**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 endedJune
                30, 2006[
                ]
            Transition
                report under Section 13 or 15(d) of the Exchange ActFor
                the transition period from ______________to
                ________________Commission
                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 July 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 - June 30, 2006 (Unaudited)Condensed
                Consolidated Statements of Income - Six months ended June 30, 2006
                and
                2005 (Unaudited)Condensed
                Consolidated Statements of Income - Three months ended June 30, 2006
                and
                2005 (Unaudited)Condensed
                Consolidated Statements of Cash Flows - Six months ended June 30,
                2006 and
                2005 (Unaudited)Notes
                to Condensed Consolidated Financial Statements - Six months ended
                June 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)***June
                30, 2006***Assets**Current
                AssetsCash
                and cash equivalents
            
            
            
            
            $
            999,055Accounts
                receivable, net of allowance for
              doubtful
                accounts of $48,700
            
            
            
            
            
            1,299,375Finance
                contracts receivable
            
            $
            19,378,656Less:
                Deferred interest
            
            
            (1,524,106
            )Less:
                Allowance for finance receivable losses
            
            
            (268,397
            )
            
            17,586,153Prepaid
                expenses and other current assets
            
            
            
            
            
            260,084Deferred
                income taxes
            
            
            
            
            
            77,000Total
                Current Assets
            
            
            
            
            
            20,221,667Property
                and Equipment, net
            
            
            
            
            
            284,776Goodwill
            
            
            
            
            
            2,513,978Other
                Intangibles, net
            
            
            
            
            
            408,481Notes
                Receivable, net
            
            
            
            
            
            3,541,775Deposits
                and Other Assets
            
            
            
            
            
            112,437Total
                Assets
            
            
            
            
            $
            27,083,114**Liabilities
                and Stockholders’ Equity**Current
                Liabilities:Revolving
                credit line
            
            
            
            
            $
            12,197,025Accounts
                payable and accrued expenses
            
            
            
            
            
            926,858Premiums
                payable
            
            
            
            
            
            3,568,267Current
                portion of long-term debt
            
            
            
            
            
            280,017Note
                payable - related party
            
            
            
            
            
            1,303,434Income
                tax payable
            
            
            
            
            
            50,685Other
                current liabilities
            
            
            
            
            
            168,404Total
                Current Liabilities
            
            
            
            
            
            18,494,690Long-Term
                Debt
            
            
            
            
            
            1,881,471Deferred
                Income Tax
            
            
            
            
            
            37,000Other
                Liabilities
            
            
            
            
            
            6,112Mandatorily
                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
            
            
            
            
            
            11,624,254Deficit
            
            
            
            
            
            (4,598,588
            )7,062,396Treasury
                stock, at cost, 776,923 shares
            
            
            
            
            
            (1,178,555
            )Total
                Stockholders’ Equity
            
            5,883,841Total
                Liabilities and Stockholders’ Equity
            $
            27,083,114





*See
      notes to condensed consolidated financial statements* .


4


**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Statements of Income (Unaudited)***Six
                Months Ended June 30,*
            
            
            *2006*
            
            
            *2005*Revenues:Commissions
                and fees
            
            $
            3,753,230
            
            $
            3,638,169Premium
                finance revenue
            
            
            2,146,701
            
            
            2,755,166Total
                Revenues
            
            
            5,899,931
            
            
            6,393,335Operating
                Expenses:General
                and administrative expenses
            
            
            4,603,965
            
            
            4,378,280Provision
                for finance receivable losses
            
            
            327,942
            
            
            356,190Depreciation
                and amortization
            
            
            224,621
            
            
            225,516Premium
                finance interest expense
            
            
            407,550
            
            
            353,204Total
                Operating Expenses
            
            
            5,564,078
            
            
            5,313,190Operating
                Income
            
            
            335,853
            
            
            1,080,145Other
                Income (Expense):Interest
                income
            
            
            2,282
            
            
            8,096Interest
                income - notes receivable
            
            
            534,247
            
            
            -Interest
                expense
            
            
            (254,664
            )
            
            (175,296
            )Interest
                expense - mandatorily redeemable preferred stock
            
            
            (19,500
            )
            
            (19,621
            )Gain
                on sale of store
            
            
            81,105
            
            
            -Total
                Other Income (Expense)
            
            
            343,470
            
            
            (186,821
            )Income
                Before Provision for Income Taxes
            
            
            679,323
            
            
            893,324Provision
                for Income Taxes
            
            
            271,729
            
            
            357,310Net
                Income
            
            $
            407,594
            
            $
            536,014Net
                Income Per Common Share:Basic
            
            $
            0.14
            
            $
            0.20Diluted
            
            $
            0.13
            
            $
            0.17Weighted
                Average Number of Shares OutstandingBasic
            
            
            2,881,466
            
            
            2,720,994Diluted
            
            
            3,243,846
            
            
            3,272,325




*See
      notes to condensed consolidated financial statements.*




5





**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Statements of Income (Unaudited)***Three
                Months Ended June 30,*
            
            *2006*
            
            *2005*Revenues:Commissions
                and fees
            
            $
            1,860,052
            
            $
            1,850,102Premium
                finance revenue
            
            
            1,172,188
            
            
            1,335,160Total
                Revenues
            
            
            3,032,240
            
            
            3,185,262Operating
                Expenses:General
                and administrative expenses
            
            
            2,314,456
            
            
            2,196,072Provision
                for finance receivable losses
            
            
            158,317
            
            
            204,774Depreciation
                and amortization
            
            
            113,317
            
            
            113,608Premium
                finance interest expense
            
            
            218,452
            
            
            194,772Total
                Operating Expenses
            
            
            2,804,542
            
            
            2,709,226Operating
                Income
            
            
            227,698
            
            
            476,036Other
                Income (Expense):Interest
                income
            
            
            923
            
            
            3,873Interest
                income - notes receivable
            
            
            321,955
            
            
            -Interest
                expense
            
            
            (153,792
            )
            
            (74,532
            )Interest
                expense - mandatorily redeemable preferred stock
            
            
            (9,750
            )
            
            (9,750
            )Gain
                on sale of store
            
            
            81,105
            
            
            -Total
                Other Income (Expense)
            
            
            240,441
            
            
            (80,409
            )Income
                Before Provision for Income Taxes
            
            
            468,139
            
            
            395,627Provision
                for Income Taxes
            
            
            187,325
            
            
            158,232Net
                Income
            
            $
            280,814
            
            $
            237,395Net
                Income Per Common Share:Basic
            
            $
            0.10
            
            $
            0.09Diluted
            
            $
            0.09
            
            $
            0.08Weighted
                Average Number of Shares OutstandingBasic
            
            
            2,896,024
            
            
            2,726,899Diluted
            
            
            3,248,668
            
            
            3,250,625





*See
      notes to condensed consolidated financial statements.*




6





**DCAP
                GROUP, INC. AND**
              **SUBSIDIARIES****Condensed
                Consolidated Statements of Cash Flows (Unaudited)***Six
                months ended June 30,*
            
            *2006*
            
            *2005*Cash
                Flows From Operating Activities:Net
                income
            
            $407,594
            
            $536,014Adjustments
                to reconcile net income to net cash
              provided
                by operating activities:Depreciation
                and amortization
            
            224,621
            
            225,516Bad
                debt expense
            
            1,200
            
            -Accretion
                of discount on notes receivable
            
            (411,592)
            
            -Amortization
                of warrants
            
            38,916
            
            23,600Gain
                on sale of store
            
            (81,105)
            
            -Changes
                in operating assets and liabilities:Decrease
                (increase) in assets:Accounts
                receivable
            
            380,320
            
            1,311,681Prepaid
                expenses and other current assets
            
            13,444
            
            50,127Deposits
                and other assets
            
            (67,689)
            
            (111,188)Increase
                (decrease) in liabilities:Premiums
                payable
            
            
            (592,694
            )
            
            2,470,866Accounts
                payable and accrued expenses
            
            
            261,280
            
            
            (911,983
            )Taxes
                payable
            
            
            (18,174
            )
            
            (318,862
            )Other
                current liabilities
            
            
            (24,429
            )
            
            (12,804
            )Net
                Cash Provided by Operating Activities
            
            
            131,692
            
            
            3,262,967Cash
                Flows from Investing Activities:(Increase)
                decrease in finance contracts receivable - net
            
            
            (1,071,130
            )
            
            218,295Decrease
                in notes and other receivables - net
            
            
            9,852
            
            
            9,007Purchase
                of notes
            
            
            (1,771,707
            )
            
            -Purchase
                of agencies
            
            
            (832,654
            )
            
            -Purchase
                of property and equipment
            
            
            (40,238
            )
            
            (5,948
            )Net
                Cash (Used in) Provided by Investing Activities
            
            
            (3,705,877
            )
            
            221,354Cash
                Flows from Financing Activities:Principal
                payments on long-term debt
            
            
            -
            
            
            (2,004,301
            )Proceeds
                from revolving credit line
            
            
            28,307,721
            
            
            32,848,533Payments
                on revolving credit line
            
            
            (25,887,220
            )
            
            (30,751,272
            )Proceeds
                from exercise of stock options
            
            
            191,250
            
            
            7,312Net
                Cash Provided by Financing Activities
            
            
            2,611,751
            
            
            100,272Net
                (Decrease) Increase in Cash and Cash Equivalents
            
            
            (962,434
            )
            
            3,584,593Cash
                and Cash Equivalents, beginning of period
            
            
            1,961,489
            
            
            515,899Cash
                and Cash Equivalents, end of period
            
            $
            999,055
            
            $
            4,100,492Supplemental
              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**


**SIX
      MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)**





1.
            The
                Condensed Consolidated Balance Sheet as of June 30, 2006, the Condensed
                Consolidated Statements of Income for the three and six months ended
                June
                30, 2006 and 2005 and the Condensed Consolidated Statements of Cash
                Flows
                for the six months ended June 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 June
                30, 2006, results of operations for the three and six months ended
                June
                30, 2006 and 2005 and cash flows for the six months ended June 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 six months ended June 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% and 26.5% **** per
      annum
      for the six months ended June 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.




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 six months ended June 30, 2006 and 2005, the provision
      for
      finance receivable losses was $327,942  and
      $421,693 (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 $299,296 and $445,738, 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 six and three months ended June 30,
      2005 to conform to the classifications used for the six and three months ended
      June 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.




Six
      Months Ended June 30, 2005




Statement
                of Income Accounts
            
            Originally
                Reported
            
            Reclassifications
            
            As
                ChangedPremium
                finance revenue
            
            $
            3,639,267
            
            $
            884,101
            
            $
            2,755,166Provision
                for finance receivable losses
            
            
            1,240,291
            
            
            (884,101
            )
            
            356,190Net
            
            $
            2,398,976
            
            $
            0
            
            $
            2,398,976


9


Three
      Months Ended June 30, 2005




Statement
                of Income Accounts
            
            
            Originally
                Reported
            
            
            Reclassifications
            
            
            As
                ChangedPremium
                finance revenue
            
            $
            1,849,731
            
            $
            514,571
            
            $
            1,335,160Provision
                for finance receivable losses
            
            
            719,345
            
            
            (514,571
            )
            
            204,774Net
            
            $
            1,130,386
            
            $
            0
            
            $
            1,130,386







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 six months
      ended June 30, 2006 and 2005 is shown in the following tables:




Six
                Months Ended
              June
                30, 2006
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            3,753,230
            
            $
            2,146,701
            
            $
            -
            
            $
            5,899,931Interest
                income
            
            
            2,172
            
            
            -
            
            
            110
            
            
            2,282Interest
                income -notes receivable
            
            
            -
            
            
            -
            
            
            534,247
            
            
            534,247Interest
                expense
            
            
            46,619
            
            
            407,550
            
            
            227,545
            
            
            681,714Depreciation
                and
              amortization
            
            
            110,492
            
            
            93,342
            
            
            20,787
            
            
            224,621Segment
                profit (loss)
              before
                income taxes
            
            
            750,450
            
            
            410,431
            
            
            (481,558
            )
            
            679,323Segment
                profit (loss)
            
            
            450,270
            
            
            246,259
            
            
            (288,935
            )
            
            407,594Segment
                assets
            
            
            4,722,707
            
            
            18,483,913
            
            
            3,901,497
            
            
            27,083,114


____________





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




10




Six
                Months Ended
              June
                30, 2005
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            3,638,169
            
            $
            2,755,166
            
            $
            -
            
            $
            6,393,335Interest
                income
            
            
            2,096
            
            
            -
            
            
            6,000
            
            
            8,096Interest
                income -notes receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            -Interest
                expense
            
            
            28,969
            
            
            353,204
            
            
            165,948
            
            
            548,121Depreciation
                and
              amortization
            
            
            81,965
            
            
            117,309
            
            
            26,242
            
            
            225,516Segment
                profit (loss)
              before
                income taxes
            
            
            961,565
            
            
            897,564
            
            
            (965,805
            )
            
            893,324Segment
                profit (loss)
            
            
            576,939
            
            
            538,871
            
            
            (579,796
            )
            
            536,014Segment
                assets
            
            
            3,274,232
            
            
            24,957,466
            
            
            1,048,097
            
            
            29,279,795


____________





(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 June 30, 2006 and 2005 is shown in the following tables:




Three
                Months Ended
              June
                30, 2006
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            1,860,052
            
            $
            1,172,188
            
            $
            -
            
            $
            3,032,240Interest
                income
            
            
            898
            
            
            -
            
            
            25
            
            
            923Interest
                income -notes receivable
            
            
            -
            
            
            -
            
            
            321,955
            
            
            321,955Interest
                expense
            
            
            23,508
            
            
            218,452
            
            
            140,034
            
            
            381,994Depreciation
                and
              amortization
            
            
            56,465
            
            
            46,357
            
            
            10,495
            
            
            113,317Segment
                profit (loss)
              before
                income taxes
            
            
            410,097
            
            
            295,782
            
            
            (237,740
            )
            
            468,139Segment
                profit (loss)
            
            
            245,988
            
            
            177,469
            
            
            (142,844
            )
            
            280,814


____________





(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
              June
                30, 2005
            
            
            Insurance
            
            
            Premium
              Finance
            
            
            Other
                (1)
            
            
            TotalRevenues
                from external
              customers
            
            $
            1,850,102
            
            $
            1,335,160
            
            $
            -
            
            $
            3,185,262Interest
                income
            
            
            1,115
            
            
            -
            
            
            2,758
            
            
            3,873Interest
                income -notes receivable
            
            
            -
            
            
            -
            
            
            -
            
            
            -Interest
                expense
            
            
            14,319
            
            
            194,772
            
            
            69,963
            
            
            279,054Depreciation
                and
              amortization
            
            
            40,922
            
            
            59,565
            
            
            13,121
            
            
            113,608Segment
                profit (loss)
              before
                income taxes
            
            
            496,741
            
            
            360,363
            
            
            (461,477
            )
            
            395,627Segment
                profit (loss)
            
            
            298,043
            
            
            216,551
            
            
            (277,199
            )
            
            237,395


____________





(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 six and three month
      period ended June 30, 2006 include share-based compensation expense totaling
      approximately $20,000 and $10,000, 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 six and three months
      ended June 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
      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.




13


Six
                Months
              Ended
              June
                  30,
            
            
            Three
                Months Ended
              June
                30,2005
            
            
            2005Net
                income, as reported
            
            $
            536,014
            
            $
            237,395Add:
                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
            
            
            (32,000
            )
            
            (16,000
            )Pro
                forma net income
            
            $
            504,014
            
            $
            221,395Net
                income per share:Basic
                - as reported
            
            $
            0.20
            
            $
            0.09Basic
                - pro forma
            
            $
            0.19
            
            $
            0.08Diluted
                - as reported
            
            $
            0.17
            
            $
            0.08Diluted
                - pro forma
            
            $
            0.16
            
            $
            0.07







We
      did
      not grant any options under either plan during the six and three months ended
      June 30, 2006 or 2005.




The
      following table represents our stock options granted, exercised, and forfeited
      during the first six 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
            
            $
            2.09
            
            
            -
            
            
            -Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (127,500
            )
            $
            1.50
            
            
            -
            
            
            -Forfeited/expired
            
            
            (19,025
            )
            $
            2.68
            
            
            -
            
            
            -Outstanding
                at
              June
                30, 2006
            
            
            181,500
            
            $
            2.44
            
            
            1.92
            
            $
            63,270Vested
                and Exercisable
              at
                June 30, 2006
            
            
            161,000
            
            $
            2.21
            
            
            1.66
            
            $
            63,270





The
      aggregate intrinsic value of the options exercised for the six months ended
      June
      30, 2006 and 2005 was $135,150 and $23,399, respectively.




14


As
      of
      June 30, 2006, there was approximately $60,000 of total unrecognized
      compensation costs related to unvested stock option awards. The $60,000 is
      expected to vest over the weighted average of 1.33 years.




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




Options
            
            
            Weighted
                Average GrantDate
                Fair ValueNonvested
                at December 31, 2005
            
            
            30,788
            
            $
            1.11Granted
            
            
            -
            
            
            -Vested
            
            
            3,713
            
            $
            .97Forfeited
            
            
            6,575
            
            
            .88Nonvested
                at June 30, 2006
            
            
            20,500
            
            $
            1.14





The
      total
      fair value of shares vested during the six month period ended June 30, 2006
      was
      $3,607.




5.
            Net
                Income Per Share




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




The
      reconciliation is as follows:




Six
                Months Ended
              June
                30,
            Three
                Months Ended
              June
                30,2006
            
            
            2005
            
            
            2006
            
            
            2005Weighted
                Average Number of Shares Outstanding
            
            
            2,881,466
            
            
            2,720,994
            
            
            2,896,024
            
            
            2,726,899Effect
                of Dilutive Securities, common stock
              equivalents
            
            
            362,380
            
            
            551,331
            
            
            352,644
            
            
            523,726Weighted
                Average Number of Shares Outstanding,
              used
                for computing diluted earnings per share
            
            
            3,243,846
            
            
            3,272,325
            
            
            3,248,668
            
            
            3,250,625





15


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





Six
                Months Ended
              June
                30,
            Three
                Months Ended
              June
                30,2006
            
            
            2005
            
            
            2006
            
            
            2005Net
                Income
            
            $
            407,594
            
            $
            536,014
            
            $
            280,814
            
            $
            237,395Interest
                Expense on Dilutive Convertible
              Preferred
                Stock
            
            
            19,500
            
            
            19,621
            
            
            9,750
            
            
            9,750Net
                Income Available to Common Shareholders
              for
                Diluted Earnings Per Share
            
            $
            427,094
            
            $
            555,635
            
            $
            290,564
            
            $
            247,145





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 six
      months ended June 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 six months
      ended June 30, 2006, an interest payment of $125,000 was received). 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 June 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 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
      June 30, 2006) or LIBOR (5.345% at June 30, 2006) plus 2.25%, and matures on
      June 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 will be amortized over 30 months and payable quarterly. 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 six months ended June 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.




**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.




17




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 are 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.




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 six months ended June 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.




18


***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 six months ended June 30, 2006 and
      2005, the provision for finance receivables losses was approximately
      $327,942  and
      $421,693 (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 approximately $299,296 and $445,738, respectively. If our provision for
      finance receivable losses was understated by 15% 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 six months ended
      June
      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 June 30,
      2006.




***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.




19


***Results
      of Operations***




*Six
      Months ended June 30, 2006 compared to Six Months ended June 30,
      2005*




Our
      operating income for the six months ended June 30, 2006 was $335,853 as compared
      to $1,080,145 for the six months ended June 30, 2005.




During
      the six months ended June 30, 2006, revenues from our insurance-related
      operations were $3,753,230 as compared to $3,638,169 for the six months ended
      June 30, 2005. The revenue increase of $115,061 was primarily attributable
      to revenues of Accurate whose assets were acquired effective January 1, 2006,
      offset by a reduction in commissions received by our other locations caused
      by a
      reduction in renewal commission rates and the elimination of certain other
      compensation by one of our major insurance carriers.




Premium
      finance revenues decreased $608,465 during the six months ended June 30, 2006
      as
      compared to the six months ended June 30, 2005. The total number of policies
      that we financed during the first half of 2006 decreased slightly from the
      first
      half of 2005; 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 six months ended June 30, 2006
      were
      $225,685 more
      than
      for the six months ended June 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.




Our
      provision for finance receivable losses for the six months ended June 30, 2006
      was $28,248 less than for the six months ended June 30, 2005. This was caused
      by
      a decrease in volume in the six months ended June 30, 2006, offset by a one-time
      actual and anticipated recovery recorded in the six months ended June 30, 2005
      of amounts previously charged-off (no similar items were recorded in the six
      months of 2006).




Our
      premium finance interest expense during the six months ended June 30, 2006
      was
      $54,346 more than for the six months ended June 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 six months
      ended June 30, 2006 compared to the six months ended June 30, 2005.




During
      the six months ended June 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 $534,247 during
      the
      six months ended June 30, 2006. No such interest-bearing notes were owned by
      us
      during the six months ended June 30, 2005.




Our
      interest expense for the six months ended June 30, 2006 was $79,368 more than
      for the six months ended June 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 six months of 2005), offset
      by
      a reduction caused by our repaying a portion of our subordinated debt in
      2005.




20


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




During
      the six months ended June 30, 2006, our provision for income taxes was $271,729
      as opposed to $357,310 for the six months ended June 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 $750,450 during the six months ended June 30, 2006 as
      compared to a net profit before income taxes of $961,565 during the six months
      ended June 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 $410,431 during the six months ended June 30, 2006 as
      compared to a net profit before income taxes of $897,564 during the six months
      ended June 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 $481,558 during the six months ended June
      30, 2006 as compared to $965,805 during the six months ended June 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.




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




Our
      operating income for the three months ended June 30, 2006 was $227,698 as
      compared to $476,036 for the three months ended June 30, 2005.




During
      the three months ended June 30, 2006, revenues from our insurance-related
      operations were $1,860,052 as compared to $1,850,102 for the three months ended
      June 30, 2005. The revenue increase of $9,950 was
      primarily attributable
      to revenues of Accurate whose assets were acquired effective January 1, 2006,
      offset by a reduction in commissions received by our other locations caused
      by a
      reduction in renewal commission rates and the elimination of certain other
      compensation by one of our major insurance carriers .




Premium
      finance revenues decreased $162,972 during the three months ended June 30,
      2006
      as compared to the three months ended June 30, 2005. The total number of premium
      loans that we financed during the second quarter of 2006 decreased slightly
      from
      the second quarter of 2005; 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 June 30, 2006
      were $118,384 more than for the three months ended June 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.




21


Our
      provision for finance receivable losses for the second quarter of 2006 was
      $46,457 less than for the second quarter of 2005. This was caused by a decrease
      in volume in the second quarter of 2006.




Our
      premium finance interest expense during the three months ended June 30, 2006
      was
      $23,680 more than for the three months ended June 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 June 30, 2006 compared to the three months ended June 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
      $321,955 during the three months ended June 30, 2006. No such interest-bearing
      notes were owned by us during the three months ended June 30, 2005.




Our
      interest expense for the three months ended June 30, 2006 was $79,260 more
      than
      for the three months ended June 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 second quarter of 2005), offset
      by
      a reduction caused by our repaying a portion of our subordinated debt in
      2005.




In
      June
      2006, we sold one of our stores, resulting in a gain of $81,105. No such sale
      occurred during the second quarter of 2005.




During
      the three months ended June 30, 2006, our provision for income taxes was
      $187,325 as opposed to $158,232 for the three months ended June 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 $410,097 during the three months ended June 30, 2006
      as
      compared to a net profit before income taxes of $496,741 during the three months
      ended June 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 $295,782 during the three months ended June 30, 2006
      as
      compared to a net profit before income taxes of $360,363 during the three months
      ended June 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 $237,740 during the three months ended June 30, 2006 as compared
      to
      $461,477 during the three months ended June 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
      June 30, 2006, we had $999,055 in cash and cash equivalents and working capital
      of $1,726,977. As of December 31, 2005, we had $1,961,489 in cash and cash
      equivalents and working capital of $5,321,837.




22


During
      the six months ended June 30, 2006, our cash and cash equivalents decreased
      by
      $962,434. This was due to the following:




·
            Net
                cash provided by operating activities during the six months ended
                June 30,
                2006 was $131,692 primarily due to the following: (i) our net income
                for
                the period of $407,594, our depreciation and amortization of $224,621,
                a
                decrease in accounts receivable of $380,320, and an increase in accounts
                payable and accrued expenses of $261,280, offset by (ii) an decrease
                in
                premiums payable of $592,694 and the accretion of discount on notes
                receivable of $411,592. 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 Accurate as well as our ability
                to
                increase payment terms of certain vendors. 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.




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




·
            Net
                cash of $3,705,877 was used in investing activities during the six
                months
                ended June 30, 2006 primarily due to an increase in our net finance
                contracts receivable of $1,071,130, 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 six months ended June 30, 2006.




·
            Net
                cash provided by financing activities during the six months ended
                June 30,
                2006 was $2,611,751 primarily due to the following: (i) proceeds
                of
                $28,307,721 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 $25,887,220
                on the revolving credit line and proceeds from the exercise of stock
                options of $191,250.




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 June 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 June 30, 2006, $12,197,025 was outstanding under
      the
      loan. As of June 30, 2006, of the $19,378,656 reflected on the Balance Sheet
      as
“Finance contracts receivable,” approximately $15,670,275 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 will be amortized over 30 months and payable quarterly.




23


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.




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 June 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 June 30, 2006
      that
      has materially affected, or is reasonably likely to materially affect, our
      internal control over financial reporting.




24


**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**4/1/06
                - 4/30/06
            
            
            7,000
            
            $
            2.69
            
            
            -
            
            
            -5/1/06
                - 5/31/06
            
            
            2,387
            
            $
            2.19
            
            
            -
            
            
            -6/1/06
                - 6/30/06
            
            
            9,816
            
            $
            2.22
            
            
            -
            
            
            -**Total**
            
            
            **19,203**
            
            **$**
            **2.39**
            
            
            **-**
            
            
            **-**





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





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





None





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





None





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





None





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





3(a)
            Restated
                Certificate of Incorporation13(b)
            Certificate
                of Designation of Series A Preferred Stock2




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.
 2
            Denotes document filed as an exhibit to our Current Report on Form 8-K
            for an
            event dated May 28, 2003 and incorporated herein by
            reference.




25


3(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














3Denotes
      document filed as an exhibit to our Quarterly Report on Form 10-QSB for the
      period ended June 30, 2005 and incorporated herein by
      reference.


26


**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: August
              14, 2006
            By:
            /s/ Barry
              B.
              GoldsteinBarry
              B. GoldsteinPresident
              (Principal
                Executive, Financial
              and
                Accounting Officer)