment
                profit (loss)
            
            
            591,723
            
            
            370,844
            
            
            (448,865
            )
            
            513,702Segment
                assets
            
            
            4,812,297
            
            
            17,099,637
            
            
            4,420,689
            
            
            26,332,623


____________





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






10




Nine
                Months Ended
              September
                30, 2005
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            5,461,000
            
            $
            3,951,434
            
            $
            -
            
            $
            9,412,434Interest
                income
            
            
            2,903
            
            
            -
            
            
            11,730
            
            
            14,633Interest
                income -notes receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            -Interest
                expense
            
            
            42,185
            
            
            548,680
            
            
            241,256
            
            
            832,121Depreciation
                and
              Amortization
            
            
            122,886
            
            
            176,611
            
            
            39,364
            
            
            338,861Segment
                profit (loss)
              before
                income taxes
            
            
            1,259,965
            
            
            1,202,276
            
            
            (1,441,780
            )
            
            1,020,461Segment
                profit (loss)
            
            
            755,979
            
            
            721,365
            
            
            (866,042
            )
            
            611,302Segment
                assets
            
            
            3,469,241
            
            
            20,178,784
            
            
            1,118,291
            
            
            24,766,316


____________





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





Summarized
      financial information concerning our reportable segments for the three months
      ended September 30, 2006 and 2005 is shown in the following tables:




Three
                Months Ended
              September
                30, 2006
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            1,636,855
            
            $
            939,255
            
            $
            -
            
            $
            2,576,110Interest
                income
            
            
            1,217
            
            
            -
            
            
            43
            
            
            1,250Interest
                income -notes receivable
            
            
            -
            
            
            -
            
            
            324,298
            
            
            324,298Interest
                expense
            
            
            24,031
            
            
            196,669
            
            
            119,927
            
            
            340,627Depreciation
                and
              Amortization
            
            
            58,314
            
            
            25,104
            
            
            11,263
            
            
            94,681Segment
                profit (loss)
              before
                income taxes
            
            
            235,755
            
            
            207,842
            
            
            (266,550
            )
            
            176,847Segment
                profit (loss)
            
            
            141,453
            
            
            124,585
            
            
            (159,930
            )
            
            106,108


____________





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






11




Three
                Months Ended
              September
                30, 2005
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            1,822,832
            
            $
            1,196,267
            
            $
            -
            
            $
            3,019,099Interest
                income
            
            
            724
            
            
            -
            
            
            5,813
            
            
            6,537Interest
                income -notes receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            -Interest
                expense
            
            
            13,216
            
            
            195,477
            
            
            75,307
            
            
            284,000Depreciation
                and
              Amortization
            
            
            40,921
            
            
            59,302
            
            
            13,122
            
            
            113,345Segment
                profit (loss)
              before
                income taxes
            
            
            294,400
            
            
            304,712
            
            
            (475,974
            )
            
            127,138Segment
                profit (loss)
            
            
            179,040
            
            
            182,494
            
            
            (286,246
            )
            
            75,288


____________





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





4.
            Employee
                Stock Compensation




In
      November 1998, we adopted the 1998 Stock Option Plan, which provides 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 Stock Option Plan to 750,000. Incentive stock options granted under this
      plan expire no later than ten years from date of grant (except no later than
      five years for a grant to a 10% stockholder). Our Board of Directors or the
      Stock Option Committee will determine the expiration date with respect to
      non-statutory options granted under this plan.




In
      December 2005, our shareholders ratified the adoption of the 2005 Equity
      Participation Plan, which provides for the issuance of incentive stock options,
      non-statutory stock options and restricted stock. Under this plan, a maximum
      of
      300,000 shares of Common Stock may be issued pursuant to options granted and
      restricted stock issued. Incentive stock options granted under this plan expire
      no later than ten years from date of grant (except no later than five years
      for
      a grant to a 10% stockholder). Our Board of Directors or the Stock Option
      Committee will determine the expiration date with respect to non-statutory
      options, and the vesting provisions for restricted stock, granted under this
      plan.




Effective
      January 1, 2006, our plans are accounted for in accordance with the recognition
      and measurement provisions of Statement of Financial Accounting Standards
      (“FAS”) No. 123 (revised 2004), Share-Based Payment (“FAS 123(R)”), which
      replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes
      Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued
      to Employees, and related interpretations. FAS 123(R) requires compensation
      costs related to share-based payment transactions, including employee stock
      options, to be recognized in the financial statements. In addition, we adhere
      to
      the guidance set forth within Securities and Exchange Commission (“SEC”) Staff
      Accounting Bulletin (“SAB”) No. 107, which provides the Staff's views regarding
      the interaction between SFAS No. 123(R) and certain SEC rules and regulations
      and provides interpretations with respect to the valuation of share-based
      payments for public companies.


12




Prior
      to
      January 1, 2006, we accounted for similar transactions in accordance with APB
      No. 25 which employed the intrinsic value method of measuring compensation
      cost.
      Accordingly, compensation expense was not recognized for fixed stock options
      if
      the exercise price of the option equaled or exceeded the fair value of the
      underlying stock at the grant date.




While
      FAS
      No. 123 encouraged recognition of the fair value of all stock-based awards
      on
      the date of grant as an expense over the vesting period, companies were
      permitted to continue to apply the intrinsic value-based method of accounting
      prescribed by APB No. 25 and disclose certain pro forma amounts as if the fair
      value approach of SFAS No. 123 had been applied. In December 2002, FAS No.
      148,
      Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
      of SFAS No. 123, was issued, which, in addition to providing alternative methods
      of transition for a voluntary change to the fair value method of accounting
      for
      stock-based employee compensation, required more prominent pro forma disclosures
      in both the annual and interim financial statements. We complied with these
      disclosure requirements for all applicable periods prior to January 1,
      2006.




In
      adopting FAS 123(R), we applied the modified prospective approach to transition.
      Under the modified prospective approach, the provisions of FAS 123(R) are to
      be
      applied to new awards and to awards modified, repurchased, or cancelled after
      the required effective date. Additionally, compensation cost for the portion
      of
      awards for which the requisite service has not been rendered that are
      outstanding as of the required effective date shall be recognized as the
      requisite service is rendered on or after the required effective date. The
      compensation cost for that portion of awards shall be based on the grant-date
      fair value of those awards as calculated for either recognition or pro-forma
      disclosures under FAS 123.




As
      a
      result of the adoption of FAS 123(R), our results for the nine and three month
      period ended September 30, 2006 include share-based compensation expense
      totaling approximately $32,000 and $12,000, respectively. Such amounts have
      been
      included in the Condensed Consolidated Statements of Income within general
      and
      administrative expenses. Stock compensation expense recorded under APB No.
      25 in
      the Consolidated Statements of Operations for both the nine and three months
      ended September 30, 2005 totaled $0.




Stock
      option compensation expense in 2006 is the estimated fair value of options
      granted amortized on a straight-line basis over the requisite service period
      for
      entire portion of the award.




The
      weighted average estimated fair value of stock options granted in the three
      months and nine months ended September 30, 2006 was $1.62 per share. There
      were
      no stock options granted in the three months and nine months ended September
      30,
      2005. The fair value of options at the date of grant was estimated using the
      Black-Scholes option pricing model. During 2006, we took into consideration
      the
      guidance under SFAS 123(R) and SAB No. 107 when reviewing and updating
      assumptions. The expected volatility is based upon historical volatility of
      our
      stock and other contributing factors. The expected term is based upon
      observation of actual time elapsed between date of grant and exercise of options
      for all employees. Previously such assumptions were determined based on
      historical data.






13




The
      assumptions made in calculating the fair values of options for the nine months
      and three months ended September 30, 2006 are as follows:




Expected
                term (in years)
            5Expected
                volatility
            101%Expected
                dividend yield
            0%Risk-free
                interest rate
            5%





The
      following table addresses the additional disclosure requirements of FAS 123(R)
      in the period of adoption. The table illustrates the effect on net income and
      earnings per share as if the fair value recognition provisions of FAS No. 123
      had been applied to all outstanding and unvested awards in the prior year
      comparable period.




Nine
                Months
              Ended
              September
                30,
            
            
            Three
                Months Ended
              September
                30,2005
            
            
            2005Net
                income, as reported
            
            $
            611,302
            
            $
            75,288Add:
                Stock-based compensation included in reported net income
            
            
            -
            
            
            -Deduct:
                Total stock-based compensation expense determined under
              fair
                value based method for all awards, net of related tax
                effects
            
            
            (124,000
            )
            
            (41,000
            )Pro
                Forma Net Income
            
            $
            487,302
            
            $
            34,288Net
                income per share:Basic
                - as reported
            
            $
            0.22
            
            $
            0.03Basic
                - pro forma
            
            $
            0.18
            
            $
            0.01Diluted
                - as reported
            
            $
            0.20
            
            $
            0.03Diluted
                - pro forma
            
            $
            0.16
            
            $
            0.01


We
      granted 10,000 options under the 2005 Equity Participation Plan during the
      three
      months and nine months ended September 30, 2006, at an exercise price of $1.87
      per share.





14


The
      following table represents our stock options granted, exercised, and forfeited
      during the first nine months of 2006.




Stock
                Options
            
            
            Number
                of Shares
            
            
            Weighted
                Average Exercise Price per Share
            
            
            Weighted
                Average Remaining Contractual Term
            
            
            Aggregate
                Intrinsic ValueOutstanding
                at January 1, 2006
            
            
            328,025
            
            $
            2.09Granted
            
            
            10,000
            
            $
            1.87Exercised
            
            
            (127,500
            )
            $
            1.50Forfeited/expired
            
            
            (27,225
            )
            $
            2.84Outstanding
                at
              September
                30, 2006
            
            
            183,300
            
            $
            2.38
            
            
            1.73
            
            $
            50,508Vested
                and Exercisable
              at
                September 30, 2006
            
            
            167,781
            
            $
            2.24
            
            
            1.51
            
            $
            49,771





The
      aggregate intrinsic value of the options exercised for the nine months ended
      September 30, 2006 and 2005 was $135,150 and $33,868, respectively.




As
      of
      September 30, 2006, there was approximately $59,000 of total unrecognized
      compensation costs related to unvested stock option awards. The $59,000 is
      expected to vest over the weighted average of 1.46 years.




The
      following table represents the change in non-vested stock options during the
      first nine months of 2006.




Options
            
            
            Weighted
                Average GrantDate
                Fair ValueNonvested
                at December 31, 2005
            
            
            30,788
            
            $
            1.11Granted
            
            
            10,000
            
            
            1.87Vested
            
            
            10,494
            
            
            1.49Forfeited
            
            
            14,775
            
            
            2.27Nonvested
                at September 30, 2006
            
            
            15,519
            
            
            1.76





The
      total
      fair value of shares vested during the nine month period ended September 30,
      2006 was $15,636.




5.
            Net
                Income Per Share




Basic
                net income per share is computed by dividing income available to
                common
                shareholders by the weighted-average number of common shares outstanding.
                Diluted earnings per share reflect, in periods in which they have
                a
                dilutive effect, the impact of common shares issuable upon exercise
                of
                stock options and conversion of mandatorily redeemable preferred
                stock.




15


The
      reconciliation is as follows:




Nine
                Months Ended
              September
                30,
            Three
                Months Ended
              September
                30,2006
            
            
            2005
            
            
            2006
            
            
            2005Weighted
                Average Number of Shares Outstanding
            
            
            2,886,372
            
            
            2,723,215
            
            
            2,896,024
            
            
            2,727,533Effect
                of Dilutive Securities, common stock
              equivalents
            
            
            356,658
            
            
            548,031
            
            
            345,216
            
            
            541,448Weighted
                Average Number of Shares Outstanding,
              used
                for computing diluted earnings per share
            
            
            3,243,030
            
            
            3,271,246
            
            
            3,241,240
            
            
            3,268,981





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





Nine
                Months Ended
              September
                30,
            Three
                Months Ended
              September
                30,2006
            
            
            2005
            
            
            2006
            
            
            2005Net
                Income
            
            $
            513,702
            
            $
            611,302
            
            $
            106,108
            
            $
            75,288Interest
                Expense on Dilutive Convertible
              Preferred
                Stock
            
            
            29,250
            
            
            29,371
            
            
            9,750
            
            
            9,750Net
                Income Available to Common Shareholders
              for
                Diluted Earnings Per Share
            
            $
            542,952
            
            $
            640,673
            
            $
            115,858
            
            $
            85,038





6.  Business
      Acquisitions




Effective
      January 1, 2006, we acquired substantially all of the assets of Accurate Agency
      of Western New York, Inc., Louisons Associates Limited and Accurate Agency,
      Inc.
      (collectively, “Accurate”), insurance brokerage firms with a total of four
      offices located in and around Rochester, New York. The results of Accurate’s
      operations have been included in the consolidated financial statements since
      that date. The acquisition allows for the expansion of our geographical
      footprint.




The
      aggregate purchase price was $1,600,000, including $800,000 of cash with the
      balance paid through the issuance of an $800,000 non-interest bearing note
      payable over 72 months commencing on January 10, 2007. The note has been
      recorded at its estimated present value of $612,481. Our initial allocation
      of
      the purchase price is subject to adjustment.




Our
      condensed consolidated statements of income include the revenue and expenses
      of
      Accurate from January 1, 2006. Had the transaction taken place on January 1,
      2005, on a pro forma basis, the effect on the reported amounts for the nine
      months ended September 30, 2005 is considered to be insignificant.




7.
            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 provides 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. Eagle is a New Jersey property and casualty insurer under
      the administrative supervision of the New Jersey Department of Banking and
      Insurance and owns approximately 10% of our outstanding common stock. The
      Surplus Notes acquired by us are past due and provide for interest at the prime
      rate or 8.5% per annum, whichever is less. Payments of principal and interest
      on
      the Surplus Notes may only be made out of the surplus of CMIC and require the
      approval of the New York State Department of Insurance. During the nine months
      ended September 30, 2006, an interest payment of $125,000 was received from
      CMIC. The discount on the Surplus Notes and the accrued interest at the time
      of
      acquisition are being accreted over a 30 month period, the estimated period
      to
      collect such amounts. Such accretion amount, together with interest on the
      Surplus Notes for the period ended September 30, 2006, is included in our
      Statement of Income as “Interest income-notes receivable.”




16




8.
            Revolving
                Credit Facility




On
      July
      28, 2006, we and our subsidiary, Payments, Inc., entered into a new revolving
      line of credit (the “New Revolver”) with Manufacturers and Traders Trust Co.
      (the “Bank”), which provides for a decrease in the credit line from $25,000,000
      to $20,000,000 and the elimination of the Bank’s agreement to arrange an
      additional $10,000,000 credit facility with other lenders on a “best efforts”
basis. The New Revolver bears interest, at our option, at either the Bank’s
      prime lending rate (8.25% at September 30, 2006) or LIBOR (5.32% at September
      30, 2006) plus 2.25%, and matures on September 30, 2008. The
      line
      of credit also allows for a $2,500,000 term loan (of the $20,000,000 credit
      line
      availability) to be used to provide liquidity for ongoing working capital
      purposes. Any draws against the term line bear interest at LIBOR plus 2.75%.
      As
      of July 28, 2006, we made our first draw against the term line of $1,300,000.
      The draw is being paid back quarterly over 30 months with interest payable
      monthly. The New Revolver eliminates the personal guaranty required of our
      CEO
      of $1,250,000 but continues his obligation on an unlimited wind-down guaranty
      and his personal guaranty as to misrepresentations that relate to dishonest
      or
      fraudulent acts committed by him or known but not timely reported by him. The
      New Revolver also allows for a reduction of life insurance coverage on the
      life
      of our CEO from $4,000,000 to $1,500,000.





9.
            Sale
                of Store




During
      the nine months ended September 30, 2006, we sold one of our retail stores
      for
      $125,000 in cash and notes. The sale of the store resulted in a gain of $81,105.
      In addition, concurrently with the sale, the purchaser entered into a franchise
      agreement with us.


17


**Item
      2.** **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION** **.**




***Overview***




There
      are
      71 store locations owned or franchised by us of which 65 are located in New
      York
      State. In the New York metropolitan area, there are 43 DCAP franchises and
      one
      joint venture DCAP store. There are also 18 Barry Scott locations and four
      Accurate locations outside the New York metropolitan area (all located in
      central and western New York State). There are five Atlantic Insurance locations
      in eastern Pennsylvania. All of the Barry Scott, Atlantic Insurance and Accurate
      locations are wholly-owned by us.




Our
      insurance storefronts serve as insurance agents or brokers and place various
      types of insurance on behalf of customers. We focus on automobile, motorcycle
      and homeowner’s insurance and our customer base is primarily individuals rather
      than businesses.




The
      stores receive commissions from insurance companies for their services. We
      receive fees from the franchised locations in connection with their use of
      the
      DCAP name. Neither we nor the stores currently serve as an insurance company
      and
      therefore do not assume underwriting risks. The stores also offer automobile
      club services for roadside assistance and income tax preparation services.




Payments
      Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
      offers premium financing to clients of DCAP, Barry Scott, Atlantic Insurance
      and
      Accurate offices, as well as non-affiliated insurance agencies. We currently
      operate within the states of New York, Pennsylvania and New Jersey.




***Critical
      Accounting Policies***




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




***Commission
      and fee income***




We
      recognize commission revenue from insurance policies at the beginning of the
      contract period except for those commissions that were receivable annually,
      for
      which we recognized the commission revenue ratably. Refunds of commissions
      on
      the cancellation of insurance policies are reflected at the time of
      cancellation.




18


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




Automobile
      club dues are recognized equally over the contract period.




***Finance
      income, fees and receivables***




For
      our
      premium finance operations, we are using the interest method to recognize
      interest income over the life of each loan in accordance with Statement of
      Financial Accounting Standard No. 91, “Accounting for Nonrefundable Fees and
      Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
      of
      Leases.”




Upon
      the
      establishment of a premium finance contract, we record the gross loan payments
      as a receivable with a corresponding reduction for deferred interest. The
      deferred interest is amortized to interest income using the interest method
      over
      the life of each loan. The weighted average interest rate charged with respect
      to financed insurance policies was approximately 26.5% and 26.5% per annum
      for
      the nine months ended September 30, 2006 and 2005, respectively. Delinquency
      fees are earned when collected. Upon completion of collection efforts, after
      cancellation of the underlying insurance policies, any uncollected earned
      interest or fees are charged off.




***Allowance
      for finance receivable losses***




Losses
      on
      finance receivables include an estimate of future credit losses on premium
      finance accounts. Credit losses on premium finance accounts occur when the
      unearned premiums received from the insurer upon cancellation of a financed
      policy are inadequate to pay the balance of the premium finance loan amount,
      which includes accrued interest and late fees. The majority of these shortfalls
      result in the write-off of the remaining principal balance against the allowance
      for finance receivable losses and the unrealized actual interest and late fees
      are charged against the premium finance revenue. We review historical trends
      of
      such losses relative to finance receivable balances to develop estimates of
      future losses. However, actual write-offs may differ materially from the
      write-off estimates that we used. For the nine months ended September 30, 2006
      and 2005, the provision for finance receivables losses was $496,456  and
      $580,683 (before estimated recoveries of $65,503 for the 2005 period which
      reduced the provision for finance receivable losses), respectively, and actual
      principal write-offs for such periods (net recoveries of previous write-offs)
      were $477,293 and $617,099, respectively. If our provision for finance
      receivable losses was understated by 10% because our actual write-offs were
      greater than anticipated, the effect would have been a reduction in our earnings
      per share by approximately $0.01 (basic) for the nine months ended September
      30,
      2006 and 2005.




***Goodwill
      and intangible assets***




The
      carrying value of goodwill was initially reviewed for impairment as of
      January 1, 2002, and is reviewed annually or whenever events or changes in
      circumstances indicate that the carrying amount might not be recoverable. If
      the
      fair value of the operations to which goodwill relates is less than the carrying
      amount of those operations, including unamortized goodwill, the carrying amount
      of goodwill is reduced accordingly with a charge to expense. Based on our most
      recent analysis, we believe that no impairment of goodwill exists at September
      30, 2006.




19


***Stock-based
      compensation***




Prior
      to
      January 1, 2006, we applied the intrinsic value-based method of accounting
      prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
      Issued to Employees, and related interpretations, to account for stock-based
      employee compensation plans and reported pro forma disclosures in our Form
      10-QSB filings by estimating the fair value of options issued and the related
      expense in accordance with SFAS No. 123. Under this method, compensation cost
      is
      recognized for awards of common shares or stock options to our directors,
      officers and employees only if the quoted market price of the stock at the
      grant
      date (or other measurement date, if later) is greater than the amount the
      grantee must pay to acquire the stock. Effective January 1, 2006, we have begun
      to comply with the recent accounting pronouncements from the Financial
      Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
      Standard (“SFAS”) No. 123 (revised 2004) “Share-Based Payment” (SFAS No. 123R)
      which requires us to include the compensation cost using the same method
      discussed above in our Statement of Income.




***Results
      of Operations***




*Nine
      Months ended September 30, 2006 compared to Nine Months ended September 30,
      2005*




Our
      operating income for the nine months ended September 30, 2006 was $331,110
      as
      compared to $1,289,269 for the nine months ended September 30,
      2005.




During
      the nine months ended September 30, 2006, revenues from our insurance-related
      operations were $5,390,085 as compared to $5,461,000 for the nine months ended
      September 30, 2005. The revenue decrease of $70,915 was primarily attributable
      to a reduction in commissions received by our locations caused by a reduction
      in
      renewal commission rates and the elimination of certain other compensation
      by
      one of our major insurance carriers, offset by revenues of Accurate whose assets
      were acquired effective January 1, 2006.




Premium
      finance revenues decreased $865,478 during the nine months ended September
      30,
      2006 as compared to the nine months ended September 30, 2005. The total number
      of policies that we financed during the first nine months of 2006 decreased
      slightly from the first nine months of 2005. Also, there was a decline in the
      number of loans originated in downstate New York, which carries a higher average
      loan size, and an increase in loans originated in central and northern New
      York
      State at a lower average loan size. As a result, our average loan size declined
      resulting in a decline in our premium finance revenue.




Our
      general and administrative expenses for the nine months ended September 30,
      2006
      were $4,510 more than for the nine months ended September 30, 2005. The increase
      in general and administrative expenses was primarily due to the expenses related
      to Accurate whose assets were acquired effective January 1, 2006, offset by
      a
      decrease in executive salaries due to the resignation in October 2005 of John
      Willis, our former Chief Operating Officer, and a decrease in advertising
      expenses.




Our
      provision for finance receivable losses for the nine months ended September
      30,
      2006 was $18,724 less than for the nine months ended September 30, 2005. This
      was caused by a decrease in volume in the nine months ended September 30, 2006,
      offset by a one-time actual and anticipated recovery recorded in the nine months
      ended September 30, 2005 of amounts previously charged-off (no similar items
      were recorded in the nine months ended September 30, 2006).




20


Our
      depreciation and amortization expense during the nine months ended September
      30,
      2006 was $19,559 less than for the nine months ended September 30, 2005. This
      decrease was primarily the result of our amortizing our loan origination costs
      incurred in connection with our revolving loan agreement entered into in
      December 2004 over the life of the revolving credit agreement entered into
      in
      July 2006.




Our
      premium finance interest expense during the nine months ended September 30,
      2006
      was $55,539 more than for the nine months ended September 30, 2005. This
      increase was the result of an increase in LIBOR, offset by a decrease in the
      average outstanding balance of our revolving credit line for the nine months
      ended September 30, 2006 compared to the nine months ended September 30,
      2005.




During
      the nine months ended September 30, 2006, we purchased $3,750,000 of surplus
      notes of Commercial Mutual Insurance Company (“CMIC”) at a price of $3,075,141.
      Accrued but unpaid interest totaled $1,794,688 at the time of the purchase.
      This
      transaction resulted in interest income-notes receivable of $858,546 during
      the
      nine months ended September 30, 2006. No such interest-bearing notes were owned
      by us during the nine months ended September 30, 2005.




Our
      interest expense for the nine months ended September 30, 2006 was $134,802
      more
      than for the nine months ended September 30, 2005. This increase was a result
      of
      interest on the promissory notes given in connection with the Accurate
      acquisition and the purchase of the CMIC surplus notes, and the borrowing
      against our revolving credit line to purchase the CMIC surplus notes (no similar
      items were recorded in the nine months ended September 30, 2005), offset by
      a
      reduction caused by our repaying a portion of our subordinated debt in
      2005.




During
      the nine months ended September 30, 2006, we sold one of our stores, resulting
      in a gain of $81,105. No such sale occurred during the nine months ended
      September 30, 2005.




During
      the nine months ended September 30, 2006, our provision for income taxes was
      $342,468 as opposed to $409,159 for the nine months ended September 30, 2005.
      This was due to the lower income before income taxes in 2006.




Our
      insurance-related operations, on a stand-alone basis, generated a net profit
      before income taxes of $986,205 during the nine months ended September 30,
      2006
      as compared to a net profit before income taxes of $1,259,965 during the nine
      months ended September 30, 2005. This decrease was primarily due to decreased
      revenues (exclusive of the revenues of the Accurate stores that were acquired
      effective January 1, 2006).  Our
      premium finance operations, on a stand-alone basis, generated a net profit
      before income taxes of $618,073 during the nine months ended September 30,
      2006
      as compared to a net profit before income taxes of $1,202,276 during the nine
      months ended September 30, 2005.  The
      decrease was primarily due to reduced premium finance revenue in 2006 as
      discussed above. Loss before income taxes from corporate-related items not
      allocable to reportable segments was $748,108 during the nine months ended
      September 30, 2006 as compared to $1,441,780 during the nine months ended
      September 30, 2005. This decrease was primarily due to an increase in interest
      income-notes receivable related to the purchase of the surplus notes issued
      by
      CMIC and a decrease in executive compensation.






21


*Three
      Months ended September 30, 2006 compared to Three Months ended September 30,
      2005*




Our
      operating loss for the three months ended September 30, 2006 was $4,743 as
      compared to operating income of $209,124 for the three months ended September
      30, 2005.




During
      the three months ended September 30, 2006, revenues from our insurance-related
      operations were $1,636,855 as compared to $1,822,832 for the three months ended
      September 30, 2005. The revenue decrease of $185,977 was primarily attributable
      to a reduction in commissions received by our locations caused by a reduction
      in
      renewal commission rates and the elimination of certain other compensation
      by
      one of our major insurance carriers, offset by revenues of Accurate whose assets
      were acquired effective January 1, 2006.




Premium
      finance revenues decreased $257,012 during the three months ended September
      30,
      2006 as compared to the three months ended September 30, 2005. The total number
      of premium loans that we financed during the third quarter of 2006 decreased
      slightly from the third quarter of 2005. Also, there was a decline in the number
      of loans originated in downstate New York, which carries a higher average loan
      size, and an increase in loans originated in central and northern New York
      State
      at a lower average loan size. As a result, our average loan size declined
      resulting in a decline in our premium finance revenue.




Our
      general and administrative expenses for the three months ended September 30,
      2006 were $221,174 less than for the three months ended September 30, 2005.
      The
      decrease in general and administrative expenses was primarily due to a decrease
      in executive salaries due to the resignation in October 2005 of John Willis,
      our
      former Chief Operating Officer, and a decrease in advertising expenses, offset
      by the expenses related to Accurate whose assets were acquired effective January
      1, 2006.




Our
      provision for finance receivable losses for the third quarter of 2006 was $9,524
      more than for the third quarter of 2005. This was caused by an increase in
      write
      offs in the third quarter of 2006, offset by a decrease in volume of contracts
      written in the third quarter of 2006.




Our
      depreciation and amortization expense during the three months ended September
      30, 2006 was $18,664 less than for the three months ended September 30, 2005.
      This decrease was primarily the result of our amortizing our loan origination
      costs incurred in connection with our revolving loan agreement entered into
      in
      December 2004 over the life of the revolving credit agreement entered into
      in
      July 2006.




Our
      premium finance interest expense during the three months ended September 30,
      2006 was $1,192 more than for the three months ended September 30, 2005. This
      increase was the result of an increase in LIBOR, offset by a decrease in the
      average outstanding balance of our revolving credit line for the three months
      ended September 30, 2006 compared to the three months ended September 30,
      2005.




On
      January 31, 2006, we purchased $3,750,000 of surplus notes of CMIC at a price
      of
      $3,075,141. Accrued but unpaid interest totaled $1,794,688 at the time of the
      purchase. This transaction resulted in interest income-notes receivable of
      $324,298 during the three months ended September 30, 2006. No such
      interest-bearing notes were owned by us during the three months ended September
      30, 2005.




22


Our
      interest expense for the three months ended September 30, 2006 was $55,435
      more
      than for the three months ended September 30, 2005. This increase was a result
      of interest on the promissory notes given in connection with the Accurate
      acquisition and the purchase of the CMIC surplus notes, and the borrowing
      against our revolving credit line to purchase the CMIC surplus notes (no similar
      items were recorded in the third quarter of 2005), offset by a reduction caused
      by our repaying a portion of our subordinated debt in 2005.




During
      the three months ended September 30, 2006, our provision for income taxes was
      $70,739 as opposed to $51,850 for the three months ended September 30, 2005.
      This was due to the higher income before income taxes in 2006.




Our
      insurance-related operations, on a stand-alone basis, generated a net profit
      before income taxes of $235,755 during the three months ended September 30,
      2006
      as compared to a net profit before income taxes of $294,400 during the three
      months ended September 30, 2005. This decrease was primarily due to decreased
      revenues (exclusive of the revenues of the Accurate stores that were acquired
      effective January 1, 2006).  Our
      premium finance operations, on a stand-alone basis, generated a net profit
      before income taxes of $207,842 during the three months ended September 30,
      2006
      as compared to a net profit before income taxes of $304,712 during the three
      months ended September 30, 2005.  The
      decrease was primarily due to reduced premium finance revenue in 2006 as
      discussed above.  Loss
      before income taxes from corporate-related items not allocable to reportable
      segments was $266,550 during the three months ended September 30, 2006 as
      compared to $475,974 during the three months ended September 30, 2005. This
      decrease was primarily due to an increase in interest income-notes receivable
      related to the recent purchase of the surplus notes issued by CMIC and a
      decrease in executive compensation.




***Liquidity
      and Capital Resources***




As
      of
      September 30, 2006, we had $1,214,924 in cash and cash equivalents and working
      capital of $760,712. As of December 31, 2005, we had $1,961,489 in cash and
      cash
      equivalents and working capital of $5,321,837.




During
      the nine months ended September 30, 2006, our cash and cash equivalents
      decreased by $746,565. This was due to the following:




·
            Net
                cash used in operating activities during the nine months ended September
                30, 2006 was $206,771 primarily due to the following: (i) an decrease
                in
                premiums payable of $702,218 and the accretion of discount on notes
                receivable of $658,546, offset by (ii) our net income for the period
                of
                $513,702, our depreciation and amortization of $319,302, a decrease
                in
                accounts receivable of $390,739, and an increase in accounts payable
                and
                accrued expenses of $228,375. Premiums payable have declined due
                to a
                change in our mix of business. We finance premiums for assigned risk
                plans, where the loan is funded in two stages, generally over a 30
                day
                period. We also finance premiums with carriers where the entire loan
                is
                funded at inception. As our mix of business has changed to include
                less
                assigned risk loans and more direct carrier loans, there is a reduction
                in
                the amount of our premium liability. The decrease in accounts receivable
                is the result of a January 2006 payment of a revenue accrual from
                an
                insurance company, which did not continue in 2006. The increase in
                accounts payable and accrued expenses was attributable to the purchase
                of
                Accurate as well as our ability to increase payment terms of certain
                vendors.






23


·
            Though
                fluctuations in our premium finance business impact our cash position
                and
                daily operations, our cash flows from operating activities do not
                reflect
                changes in the premium finance contract receivables or borrowings
                under
                our revolving credit facility associated with that business. Changes
                in
                the premium finance contract receivables are considered investing
                activities as they include the making and collection of loans and
                borrowings under our revolving line of credit are considered financing
                activities.




·
            Net
                cash of $2,438,793 was used in investing activities during the nine
                months
                ended September 30, 2006 primarily due to the following: (i) the
                use of
                $1,771,707 in cash to purchase the surplus notes issued by CMIC and
                the
                use of $832,654 in cash to purchase the Accurate agency and another
                agency’s book of business in the nine months ended September 30, 2006,
                offset by (ii) a decrease in our net finance contracts receivable
                of
                $242,585.




·
            Net
                cash provided by financing activities during the nine months ended
                September 30, 2006 was $1,898,999 primarily due to the following:
                (i)
                proceeds of $41,785,558 from our revolving credit line from Manufacturers
                and Traders Trust Co. (“M&T”) for premium finance purposes and for the
                purchase of the surplus notes issued by CMIC, offset by (ii) payments
                of
                $38,539,375 on the revolving credit line, $1,303,434 on the related
                party
                note, and $235,000 of long-term
                debt.




Our
      premium finance operations are financed pursuant to a $20,000,000 revolving
      line
      of credit from M&T entered into on July 28, 2006, which replaced our
      revolving line of credit agreement with M&T dated December 27, 2004. The
      line of credit bears interest at either (i) M&T’s prime rate or (ii) LIBOR
      plus 2.25%, matures on September 30, 2008 and is secured by substantially all
      of
      our assets. We can borrow against the line to the extent of 85% of eligible
      premium finance receivables. As of September 30, 2006, $11,852,707 was
      outstanding under the loan. As of September 30, 2006, of the $17,866,052
      reflected on the Balance Sheet as “Finance contracts receivable,” approximately
      $14,445,721 represents eligible receivables for purposes of our finance credit
      agreement. The line of credit also allows for a $2,500,000 term loan (of the
      $20,000,000 credit line availability) to be used to provide liquidity for
      ongoing working capital purposes. Any draws against this line bear interest
      at
      LIBOR plus 2.75%. As of July 28, 2006, we made our first draw of $1,300,000
      against the term line. The draw is being paid back quarterly over 30 months
      with
      interest payable monthly.




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




In
      connection with our initial acquisition of the line of credit from M&T, we
      obtained a $3,500,000 secured subordinated loan to support our premium finance
      operations. In January 2005, we utilized the M&T line of credit to repay
      $1,000,000 of the subordinated debt. In May 2005, we utilized the line of credit
      to repay an additional $1,000,000 of the subordinated debt. The remaining
      balance of the loan was due in January 2006 and carries interest at the rate
      of
      12-5/8% per annum. Effective May 25, 2005, we obtained an extension of the
      maturity date of the remaining subordinated debt to September 30, 2007. We
      have
      the right to prepay the subordinated debt (subject to M&T’s consent) without
      penalty.




24


On
      January 31, 2006, we purchased $3,750,000 of surplus notes issued by CMIC for
      a
      price of $3,075,141, of which $1,303,434 was paid by delivery of a six month
      promissory note which provided for interest at the rate of 7.5% per annum.
      The
      promissory note was paid in full on July 28, 2006. Accrued but unpaid interest
      on the surplus notes totaled $1,794,688 at the time of the
      purchase.




***Off-Balance
      Sheet Arrangements***




We
      have
      no off-balance sheet arrangements that have or are reasonably likely to have
      a
      current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that is material to investors.




**Item
      3.**   **CONTROLS
      AND PROCEDURES**




Our
      Chief
      Executive Officer and Chief Financial Officer conducted an evaluation of the
      effectiveness of our disclosure controls and procedures. Based on this
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were effective as of September
      30,
      2006 in alerting him in a timely manner to material information required to
      be
      included in our SEC reports. In addition, no change in our internal control
      over
      financial reporting occurred during the fiscal quarter ended September 30,
      2006
      that has materially affected, or is reasonably likely to materially affect,
      our
      internal control over financial reporting.




25




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




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




None





**Item
                2.**
            
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS**




(a)  Not
      applicable


(b)  Not
      applicable


(c)  Issuer
      repurchases during the quarter:





**Small
      Business Issuer Purchases of Equity Securities**





**Period**
            
            
            **(a)**
              **Total
                Number of Shares Purchased(1**)****
            
            
            **(b)**
              **Average
                Price Paid per Share**
            
            
            **(c)**
              **Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs**
            
            
            **(d)**
              **Maximum
                Number of Shares that May Yet Be Purchased Under the Plans or
                Programs**7/1/06
                - 7/31/06
            
            
            2,390
            
            $
            1.99
            
            
            -
            
            
            -8/1/06
                - 8/31/06
            
            
            1,306
            
            $
            2.22
            
            
            -
            
            
            -9/1/06
                - 9/30/06
            
            
            895
            
            $
            2.18
            
            
            -
            
            
            -**Total**
            
            
            **4,591**
            
            **$**
            **2.09**
            
            
            **-**
            
            
            **-**





(1) Represents
      shares acquired by “affiliated purchaser”.




**Item
                3.**
            
            **DEFAULTS
                UPON SENIOR SECURITIES**




None





**Item
                4.**
            
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**





Our
      Annual Meeting of Stockholders was held on September 22, 2006. The following
      is
      a listing of the votes cast for or withheld with respect to each nominee for
      director.





**Number
                of Shares****For**
            **Withheld**Barry
                B. Goldstein
            2,104,047
            11,402Morton
                L. Certilman
            2,030,305
            13,744Jay
                M. Haft
            1,990,361
            53,688David
                A. Lyons
            2,032,867
            11,182Jack
                D. Seibald
            2,032,867
            11,182Robert
                M. Wallach
            1,800,166
            243,883






26





**Item
      5.**   **OTHER
      INFORMATION**





None





**Item
      6.**   **EXHIBITS**





3(a)
            Restated
                Certificate of Incorporation13(b)
            Certificate
                of Designation of Series A Preferred Stock23(c)
            By-laws,
                as amended331
            Rule
                13a-14(a)/15d-14(a) Certification as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 200232
            Certification
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                18
                U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002








1 Denotes
          document filed as an exhibit to our Quarterly Report on Form 10-QSB for
          the
          period ended September 30, 2004 and incorporated herein by
          reference.
 2Denotes document filed as an exhibit to our Current Report on
          Form 8-K for an event dated May 28, 2003 and incorporated
          herein by reference.
 3  Denotes
          document filed as an exhibit to our Quarterly Report on Form 10-QSB for
          the
          period ended September 30, 2005 and incorporated herein by
          reference.


27


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**DCAP
                GROUP, INC.**Date: 
              November 13, 2006
            By:
            /s/ Barry
              B.
              GoldsteinBarry
              B. GoldsteinPresident
              (Principal
                Executive, Financial
              and
                Accounting Officer)