**SECURITIES
AND EXCHANGE COMMISSION**


**WASHINGTON,
D.C. 20549**


**FORM
10-KSB**





(Mark
One)


(x)
    **ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**For
      the fiscal year ended
    December
      31, 2004





(
      )
    **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**For
      the transition period from
    to





Commission
      file number
    0-1665





**DCAP
GROUP, INC.**


(Name of
small business issuer in its charter)





Delaware
    36-2476480(State
      or other jurisdiction of incorporation or organization)
    (I.R.S.
      Employer Identification No.)





1158
      Broadway, Hewlett, New York
    11557(Address
      of principal executive offices)
    (Zip
      Code)





(516)
      374-7600(Issuer’s
      telephone number, including area code)





Securities
registered under Section 12(b) of the Exchange Act:





Title
      of each class
    Name
      of each exchange on which registeredNone





Securities
registered under Section 12(g) of the Exchange Act:





Common
Stock, $.01 par value


(Title of
class)





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__  .





Check if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.( )





State
issuer's revenues for its most recent fiscal year: $15,088,013





State the
aggregate market value of the voting stock held by non-affiliates computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within the past 60 days:
$10,414,869 as of February 28, 2005.





**(ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS)**


Check
whether the issuer has filed all documents and reports 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 REGISTRANTS)**


State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 2,722,024 shares as of February 28, 2005.





**DOCUMENTS
INCORPORATED BY REFERENCE**


None


Transitional
Small Business Disclosure Format: Yes ____  
No  [X]










INDEX


**Page
      No.**Explanatory
      Note/Forward-Looking Statements
    1****
      **PART
      I**
      ****Item
      1.
    Description
      of Business
    2Item
      2
    Description
      of Property
    10Item
      3.
    Legal
      Proceedings
    10Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    11****
      **PART
      II**
      ****Item
      5.
    Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities
    12Item
      6.
    Management=s
      Discussion and Analysis or Plan of Operation
    13Item
      7.
    Financial
      Statements
    24Item
      8.
    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
    24Item
      8A.
    Controls
      and Procedures
    24Item
      8B.
    Other
      Information
    24****
      **PART
      III**
      ****Item
      9.
    Directors
      and Executive Officers of the Registrant
    25Item
      10.
    Executive
      Compensation
    28Item
      11.
    Security
      Ownership of Certain Beneficial Owners and Management and
      Related
      Stockholder Matters
    29Item
      12.
    Certain
      Relationships and Related Transactions
    32Item****13.
    Exhibits,
      List and Reports on Form 8-K
    35Item
      14.
    Principal
      Accountant Fees and Services
    38****
      **Signatures**













PART I




**Explanatory
Note**




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




**Forward-Looking
Statements**




This
Annual 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 Annual 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 this Annual
Report under “Factors That May Affect Future Results and Financial Condition”.




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














1


**ITEM
1.**  **DESCRIPTION
OF BUSINESS**




**(a)**  **Business
Development**




***General***




We
operate two lines of business:




$
    franchising,
      ownership and operation of storefront insurance agencies under the DCAP,
      Barry Scott and Atlantic Insurance brand
names




$
    premium
      financing of insurance policies for our DCAP, Barry Scott and Atlantic
      Insurance clients as well as clients of non-affiliated entities




Our
business strategy anticipates the utilization and expansion of our distribution
network and delivery of insurance-related services through this network.
Pursuant to this strategy, we have




$
    granted
      franchises for the use of the DCAP trade
name




$
    sold
      our interest in a number of storefronts but retained them as DCAP
      franchises




$
    as
      discussed below,purchased
      Barry Scott Companies, Inc., which has 19 store locations, and the assets
      of AIA Acquisition Corp., which has five store locations that operate
      under the Atlantic Insurance brand name




$
    changed
      our business model with respect to our premium finance operations from
      selling finance contracts to third parties to internally financing those
      contracts




***Developments
During 2004***




The
following material events occurred during 2004:




·
    Effective
      August 26, 2004, we effected a one-for-five reverse split of our common
      shares.




·
    In
      September 2004, we hired John J. Willis, Jr. as our Chief Operating
      Officer. See Item 9 of this Annual Report.




·
    On
      October 7, 2004, our common shares began trading on the NASDAQ Small Cap
      Market.




·
    In
      December 2004, we increased our premium finance line of credit with
      Manufacturers and Traders Trust Co. (“M&T”) from $18,000,000 to
      $25,000,000 and extended the term of the line to June 30, 2007. Subject to
      certain conditions, M&T has agreed to arrange an additional
      $10,000,000 credit facility with other lenders on a “best efforts” basis.
      The terms of the new line of credit agreement are similar to our previous
      line of credit agreement with M&T, except that the interest rate was
      reduced from M&T’s prime lending rate plus 1.5% to, at our option,
      either (i) M&T’s prime lending rate or (ii) LIBOR plus 2.5%, and the
      amount that we can borrow was raised from 80% to 85% of eligible premium
      finance receivables. In January 2005, we utilized the line of credit to
      repay $1,000,000 of our $3,500,000 subordinated debt discussed under
      “Developments During 2003” below. We need to extend the maturity date of
      our subordinated debt as discussed under “Factors That May Affect Future
      Results and Financial Condition” in Item 6 of this Annual
      Report.




2


***Developments
During 2003***




The
following material events occurred during 2003:




$
    Effective
      May 1, 2003, we acquired substantially all of the assets of AIA
      Acquisition Corp., an insurance brokerage firm with five offices located
      in eastern Pennsylvania that operate under the Atlantic Insurance brand.
      The acquisition allowed for the expansion of our geographical footprint
      outside New York State and allowed for us to capitalize on operational and
      administrative efficiencies. See Item 12 of this Annual Report.




$
    In
      July 2003, in connection with the change in our premium finance operations
      business model, as discussed above, we obtained an $18,000,000 revolving
      line of credit from M&T that was due in July 2005. Interest on this
      loan was payable at the rate of prime plus 1.5%. Concurrently, we obtained
      a $3,500,000 secured subordinated loan, that is repayable in January 2006
      and carries interest at the rate of 12-5/8% per annum. In connection with
      the $3,500,000 debt financing, we issued warrants for the purchase of
      105,000 common shares at an exercise price of $6.25 per share. The
      warrants expire on January 10, 2006. See “Developments During 2004”
      above.




***Developments
During 2002***




The
following material events occurred during 2002:




$
    On
      August 30, 2002, we purchased Barry Scott Companies, Inc. from a
      subsidiary of the insurance carrier, The Progressive Corporation. Through
      the acquisition, we added 20 new locations, 18 of which are located north
      of Westchester County, New York and outside the DCAP footprint. In 2003,
      one of the acquired stores was damaged by fire and not
      reopened.




The
purchase price was $850,000, of which $325,000 was paid at closing. The balance
of the purchase price is payable as follows: (i) $125,000 on August 30, 2004,
(ii) $125,000 on August 30, 2005, and (iii) $275,000 on August 30, 2006 (of
which $40,000 was prepaid in 2003). As security for the payment of the
installments and other obligations under the acquisition agreement, a security
interest was granted to Progressive in the shares of stock acquired and in the
assets of Barry Scott and its subsidiaries.




3


$
    In
      August 2002, we raised gross proceeds of $500,000 through a private
      placement of our common shares.




$
    During
      2002, we determined that our operation of the former International Airport
      Hotel in San Juan, Puerto Rico was a non-core business and that we should
      settle the ongoing litigation with the Ports Authority of Puerto Rico, the
      owner of the hotel, concerning the term of the lease granted to our
      wholly-owned subsidiary, IAH, Inc. Accordingly,in
      December 2002, IAH reached a verbal understanding with the Ports Authority
      and, on January 29, 2003, IAH finalized a settlement agreement with the
      Ports Authority. Pursuant to the agreement, in consideration for
      IAH=s
      agreement to release all rights with respect to the lease and to vacate
      the premises, in January 2003, the Ports Authority paid to IAH the sum of
      $500,000.




**(b)**
    **Business
      of Issuer**




***General***




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




There are
68 store locations owned or franchised by us of which 62 are located in New York
State. In the New York metropolitan area, there are 43 DCAP franchises, one
joint venture DCAP store and one Barry Scott location. There are also 18 Barry
Scott locations outside the New York metropolitan area (all located in central
New York State). There are five Atlantic Insurance locations in eastern
Pennsylvania. All of the Barry Scott and Atlantic Insurance locations are
wholly-owned by us.




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 serve as an insurance company and therefore
do not assume underwriting risks.




Through
our wholly-owned subsidiary, Payments Inc., we provide insurance premium
financing services to our DCAP, Barry Scott and Atlantic Insurance locations as
well as non-affiliated insurance agencies. Payments Inc. is licensed by the New
York State Department of Banking as an insurance premium finance agency and has
been granted permission to conduct business in Pennsylvania and New
Jersey.




We also
offer automobile club services for roadside emergencies. Income tax preparation
services are also offered in connection with the operation of the DCAP stores.




4


We were
incorporated in 1961 and changed our name from EXTECH Corporation to DCAP Group,
Inc. in 1999.




Our
executive offices are located at 1158 Broadway, Hewlett, New York 11557; our
telephone number is (516) 374-7600 and our fax number is (516) 295-7216.




***Insurance
Agencies***




*Insurance
Brokerage*




Our
storefront agencies deal primarily with the insurance needs of individuals. In
the states in which we operate, all automobile owners must secure liability
insurance coverage. We provide various choices to the insured depending on
market conditions.




During
the fiscal year ended December 31, 2004, approximately 90% of our insurance
revenues were derived from commissions and other fees received in connection
with the selling of automobile and other property and casualty insurance
policies.




In
addition to automobile insurance, we offer:




$  property
and casualty insurance for motorcycles, boats and livery/taxis


$  life
insurance


$  business
insurance


$  homeowner = s
insurance


$  excess
coverage




We have
obtained the right to receive calls placed to “1-800-INSURANCE” in the states of
New York, New Jersey and Pennsylvania (except for one area code in Pennsylvania)
as a way to increase our insurance brokerage business.




*Franchises*




An
important part of our strategy has been to increase our name recognition. We
decided that granting others DCAP franchises is an important step in achieving
this goal.




Franchises
currently pay us an initial franchise fee of $25,000 to offer insurance products
under the DCAP name. Franchisees are obligated to also pay us monthly fees
during the term of the franchise agreement, generally commencing after a twelve
month period from the date on which the storefront opens for business. Monthly
fees payable by franchisees constituted approximately 8% of our insurance
revenues during the year ended December 31, 2004.




5


*Automobile
Club*




As a
complement to our automobile insurance operations, we offer automobile club
services for roadside emergencies. We offer memberships for such services, and
we make arrangements with towing dispatch companies to fulfill service call
requirements.




During
fiscal 2004, fees received in connection with automobile club services
constituted approximately 2% of our insurance revenues.




*Income*  *Tax
Return Preparation*




A number
of our franchise locations provide income tax return preparation services. The
tax return preparation service allows us to offer an additional service to the
walk-in customers who comprise the bulk of our customer base, as well as to
existing customers. We have also obtained the right to receive calls placed to
“1-800-INCOME TAX” as a way to increase our tax preparation business.




During
fiscal 2004, fees received in connection with income tax return preparation were
nominal.




*Structure
and Operations*




As stated
above, we currently have 68 offices, of which 43 are franchises, 24 are
wholly-owned, and one is a joint venture. Our franchises and joint venture
office consist of both “conversion” and “startup” operations. In a conversion
operation, an existing insurance brokerage with an established business becomes
a DCAP office. In a startup operation, an entrepreneur begins operations as a
DCAP office. Our wholly-owned and joint venture offices are managed by our
employees; each franchise is managed by or under the supervision of the
franchisee.




In order
to promote consistency and efficiency, and as a service to our franchises, we
offer training to office managers. Our training program covers:




$  marketing,
sales and underwriting


$  office
and logistics


$  computer
information


$  our
proprietary database software, DCAP Management System




We
provide the administrative services and functions of a “central office” to our
wholly-owned and joint venture offices. The services provided to these
storefront offices are:




$  sales
training


$  bookkeeping
and accounting


$  processing
services




Franchises
operate without the assistance of our “central office” services.




6


We also
provide support services to stores such as:




$  assistance
with regard to the hiring of employees


$  assistance
with regard to the writing of local advertising


$  advice
regarding potential carriers for certain customers




We also
manage the cooperative advertising program in which all of our offices
participate.




In
addition to the above services, we provide to all of our offices a direct
business relationship with nationally-known and local insurance carriers that
may otherwise be beyond the reach of small, privately-owned retail insurance
operations.




***Premium
Financing***




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. Our wholly-owned subsidiary, Payments Inc.,
is licensed by the New York State Banking Department as a premium finance agency
and has been granted permission to conduct business in Pennsylvania and New
Jersey.




In a
typical premium finance arrangement, we lend the amount of the premium (minus
the customer’s down payment) to the customer and pay it to the insurance company
on behalf of the customer. The customer makes periodic payments to us over the
term of the finance agreement (generally nine to ten months). We strive to
design our payment plans so that the balance of the principal of the loan is at
all times less than the amount of the unearned portion of the insurance premiums
being financed, which backs the loan. We also seek to mitigate risk by acting on
a timely basis to request cancellation of the policy if the policyholder
defaults on his or her obligation to repay the premium finance
loan.




If the
policy is cancelled before its term expires, the policyholder has a right to
receive a return of the unearned premium. Under our premium finance agreement,
the policyholder assigns this right to us to secure his or her obligations under
the loan. If the policyholder fails to make a payment, we have the right to
request that the insurance company cancel the policy and pay to us the amount of
any unearned premium on the policy. If the amount of unearned premium exceeds
the balance due on the loan plus any interest and applicable fees owed by the
policyholder to us, then we return the excess amount to the policyholder in
accordance with applicable law.




The
regulatory framework under which our premium finance procedures are established
is generally set forth in the premium finance statutes of the states in which we
operate. Among other restrictions, the interest rate we may charge our customers
for financing their premiums is limited by these state statutes. See “Government
Regulation.”




Reference
is made to Items 1(a) and 6 of this Annual Report for a discussion of the line
of credit and subordinated debt that we utilize in connection with our premium
finance operations.




7


***Strategy***




In order
to achieve our goal of utilizing and expanding our distribution network and
delivering insurance-related services through this network, we currently have
the following four-pronged business strategy:




$
    promote
      franchise sales by providing proprietary products and services that may
      not be available elsewhere




$
    acquire
      storefront agencies in the Northeast in order to expand our geographical
      footprint




$
    increase
      the size of our premium finance business, both within and outside the DCAP
      storefronts, including the introduction of our business in other
      states




$
    seek
      to expand our operations by acquiring businesses or other assets which we
      believe will complement or enhance our
business




In
seeking to promote franchise sales, we pursue increased name recognition through
the establishment of additional DCAP storefront sites (both conversion and
start-up types) and increased marketing activities. In addition, our cooperative
advertising program will continue to use the aggregated buying power of the
DCAP, Barry Scott and Atlantic Insurance offices to advertise in various
editions of telephone directories and in other media.




We
utilize toll-free telephone numbers to increase business. Telephone calls
received are routed to the DCAP, Barry Scott or Atlantic Insurance office
nearest the call (based on the zip code of the caller) for handling. We are
promoting “1-800-INSURANCE” in our current markets and intend to utilize such
numbers in the future as our market expands.




During
2005, we will continue to seek to acquire additional locations in order to
further capitalize on existing proprietary services, relationships with carriers
and the increased premium finance activity.





As
indicated above, one of our strategies involves the growth of our premium
finance business. Until mid-2003, as the number of insurance companies
participating voluntarily in the New York non-standard automobile insurance
market declined, fewer policies were written on a voluntary basis and there was
an offsetting increase in the size of the involuntary or “assigned risk” market.
The New York Auto Insurance Plan (“NYAIP”), which provides coverage for
“assigned risk” drivers, provides for limited finance options. Unless the
insured can either pay the entire premium at policy inception, or can provide a
large downpayment and be capable of paying the balance over a short period of
time, there is a need for premium financing. Our premium finance subsidiary,
Payments Inc., offers the insured a reduced downpayment and the ability to
spread the balance over a period of up to ten months.




Since
mid-2003, as a result of rate increases for NYAIP policies, and the relaxation
in underwriting standards by voluntary carriers, the size of the voluntary
non-standard market has been increasing and the NYAIP market has declined.
Although NYAIP premiums continued to rise until August 2004, the decline in the
NYAIP market has led us to seek non-NYAIP premium financing business. Beginning
in late 2004, we began to provide premium financing on some policies written in
the voluntary market.




8


Our final
strategy involves the expansion of our operations into complementary areas. We
continually explore such opportunities as a means to enhance our business.
Complimentary insurance products, including different or enhanced coverages, and
other financial products (such as mortgages) are being considered.




***Competition***




We
compete with numerous insurance agents and brokers in our market. The amount of
capital required to commence operations is generally small and the only material
barrier to entry is the ability to obtain the required licenses and appointments
as a broker or agent for insurance carriers. There is no price competition
between us and other agents and brokers. All must sell a particular carrier’s
policies at exactly the same price. Because we may be able to offer a different
payment plan through premium financing, we are able to differentiate ourselves.




In recent
years, extensive competition has come from direct sales entities, such as GEICO
Insurance and Progressive Insurance, who have concentrated their advertising
efforts on television and radio. In addition, the Internet sales effort of some
of our competitors has shown promise. Further, legislation that allows banks to
offer insurance to their customers has taken market share from the storefront
insurance operators.




Our
premium finance operation competes with many other companies that have been in
business longer than we have, and have long term relationships with their
insurance agency clients.




***Government
Regulation***




Our
premium finance subsidiary, Payments Inc., is regulated by governmental agencies
in states in which it conducts business. The regulations, which generally are
designed to protect the interests of policyholders who elect to finance their
insurance premiums, vary by jurisdiction, but usually, among other matters,
involve:




·
    regulating
      the interest rates, fees and service charges we may charge our
      customers




·
    imposing
      minimum capital requirements for our premium finance subsidiary or
      requiring surety bonds in addition to or as an alternative to such capital
      requirements




·
    governing
      the form and content of our financing
agreements




9


·
    prescribing
      minimum notice and cure periods before we may cancel a customer’s policy
      for non-payment under the terms of the financing
  agreement




·
    prescribing
      timing and notice procedures for collecting unearned premium from the
      insurance company, applying the unearned premium to our customer’s premium
      finance account, and, if applicable, returning any refund due to our
      customer




·
    requiring
      our premium finance company to qualify for and obtain a license and to
      renew the license each year




·
    conducting
      periodic financial and market conduct examinations and investigations of
      our premium finance company and its
operations




·
    requiring
      prior notice to the regulating agency of any change of control of our
      premium finance company




***Employees***




We employ
approximately 92 persons. We believe that our relationship with our employees is
good.




**ITEM
2.**  **DESCRIPTION
OF PROPERTY** ****




Our
principal executive offices are located at 1158 Broadway, Hewlett, New York, our
central processing offices are located at 1762 Central Avenue, Albany, New York
and the administrative offices of Payments Inc. are located at 1154 Broadway,
Hewlett, New York.




Our 19
Barry Scott offices are located in upstate New York (with the exception of one
located in the New York metropolitan area). Our five Atlantic Insurance offices
are located in eastern Pennsylvania. We also have one joint venture DCAP store
that is located in Greenbrook, New Jersey.




Our 25
wholly-owned or joint venture storefront locations and our executive and other
offices are operated pursuant to lease agreements that expire from time to time
through 2011. The current yearly aggregate base rental for the offices is
approximately $346,000.




**ITEM
3.**  **LEGAL
PROCEEDINGS**




As
described in Item 1(a) of this Annual Report, in August 2002, we acquired Barry
Scott Companies, Inc. from a subsidiary of The Progressive Corporation. In 1998,
Barry Scott Companies, Inc. had acquired all of the outstanding stock of
Aard-Vark Agency, Ltd. Accordingly, we acquired Aard-Vark as part of our
acquisition of Barry Scott Companies, Inc. On January 21, 2003, Aard-Vark
commenced an action against Barnett Prager, Anita Prager and All About Security,
Inc. in Supreme Court of the State of New York, Queens County. Aard-Vark alleges
claims based on breach of an employment agreement. In response, on April 28,
2003, the defendants served counterclaims against Aard-Vark in which they
alleged breach of contract, breach of implied covenant of good faith and fair
dealing, misrepresentation and breach of fiduciary duty. The defendants sought
damages of up to $2,000,000 for each of several claims against Aard-Vark.
Pursuant to the terms of the agreement whereby we acquired Barry Scott
Companies, Inc., Progressive agreed to indemnify and defend us from any claims
or liabilities arising in connection with the transaction by which Aard-Vark was
acquired by Barry Scott Companies, Inc. Progressive has assigned counsel to
defend the counterclaims against Aard-Vark. In June 2004, the defendants’
counterclaims were dismissed.




10


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




Our
Annual Meeting of Stockholders was held on November 24, 2004. The following is a
listing of the votes cast for or withheld with respect to each nominee for
director (the election of directors being the only matter voted upon at the
meeting):




1.  Election
of Board of Directors.




**Number
      of Shares****For**
    **Withheld**Barry
      B. Goldstein
    1,904,622
    2,768Morton
      L. Certilman
    1,903,212
    4,178Jay
      M. Haft
    1,906,305
    1,085Jack
      D. Seibald
    1,906,323
    1,067Robert
      M. Wallach
    1,661,032
    246,358







11





**PART
II**




**ITEM
5.**  **MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES** ****





***Market
Information***




Since
October 7, 2004, our common shares have been quoted on the NASDAQ Small Cap
Market under the symbol “DCAP.” Prior to that time, our common shares were
quoted on the OTC Bulletin Board under the symbol “DCAP.”




Set forth
below are the high and low bid prices for our common shares for the periods
indicated, as reported on the NASDAQ Small Cap Market or the OTC Bulletin Board,
as the case may be. The prices set forth are prices between broker-dealers and
do not include retail mark-ups or mark-downs or any commissions to the
broker-dealer. The prices may not necessarily reflect actual
transactions.




**High**
    **Low****2004
      Calendar Year**First
      Quarter
    $7.35
    $4.75Second
      Quarter
    6.60
    5.45Third
      Quarter
    6.30
    4.50Fourth
      Quarter
    8.25
    6.86







**High**
    **Low****2003
      Calendar Year**First
      Quarter
    $2.55
    $1.25Second
      Quarter
    3.25
    1.60Third
      Quarter
    6.05
    2.65Fourth
      Quarter
    5.10
    4.05







***Holders***




As of
March 11, 2005, there were approximately 1,527 record holders of our common
shares.




***Dividends***




Holders
of our common shares are entitled to dividends when, as and if declared by our
Board of Directors out of funds legally available. There are also outstanding
780 Series A preferred shares. These shares are entitled to cumulative aggregate
dividends of $39,000 per annum (5% of their liquidation preference of $780,000).
No dividends may be paid on our common shares unless an equivalent pro rata
payment is made to the holders of the Series A preferred shares on the
accumulated and unpaid dividends payable to such holders at such
time.




12


We have
not declared or paid any dividends in the past to the holders of our common
shares and do not currently anticipate declaring or paying any dividends in the
foreseeable future. We intend to retain earnings, if any, to finance the
development and expansion of our business. Future dividend policy will be
subject to the discretion of our Board of Directors and will be contingent upon
future earnings, if any, our financial condition, capital requirements, general
business conditions, and other factors. Therefore, we can give no assurance that
any dividends of any kind will ever be paid to holders of our common shares.




***Recent
Sales of Unregistered Securities***




Not
applicable.




***Issuer
Purchases of Equity Securities***




During
the fourth quarter of 2004, we did not repurchase any of our equity securities.
However, in December 2004, as payment of the exercise price for the purchase of
160,000 common shares by Barry Goldstein, our President and Chief Executive
Officer, pursuant to his exercise of an incentive stock option, Mr. Goldstein
delivered 27,211 of our common shares. In addition, in connection with Mr.
Goldstein’s exercise in December 2004 of a nonstatutory stock option for the
purchase of 34,000 of our common shares, 6,789 of the shares were withheld by us
in connection with the satisfaction of our tax withholding
obligation.




**ITEM
6** **.**  **MANAGMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**




***Overview***




We
operate 25 storefronts, including 19 Barry Scott locations acquired through our
August 2002 acquisition of Barry Scott Companies, Inc. and five Atlantic
Insurance locations acquired through our May 2003 acquisition of substantially
all the assets of AIA Acquisition Corp. We also have 43 franchised DCAP
locations.




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




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




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




13


***Critical
Accounting Policies***




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




*Commission
and fee income*




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




Franchise
fee revenue is recognized when substantially all of our contractual requirements
under the franchise agreement are completed.




Fees for
income tax preparation are recognized when the services are completed.
Automobile club dues are recognized equally over the contract period.




*Finance
income, fees and receivables*




Prior
July 14, 2003, premium financing fee revenue was earned based upon the
origination of premium finance contracts sold by agreement to third parties. The
contract fee gave consideration to an estimate as to the collectability of the
loan amount. Periodically, actual results were compared to estimates previously
recorded, and adjusted accordingly.




On July
14, 2003, we changed our business model with respect to our premium finance
operations from selling finance contracts to third parties to internally
financing those contracts. To accomplish this, we obtained a credit facility and
commenced recording interest and fee-based revenue over the life of each loan
(generally nine to ten months) and expenses of operating a finance company, such
as servicing, bad debts and interest expense.




14


Thus,
rather than recording a one-time fee per contract (as we did prior to July 14,
2003), we are now recording income and expense over the life of each contract,
as well as receivables and payables relating to the operations of a premium
finance company. 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.”




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 account. The
majority of these shortfalls result in the write-off of unrealized interest. 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.




*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 December
31, 2004.




*Stock-based
compensation*




We apply
the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, to account for stock-based employee compensation plans
and report pro forma disclosures in our Form 10-KSB 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.




15


*Recent
Accounting Pronouncements*




In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123, and its
related implementation guidance. The effective date of the standard for us is
for periods beginning after December 15, 2005. Upon adoption of SFAS No. 123R,
we will be required to record compensation expense on stock options granted to
employees. We expect to apply the permitted prospective transition method,
whereby we will continue to account for any portion of awards outstanding at the
date of transition using the accounting principles originally applied to those
awards. Accordingly, we expect that the impact from the adoption of SFAS No.
123R will not be material to the consolidated financial statements with respect
to awards outstanding as of the date of transition. New stock option awards will
be accounted for prospectively using the provisions of SFAS No. 123R; the impact
on consolidated financial statements will depend upon the characteristics of
such future awards, and may be material.




In
January 2003, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure” (“SFAS No. 148”). This Statement amends
SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of this Statement
were required to be adopted for fiscal years ending after December 15, 2002. We
have adopted the disclosure provisions of this Statement. We apply APB Opinion
No. 25, “Accounting for Stock Issued to Employees” in accounting for our
employee stock options. Accordingly, no compensation expense has been recognized
in our financial statements because the exercise price of the employee stock
options is equal to or greater than the market price of our common stock on the
date of grant. We, however, use the minimum value method of measuring stock
options for pro forma disclosure purposes under SFAS No. 123. As permitted by
SFAS No. 123, compensation cost for stock options is recognized in income based
on the excess, if any, of the fair market value of the stock at the date of
grant over the amount an employee must pay to acquire the stock.




In
December 2003, the FASB issued a revision to Interpretation No. 46,
“Consolidation of Variable Interest Entities” (“FIN 46”) which was first issued
in January 2003 and requires the consolidation of variable interest entities, as
defined. For us, variable interest entities created after December 31, 2003
require application of the provisions of FIN 46 immediately. For all previously
existing entities subject to FIN 46, application is required by the
beginning of fiscal 2005. We are currently assessing the applicability and
potential impact of FIN 46 on certain of our facility operating leases and
other contractual relationships. If any of the entities related to these
arrangements require consolidation under the provisions of FIN 46, the impact
would be material to our financial position. For our interest in an entity that
is subject to FIN 46 and that is created after December 31, 2003, we shall
apply FIN 46 to that entity immediately. For our interest in an entity that
is subject to FIN 46 and was created prior to December 31, 2003, we shall
apply FIN 46 in fiscal 2005. Based on our preliminary assessment of FIN 46,
we anticipate that it will not have a material effect on our financial
condition, results of operations or cash flows.




16


***Results
of Operations***




Our net
income for the year ended December 31, 2004 was $1,374,364 as compared to
$1,289,803 for the year ended December 31, 2003.




During
the year ended December 31, 2004, revenues from our insurance-related operations
were $7,126,398 as compared to $6,354,920 for the year ended December 31, 2003.
The increase was generally due to revenues of our Atlantic Insurance stores
(whose assets were acquired effective May 1, 2003) as well as an increase in
contingent commissions during 2004. See “Factors That May Affect Future Results
and Financial Condition” in this Item 6 with regard to the recent trend in the
insurance industry to no longer pay contingent commissions.




Premium
finance revenues increased $5,630,786 during the year ended December 31, 2004 as
compared to the year ended December 31, 2003 as indicated by the following
table:




**2004**
    
    
    **2003**Revenue
      from sale of receivables
    
    $
    0
    
    $
    626,552Interest
      and late fee revenue
    
    
    7,961,617
    
    
    1,704,279$
    7,961,617
    
    $
    2,330,831





During
the period from January 1, 2003 until July 13, 2003, we recognized premium
finance revenue from the sale of the premium finance receivables to a third
party and recorded a one-time fee per contract. On July 14, 2003, we obtained an
$18,000,000 two-year line of credit from Manufacturers and Traders Trust Co. to
finance our premium finance operations. Concurrently, we obtained $3,500,000 in
funding from a private placement of subordinated debt and warrants to support
our premium finance operations. We then began utilizing these credit facilities
and commenced recording interest and fee based revenue over the life of each
loan and expenses of operating a finance company, such as servicing, bad debts
and interest expense. Thus rather than recording a one time fee per contract, we
are recording income and expense over the life of each contract. See “Liquidity
and Capital Resources” in this Item 6.




Effective
November 2003, we began providing premium finance services to our Barry Scott
locations (following the expiration of a requirement that the locations use
another provider), and in March 2004, we began providing premium finance
services to our Atlantic Insurance offices.




Our
general and administrative expenses for the year ended December 31, 2004 were
$2,122,872 more than for the year ended December 31, 2003. This increase was
primarily due to the expenses of our Atlantic Insurance stores (whose assets
were acquired effective May 1, 2003) and the expenses of operating a finance
company, as discussed above, which we commenced on July 14, 2003.




17


Our
depreciation and amortization expense for the year ended December 31, 2004 was
$142,598 more than for the year ended December 31, 2003. This increase was
primarily the result of our recording amortization of costs associated with
obtaining the financing discussed above.




During
the year ended December 31, 2004, we incurred premium finance interest expense
of $1,188,990 as compared to $335,343 for the year ended December 31, 2003.
During the year ended December 31, 2004, we recorded a provision for finance
receivable losses of $2,965,796 as compared to $348,228 for the year ended
December 31, 2003. These increases were the result of the change in our premium
finance business in July 2003 as discussed above.




In May
2003, we issued redeemable preferred shares in connection with the acquisition
of the assets of AIA Acquisition Corp. and incurred interest expense of $45,200
during the year ended December 31, 2004 as compared to $30,133 during the year
ended December 31, 2003.




During
the year ended December 31, 2003, we sold two of our stores and the book of
business relating to one store, resulting in a gain of $178,662. No such sales
occurred during the year ended December 31, 2004.




During
the year ended December 31, 2004, our provision for income taxes was $481,400 as
compared to a provision for income taxes of $22,608 for the year ended December
31, 2003. This primarily was due to the utilization of net loss
carryforwards of approximately $1,300,000 against our total income in 2003,
while net loss carryforwards of only approximately $439,000 were utilized in
2004.




Our
insurance-related operations, on a stand-alone basis, generated a net profit
before income taxes of $1,753,282 during the year ended December 31, 2004 as
compared to a net profit before income taxes of $1,298,868 during the year ended
December 31, 2003. The increase was primarily the result of the inclusion of the
operations of the Atlantic Insurance stores and an increase in contingent
commission revenue during 2004. Our premium finance operations, on a stand-alone
basis, generated a net profit before income taxes of $1,586,173 during the year
ended December 31, 2004 as compared to a net profit before income taxes of
$839,311 during the year ended December 31, 2003. The increase was primarily due
to increased profits resulting from the change in our business model discussed
above. The net loss before income taxes from corporate-related items not
allocable to reportable segments was $1,483,691 during the year ended December
31, 2004 as compared to $779,672 during the year ended December 31, 2003. This
increase was primarily due to the gain on the sale of stores during the year
ended December 31, 2003 while no sales of stores occurred during the year ended
December 31, 2004 as well as increased executive compensation (due to, among
other things, the hiring of John J. Willis, Jr. as our Chief Operating Officer),
the purchase of directors and officers liability insurance and the payment of
directors fees during the year ended December 31, 2004. See “Factors That May
Affect Future Results and Financial Condition” in this Item 6 with regard to the
recent trend in the insurance industry to no longer pay contingent commissions.




In
January 2003, our subsidiary, IAH, Inc., discontinued the operations of the
International Airport Hotel in San Juan, Puerto Rico. During the year ended
December 31, 2003, this discontinued operation generated a net loss of $46,096.
There were no such operations during the year ended December 31,
2004.




18


***Liquidity
and Capital Resources***




As of
December 31, 2004, we had $515,899 in cash and cash equivalents and working
capital of $5,678,700. As of December 31, 2003, we had $1,349,304 in cash and
cash equivalents and working capital of $5,168,694.




Cash and
cash equivalents decreased by $833,405 between December 31, 2003 and December
31, 2004 primarily due to the following:




·
    Net
      cash used in operating activities during the year ended December 31, 2004
      was $721,504 primarily due to the following: (i) a decrease in premiums
      payable of $2,090,840 and an increase in accounts receivable of
      $1,122,268, offset by (ii) our net income for the year of $1,374,364, plus
      depreciation and amortization of $425,384, an increase in taxes payable of
      $510,053 and an increase in accounts payable and accrued expenses of
      $380,629.




·
    We
      used $2,508,149 in investing activities during the fiscal year ended
      December 31, 2004 primarily due to an increase in our net finance
      contracts receivable of $2,347,873.




·
    Net
      cash provided by financing activities during the year ended December 31,
      2004 was $2,396,248 primarily due to proceeds of $66,178,841 from our
      revolving loan from Manufacturers and Traders Trust Co. for premium
      finance purposes and proceeds from the exercise of stock options and
      warrants of $445,676, offset by payments of $63,551,264 on the revolving
      loan.




Our
premium finance operations are financed pursuant to a $25,000,000 revolving line
of credit from Manufacturers and Traders Trust Co. Subject to certain
conditions, M&T has agreed to arrange an additional $10,000,000 credit
facility with other lenders on a “best efforts” basis. The line of credit bears
interest at either (i) M&T’s prime rate or (ii) LIBOR plus 2.5%, matures on
June 30, 2007 and is secured by substantially all of our assets. We can borrow
against the line to the extent of 85% of eligible premium finance receivables.
As of December 31, 2004, $11,595,659 was outstanding under the loan. See
“Business-Development-Developments During 2004” in item 1 of this Annual Report
for a description of the changes made in December 2004 from our initial line of
credit with M&T to that described above.




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 out initial acquisition of the line of credit from M&T, we
obtained a $3,500,000 secured subordinated loan to support our premium finance
operations. In January 2005, we utilized the M&T line of credit to repay
$1,000,000 of the subordinated debt. Effective April 30, 2005, we are permitted,
under certain circumstances, to utilize the line of credit to repay an
additional $1,000,000 of the subordinated debt. The remaining balance of the
loan is repayable in January 2006 and carries interest at the rate of 12-5/8%
per annum. See “Factors That May Affect Future Results and Financial Condition”
in this Item 6 with regard to the need to extend the maturity date of our
subordinated debt pursuant to the requirements of our premium finance line of
credit.




19


***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 conditions, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.




***Factors
That May Affect Future Results and Financial
Condition***




Based
upon the following factors, as well as other factors affecting our operating
results and financial condition, past financial performance should not be
considered to be a reliable indicator of future performance, and investors
should not use historical trends to anticipate results or trends in future
periods. In addition, such factors, among others, may affect the accuracy of
certain forward-looking statements contained in this Annual Report.




*Because
our core product is personal automobile insurance, our business may be adversely
affected by negative developments in the conditions in this
industry.*




Approximately
43% of our revenues for 2004 were commissions and fees from the sale of personal
automobile and other property and casualty insurance policies. As a result of
our concentration in this line of business, negative developments in the
economic, competitive or regulatory conditions affecting the personal automobile
insurance industry could have a material adverse effect on our results of
operations and financial condition.




*Because
substantially all of our insurance-related operations are located in New York
and Pennsylvania, our business may be adversely affected by conditions in these
states.*




Substantially
all of our insurance-related operations are located in the states of New York
and Pennsylvania. Our revenues and profitability are affected by the prevailing
regulatory, economic, demographic, competitive and other conditions in these
states. Changes in any of these conditions could make it more costly or
difficult for us to conduct our business. Adverse regulatory developments in New
York or Pennsylvania, which could include fundamental changes to the design or
implementation of the automobile insurance regulatory framework, could have a
material adverse effect on our results of operations and financial
condition.




20


*Our
inability to refinance our current line of credit or obtain additional required
financing would have an adverse effect on our premium finance
revenue* ***.***




The
working capital needs of our premium finance subsidiary, Payments Inc., are
substantially dependent on its line of credit agreement with Manufacturers and
Traders Trust Co. that expires in June 2007. That agreement includes covenants
requiring us to pass specified financial tests and to refrain from certain kinds
of actions. In the event we fail to meet our covenants or are unable to extend,
refinance, replace or increase our bank line of credit on economically feasible
terms, our income and the marketability of our premium finance services would be
materially adversely affected.




*We
need to extend the maturity date of our subordinated debt pursuant to the
requirements of our premium finance line of credit.*




One of
the requirements of Manufacturers and Traders Trust Co. to the increase in
December 2004 in our premium finance line of credit from $18,000,000 to
$25,000,000 was that we obtain an extension of the maturity date of the
subordinated debt that supports our premium finance operations from January 2006
to December 2007. The extension is required to be obtained by June 29, 2005.
There is currently $2,500,000 of subordinated debt outstanding and we have the
right, under certain circumstances, to utilize the line of credit to repay an
additional $1,000,000 of the subordinated debt effective April 30, 2005. We have
the right to prepay the subordinated debt (subject to M&T’s consent). We are
currently in negotiations with the holders of the subordinated debt with regard
to an extension of the maturity date. In the event we are unable to obtain such
extension or otherwise satisfy M&T’s requirements in this regard (either
through the obtaining of replacement subordinate debt financing, debt
conversion, equity conversion or other financing transaction, in each case upon
terms acceptable to M&T), we would be in default of our line of credit
agreement. We require the M&T line of credit (or substitute financing) to
operate our premium finance business. The loss of available financing would have
a material adverse effect upon our business, financial condition and operations. **




*Increases
in interest rates would have an adverse effect on our premium finance
operations.*




Our
premium finance line of credit with M&T provides for interest based upon
M&T’s floating prime rate or the floating LIBOR rate. Increases in these
rates would increase the cost of borrowing for premium financing. Since we
generally charge interest on our premium finance loans at the statutory rate
permitted in each state, we would not be able to increase our loan rates to
compensate for any such increased cost of borrowing.




*If we
lose key personnel or are unable to recruit qualified personnel, our ability to
implement our business strategies could be delayed or
hindered.*




Our
future success will depend, in part, upon the efforts of Barry Goldstein, our
Chief Executive Officer, and John J. Willis, Jr., our Chief Operating Officer.
The loss of Mr. Goldstein and/or Mr. Willis or other key personnel could prevent
us from fully implementing our business strategies and could materially and
adversely affect our business, financial condition and results of operations. In
addition, an event of default under our line of credit agreement will be
triggered if Mr. Goldstein is no longer serving as chief executive and chief
operating officer of Payments Inc. We have an employment agreement with Mr.
Goldstein that expires on April 1, 2007 and an employment agreement with Mr.
Willis that expires on October 18, 2007. As we continue to grow, we will need to
recruit and retain additional qualified management personnel, but we may not be
able to do so. Our ability to recruit and retain such personnel will depend upon
a number of factors, such as our results of operations and prospects and the
level of competition then prevailing in the market for qualified
personnel.




21


*The
recent trend in the insurance industry to cease the payment of contingent
commissions could adversely affect us* .




One of
the reasons for the increase in the revenues and profitability in 2004 of our
insurance-related operations was contingent commissions received by us from
insurers based upon the performance of the policies obtained by us. In October
2004 an action was brought by the New York State Attorney General against Marsh
& McLennan Companies, the nation’s leading insurance brokerage firm,
alleging, among other things, that it had improperly steered clients to insurers
with whom it had lucrative contingent commission arrangements. As a result of
the ongoing investigation of this mater by the Attorney General’s office and
others, there has been an industry-wide change in the method by which insurance
brokers are compensated from contingent commission arrangements to increased
base commission arrangements. Prior to and during 2004, we earned contingent
commissions when our business with a particular carrier met certain threshold
levels of profitability and/or growth. While there is no way to predict whether
we would have attained such benchmarks in 2005, those carriers which have
eliminated these contingencies have, in general, provided for increases to our
base compensation rates. The uncertainty concerning contingencies has been
eliminated, but the additional base compensation may not be sufficient to meet
our previous commission level. Such change may have an adverse effect on our
results of operations.




*Reductions
in the New York involuntary automobile insurance market may adversely affect our
premium finance business.*




Our
primary source of premium finance loans has been the assigned risk, or
involuntary, automobile insurance market. In New York, since mid-2003, there has
been a decline in the number of new applications for coverage at the New York
Auto Insurance Plan. This has led to a reduction in the number of loans where
policies of this type are the collateral. We have offset the rate of decline by
increasing our loan originations at our Barry Scott and Atlantic Insurance
locations. In general, these loans are of a smaller average size. Beginning in
2004, we began to finance certain voluntary auto insurance policies. There is no
guaranty that the number or size of the loans in the voluntary marketplace will
offset the declines experienced in the involuntary market.




*The
volatility of premium pricing and commission rates could adversely affect our
operations.*




We
currently derive most of our insurance-related revenues from commissions paid by
insurance companies. The commission is usually a percentage of the premium
billed to an insured. Insurance premiums are not determined by us. Historically,
property and casualty premiums have been cyclical in nature and have displayed a
high degree of volatility based on economic and competitive conditions. Because
our commission revenue is paid to us based on insurance premiums, a decline in
premium levels will have an adverse effect on our business. In times of expanded
underwriting capacity of insurance companies, premium rates have decreased
causing a reduction in the commissions payable to us. In addition, in many
cases, insurance companies may seek to reduce their expenses by reducing the
commission rates payable to insurance agents or brokers and generally reserve
the right to make such reductions. We cannot predict the timing or extent of
future changes in commission rates or premiums and therefore cannot predict the
effect, if any, that such changes would have on our operations.




22


*We
are subject to regulation that may restrict our ability to earn
profits.*




Our
premium finance subsidiary is subject to regulation and supervision by the
financial institution departments in the states where it offers to finance
premiums. Certain regulatory restrictions, including restrictions on the maximum
permissible rates of interest for premium financing, and prior approval
requirements may affect its ability to operate.




The
operations of our storefronts depend on their continued good standing under the
licenses and approvals pursuant to which they operate. Licensing laws and
regulations vary from jurisdiction to jurisdiction. Such laws and regulations
are subject to amendment or interpretation by regulatory authorities, and
generally such authorities are vested with broad discretion as to the granting,
suspending, renewing and revoking of licenses and approvals.




In
addition, there are currently 43 DCAP franchises. The offering of franchises is
regulated by both the federal government and some states, including New York.




*As a
holding company, we are dependent on the results of operations of our operating
subsidiaries and the regulatory and contractual capacity of our premium finance
subsidiary to pay dividends to us.*




We are a
holding company and a legal entity separate and distinct from our operating
subsidiaries. As a holding company without significant operations of our own,
the principal sources of our funds are dividends and other payments from our
operating subsidiaries. Dividends from our premium finance subsidiary are
limited by the minimum capital requirements in applicable state regulations and
by covenants in our loan agreement with Manufacturers and Traders Trust Co.
Consequently, our ability to repay debts, pay expenses and pay cash dividends to
our shareholders may be limited.




*Our
premium finance subsidiary is subject to capital requirements, and our failure
to meet these standards could subject us to regulatory
actions.*




Our
premium finance subsidiary is subject to minimum capital requirements imposed
under the laws of the states in which it conducts business. Failure to meet
applicable minimum statutory capital requirements could subject our premium
finance subsidiary to further examination or corrective action imposed by state
regulators, including limitations on our engaging in finance activities, state
supervision or even liquidation.




23


*Our
business is highly competitive, which may make it difficult for us to market our
core products effectively and profitably.*




The
personal automobile insurance business is highly competitive. We compete with
numerous other insurance agents and brokers in our market. The amount of capital
required to commence operations as a broker or agent is generally small and the
only material barrier to entry is the ability to obtain the required licenses
and appointments as a broker or agent for insurance carriers. We also compete
with insurers, such as GEICO Insurance, that sell insurance policies directly to
their customers.




Some of
our competitors, including those who provide premium finance services, have
substantially greater financial and other resources than we have, and they may
offer a broader range of products or offer competing products or services at
lower prices. Our results of operations and financial condition could be
materially and adversely affected by a loss of business to competitors offering
similar insurance products or services at lower prices or having other
competitive advantages.




*A
decline in the number of insurance companies offering insurance products in our
markets would adversely affect our business.*




Based
upon economic conditions and loss history, insurance companies enter and leave
our market. A reduction in the number of available insurance products that we
can offer to our customers would adversely affect our business.




*We
may have difficulties in managing our expansion into new geographic markets, and
we may not be successful in identifying agency acquisition candidates or
integrating their operations.*




Our
future growth plans include expanding into new states by acquiring the business
and assets of local agencies. Our future growth will face risks, including risks
associated with obtaining necessary licenses for our premium finance operations
and our ability to identify agency acquisition candidates or, if acquired, to
integrate their operations. In addition, we may acquire businesses in states in
which market and other conditions may not be favorable to us.




Our
inability to identify and acquire agency acquisition candidates could hinder our
growth by slowing down our ability to expand into new states. If we do acquire
additional agencies, we could suffer increased costs, disruption of our business
and distraction of our management if we are unable to integrate the acquired
agencies into our operations smoothly. Our geographic expansion will also
continue to place significant demands on our management, operations, systems,
accounting, internal controls and financial resources. Any failure by us to
manage our growth and to respond to changes in our business could have a
material adverse effect on our business, financial condition and results of
operations.




24


*We
may seek to expand through acquisitions of complementary businesses or other
assets which involve additional risks that may adversely affect
us.*




We
continually seek to expand our operations by acquiring businesses or other
assets which we believe will complement or enhance our business. We may also
acquire or make investments in complementary businesses, products, services or
technologies. In the event we effect any such acquisition, we may not be able to
successfully integrate any acquired business, asset, product, service or
technology in our operations without substantial costs, delays or other problems
or otherwise successfully expand our operations. In addition, efforts expended
in connection with such acquisitions may divert our management’s attention from
other business concerns. We also may have to borrow money to pay for future
acquisitions and we may not be able to do so at all or on terms favorable to us.
Additional borrowings and liabilities may have a materially adverse effect on
our liquidity and capital resources.




*We
are materially dependent upon the operations of our third party premium finance
servicing agent.*




The
administration, servicing and collection of our premium finance receivables is
handled by a third party. Our premium finance business is materially dependent
upon the operations of such company in a professional manner, including the
timely cancellation of insurance policies based upon the failure of the customer
to pay a premium finance receivable installment.




*We
rely on our information technology and telecommunication systems, and the
failure of these systems could materially and adversely affect our
business* ***.***




Our
business is highly dependent upon the successful and uninterrupted functioning
of our information technology and telecommunications systems as well as those of
our premium financing servicing agent. We rely on these systems to support our
operations, as well as to process new and renewal business, provide customer
service, make claims payments, support premium financing activities, and
facilitate collections and cancellations. The failure of these systems could
interrupt our operations and result in a material adverse effect on our
business.




*The
enactment of tort reform could adversely affect our business.*




Legislation
concerning tort reform is from time to time considered in the United States
Congress and in several states. Among the provisions considered for inclusion in
such legislation are limitations on damage awards, including punitive damages.
Enactment of these or similar provisions by Congress or by states in which we
sell insurance could result in a reduction in the demand for liability insurance
policies or a decrease in the limits of such policies, thereby reducing our
commission revenues. We cannot predict whether any such legislation will be
enacted or, if enacted, the form such legislation will take, nor can we predict
the effect, if any, such legislation would have on our business or results of
operations.




25





**ITEM
7.**  **FINANCIAL
STATEMENTS**




The
financial statements required by this Item 7 are included in this Annual Report
on Form 10-KSB following Item 14 hereof.




**ITEM
8.**  **CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON** **** **ACCOUNTING
AND FINANCIAL DISCLOSURE**




There
were no changes in accountants due to disagreements on accounting and financial
disclosure during the twenty-four month period ended December 31,
2004.




**ITEM
8A.**  **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 December 31,
2004 in alerting him in a timely manner to material information required to be
included in our Securities and Exchange Commission reports. In addition, no
change in our internal control over financial reporting occurred during the
fourth quarter of the fiscal year ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial  reporting.




**ITEM
8B** .  **OTHER
INFORMATION**




Effective
November 1, 2004, we entered into a one year consulting agreement with Morton L.
Certilman, one of our directors, pursuant to which he is entitled to receive
approximately $60,000.




26




**PART
III**




**ITEM
9.**  **DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT**




***Executive
Officers and Directors***




The
following table sets forth the positions and offices presently held by each of
our current directors and executive officers and their ages:




**Name**
    **Age**
    **Positions
      and Offices Held**Barry
      B. Goldstein
    52
    President,
      Chairman of the Board, Chief Executive Officer, Chief Financial Officer,
      Treasurer and DirectorJohn
      J. Willis, Jr.
    40
    Executive
      Vice President and Chief Operating OfficerMorton
      L. Certilman
    73
    Secretary
      and DirectorJay
      M. Haft
    69
    DirectorJack
      D. Seibald
    44
    DirectorRobert
      M. Wallach
    52
    Director





*Barry
B. Goldstein*




Mr.
Goldstein was elected our President, Chief Executive Officer, Chief Financial
Officer, Chairman of the Board, and a director in March 2001 and our Treasurer
in May 2001. From April 1997 to December 2004, he served as President of AIA
Acquisition Corp., which operated insurance agencies in Pennsylvania and which
sold substantially all of its assets to us in May 2003. Mr. Goldstein received
his B.A. and M.B.A. from State University of New York at Buffalo, and has been a
certified public accountant since 1979.




*John
J. Willis, Jr.*




Mr. Willis
was elected our Executive Vice President and Chief Operating Officer in
September 2004.  Prior to joining us, he was Vice President
of Product Management for The Hartford Insurance Company's Northeast Region. In
this capacity, he was responsible for the growth and profitability of the
automobile, homeowners and umbrella products sold through agency and direct
distribution channels in ten states.  From March 1997 through May 2002,
he served in various capacities at Progressive Insurance Company,
including Agency Auto Product Manager, Agency Distribution Manager, Claims
Manager, and Manager of a small chain of company-owned insurance
agencies.  Mr. Willis received a Bachelor’s degree in Finance, summa  cum  laude , from
Syracuse University and earned his M.B.A. at Harvard University’s Graduate
School of Business Administration.




*Morton
L. Certilman*




Mr.
Certilman served as our Chairman of the Board from February 1999 until March
2001. From October 1989 to February 1999, he served as our President. He was
elected our Secretary in May 2001 and has served as one of our directors since
1989. Mr. Certilman has been engaged in the practice of law since 1956 and is
affiliated with the law firm of Certilman Balin Adler & Hyman, LLP. Mr.
Certilman is the immediate past Chairman of the Long Island Regional Planning
Board, and formerly served as Chairman of the Nassau County Coliseum
Privatization Commission and the Northrop/Grumman Master Planning Council. He
served as a director of the Long Island Association and the New Long Island
Partnership for a period of ten years and currently serves as a director of the
Long Island Sports Commission. Mr. Certilman also currently serves as Chairman
of the Long Island Museum of Science and Technology. Mr. Certilman has lectured
extensively before bar associations, builders = institutes, title companies, real estate institutes, banking and law school
seminars, The Practicing Law Institute, The Institute of Real Estate Management
and at annual conventions of such organizations as the National Association of
Home Builders, the Community Associations Institute and the National Association
of Corporate Real Estate Executives. He was a member of the faculty of the
American Law Institute/American Bar Association, as well as the Institute on
Condominium and Cluster Developments of the University of Miami Law Center. Mr.
Certilman has written various articles in the condominium field, and is the
author of the New York State Bar Association Condominium Cassette and the
Condominium portion of the State Bar Association book on “Real Property Titles.”
Mr. Certilman received an LL.B. degree, cum  laude , from
Brooklyn Law School.




27


*Jay
M. Haft*




Mr. Haft
served as our Vice Chairman of the Board from February 1999 until March 2001.
From October 1989 to February 1999, he served as our Chairman of the Board. He
has served as one of our directors since 1989. Mr. Haft has been engaged in the
practice of law since 1959 and since 1994 has served as counsel to Parker Duryee
Rosoff & Haft (and since December 2001, its successor, Reed Smith). From
1989 to 1994, he was a senior corporate partner of Parker Duryee. Mr. Haft is a
strategic and financial consultant for growth stage companies. He is active in
international corporate finance and mergers and acquisitions. Mr. Haft also
represents emerging growth companies. He has actively participated in strategic
planning and fund raising for many high-tech companies, leading edge medical
technology companies and marketing companies. He is a director of a number of
public and private corporations, including DUSA Pharmaceuticals, Inc., whose
securities are traded on the Nasdaq Stock Market, and also serves on the Board
of the United States-Russian Business Counsel. Mr. Haft is a past member of the
Florida Commission for Government Accountability to the People, a past national
trustee and Treasurer of the Miami City Ballet, and a past Board member of the
Concert Association of Florida. He is also a trustee of Florida International
University Foundation and serves on the advisory board of the Wolfsonian Museum
and Florida International University Law School. Mr. Haft received B.A. and
LL.B. degrees from Yale University.




*Jack
D. Seibald*




Mr.
Seibald has been a Managing Member of Whiteford Advisors LLC, an investment
management firm, since its founding in 1997. With a background in equity
research and investment management, Mr. Seibald’s experience in the investment
business dates to 1983. He began his career at Oppenheimer & Co. and has
also been affiliated with Salomon Brothers, Morgan Stanley & Co, and
Blackford Securities. Mr. Seibald also operated The Seibald Report, Inc., an
independent investment research company. Mr. Seibald is currently a registered
representative with Sanders Morris Harris, a broker-dealer. He holds a B.A. from
George Washington University and an M.B.A. from Hofstra University. He has
served as one of our directors since 2004.




28


*Robert
M. Wallach*




Mr.
Wallach has served since 1993 as President, Chairman and Chief Executive Officer
of The Robert Plan Corporation, a servicer and underwriter of private passenger
and commercial automobile insurance. He has served as one of our directors since
1999.




There are
no family relationships among any of our executive officers and
directors.




Each
director will hold office until the next annual meeting of stockholders and
until his successor is elected and qualified or until his earlier resignation or
removal. Each executive officer will hold office until the initial meeting of
the Board of Directors following the next annual meeting of stockholders and
until his successor is elected and qualified or until his earlier resignation or
removal.




***Audit
Committee Financial Expert***




Our Board
of Directors has determined that the Audit Committee of the Board does not have
an “audit committee financial expert,” as that is defined in Item 401(e)(2) of
Regulation S-B. We have been seeking to obtain the services of an individual who
would serve on our Board and Audit Committee and who would be an “audit
committee financial expert.”




***Section
16(a) Beneficial Ownership Reporting Compliance***




Section
16 of the Exchange Act requires that reports of beneficial ownership of common
shares and changes in such ownership be filed with the Securities and Exchange
Commission by Section 16 “reporting persons,” including directors, certain
officers, holders of more than 10% of the outstanding common shares and certain
trusts of which reporting persons are trustees. We are required to disclose in
this Annual Report each reporting person whom we know to have failed to file any
required reports under Section 16 on a timely basis during the fiscal year ended
December 31, 2004. To our knowledge, based solely on a review of written
representations that no reports were required, during the fiscal year ended
December 31, 2004, our officers, directors and 10% stockholders complied with
all Section 16(a) filing requirements applicable to them, except that Mr. Willis
failed to report on a timely basis purchases of common shares on two dates
during 2004.




***Code
of Ethics for Senior Financial Officers***




Our Board
of Directors has adopted a Code of Ethics for our principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. A copy of the Code of Ethics was filed as
an exhibit to our Annual Report for the fiscal year ended December 31, 2003. We
intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding
an amendment to, or a waiver from, or Code of Ethics by posting such information
on our website, www.dcapinsurance.com.




29





**ITEM
10.** ****  **EXECUTIVE
COMPENSATION**




***Summary
Compensation Table***




The
following table sets forth certain information concerning the compensation for
the fiscal years ended December 31, 2004, 2003 and 2002 for Barry B. Goldstein,
our Chief Executive Officer:




**Name
      and**
      **Principal
      Position**
    **Year**
    **Annual
      Compensation**
    **Long
      Term Compensation**
      **Awards**
      **Shares
      Underlying Options**
    **All
      Other****Compensation****Salary**
    **Bonus**Barry
      B. Goldstein
      Chief
      ExecutiveOfficer
    2004
    $350,000
    $100,000(1)
    -
    -2003
    300,000
    50,000(2)
    -
    -2002
    200,000
    20,000
    200,000
    -




(1)Paid in
June 2004 for services rendered during 2003.


(2)  Paid in
March 2003 for services rendered during 2002.




***Option*** **** ***Tables***




**OPTION
GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2004**




**Name**
    **Number
      of Common**
      **Shares
      Underlying**
      **Options
      Granted**
    **Percentage
      of Total**
      **Options
      Granted to**
      **Employees
      in Fiscal Year**
    **Exercise
      Price**
    **Expiration
      Date**Barry
      B. Goldstein
    -
    -
    -
    -







**AGGREGATED
OPTION EXERCISES IN FISCAL YEAR**


**ENDED
DECEMBER 31, 2004 AND FISCAL YEAR-END OPTION VALUES**




**Name**
    **Number
      of**
      **Shares
      Acquired**
      **on
      Exercise**
    **Value****Realized**
    **Number
      of Shares Underlying Unexercised Options**
      **at
      December 31, 2004****Exercisable/Unexercisable**
    **Value
      of Unexercised**
      **In-the-Money
      Options**
      **at
      December 31, 2004****Exercisable/Unexercisable**Barry
      B. Goldstein
    194,000
    $1,174,900
    166,000
      / 40,000
    $1,037,500
      / $260,000







***Long-Term
Incentive Plan Awards***




No awards
were made to Mr. Goldstein during the fiscal year ended December 31, 2004 under
any long-term incentive plan.




***Compensation
of Directors***




Effective
January 1, 2004, our non-employee directors are entitled to receive compensation
for their services as directors as follows:




30


·
    $15,000
      per annum


·
    additional
      $5,000 per annum for committee chair


·
    $500
      per Board meeting attended ($250 if
telephonic)


·
    $250
      per committee meeting attended ($125 if
telephonic)




Each of
Messrs. Certilman and Haft also received additional compensation of $15,000
during 2004 in consideration of their services as a director.




In
addition, for the one year period commencing November 1, 2004, Mr. Certilman is
entitled to receive a fee of approximately $60,000 from us for consulting
services.




***Employment
Contracts, Termination of Employment and*** **** ***Change-in-Control
Arrangements***




Mr.
Goldstein is employed as our President, Chairman of the Board and Chief
Executive Officer pursuant to an employment agreement that expires on April 1,
2007. Mr. Goldstein is entitled to receive a salary of $350,000 per annum plus
such additional compensation as may be determined by the Board of Directors.
Pursuant to the employment agreement with Mr. Goldstein, he would be entitled,
under certain circumstances, to a payment equal to one and one-half times his
then annual salary in the event of the termination of his employment following a
change of control of DCAP.




**ITEM
11.** ****  **SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND** **** **MANAGEMENT
AND RELATED STOCKHOLDER MATTERS**




***Security
Ownership***




The
following table sets forth certain information as of February 28, 2005 regarding
the beneficial ownership of our common shares by (i) each person who we believe
to be the beneficial owner of more than 5% of our outstanding common shares,
(ii) each present director, (iii) each person listed in the Summary Compensation
Table under “Executive Compensation,” and (iv) all of our present executive
officers and directors as a group.




31


**Name
      and Address**
      **Of
      Beneficial Owner**
      ****
    **Number
      of Shares**
      **Beneficially
      Owned**
    **Approximate**
      **Percent
      of Class**Barry
      B. Goldstein
      1158
      Broadway
      Hewlett,
      New York
    386,400
      (1)(2)
    13.2%AIA
      Acquisition Corp.
      6787
      Market Street
      Upper
      Darby, Pennsylvania
    361,600
      (3)
    11.9%Eagle
      Insurance Company
      c/o
      The Robert Plan Corporation
      999
      Stewart Avenue
      Bethpage,
      New York
    297,378
    10.9%Robert
      M. Wallach
      c/o
      The Robert Plan Corporation
      999
      Stewart Avenue
      Bethpage,
      New York
    297,378
      (5)
    10.9%Jack
      D. Seibald
      1336
      Boxwood Drive West
      Hewlett
      Harbor, New York
    274,750
      (1)(6)
    9.9%Morton
      L. Certilman
      The
      Financial Center at Mitchel Field
      90
      Merrick Avenue
      East
      Meadow, New York
    211,701
      (1)(7)
    7.7%Jay
      M. Haft
      69
      Beaver Dam Road
      Salisbury,
      CT
    182,278
      (1)(8)
    6.6%Abraham
      Weinzimer
      418
      South Broadway
      Hicksville,
      New York
    156,784
    5.8%All
      executive officers
      and
      directors as a group (6 persons)
    1,371,477
      (1)(2)(5)(6)
      (7)(8)(9)(10)
    45.1%







(1)
    Based
      upon Schedule 13D filed under the Securities Exchange Act of 1934, as
      amended.




(2)
    Represents
      (i) 206,000 shares issuable upon the exercise of options that are
      exercisable currently or within 60 days, (ii) 8,500 shares held by Mr.
      Goldstein's children, and (iii) 11,900 shares held in a retirement trust
      for the benefit of Mr. Goldstein. Mr. Goldstein disclaims beneficial
      ownership of the shares held by his children and retirement trust.
      Excludes shares owned by AIA Acquisition Corp. of which members of Mr.
      Goldstein’s family are principal
stockholders.




32


(3)
    Based
      upon Schedule 13G filed under the Securities Exchange Act of 1934, as
      amended, and other information that is publicly available. Includes
      312,000 shares issuable upon the conversion of preferred shares that are
      currently convertible.




(4)
    Eagle
      is a wholly-owned subsidiary of The Robert Plan
    Corporation.




(5)
    Represents
      shares owned by Eagle, of which Mr. Wallach, one of our directors, is a
      Vice President. Eagle is a wholly-owned subsidiary of The Robert Plan
      Corporation, of which Mr. Wallach is President, Chairman and Chief
      Executive Officer.




(6)
    Represents
      (i) 113,000 shares owned jointly by Mr. Seibald and his wife, Stephanie
      Seibald; (ii) 100,000 shares owned by SDS Partners I, Ltd., a limited
      partnership (“SDS”); (iii) 3,000 shares owned by Boxwood FLTD Partners, a
      limited partnership (“Boxwood”); (iv) 33,000 shares owned by Stewart
      Spector IRA (“S. Spector”); (v) 3,000 shares owned by Barbara Spector IRA
      Rollover (“B. Spector”); (vi) 4,000 shares owned by Karen Dubrowsky IRA
      (“Dubrowsky”); and (vii) 18,750 shares issuable upon the exercise of
      currently exercisable warrants. Mr. Seibald has voting and dispositive
      power over the shares owned by SDS, Boxwood, S. Spector, B. Spector and
      Dubrowsky. The amount reflected as owned by S. Spector includes shares
      issuable upon the exercise of currently exercisable warrants.




(7)
    Includes
      25,000 shares issuable upon the exercise of currently exercisable
      options.




(8)
    Includes
      (i) 25,000 shares issuable upon the exercise of currently exercisable
      options and (ii) 3,076 shares held in a retirement trust for the benefit
      of Mr. Haft.




(9)
    Includes
      shares owned by Eagle, of which Mr. Wallach is a Vice President. Mr.
      Wallach is also President, Chairman and Chief Executive Officer of The
      Robert Plan, Eagle's parent.




(10)
    Includes
      17,500 shares issuable upon the exercise of currently exercisable
      options.




***Securities
Authorized for Issuance Under Equity Compensation
Plans***




The
following table sets forth information as of December 31, 2004 with respect to
compensation plans (including individual compensation arrangements) under which
our common shares are authorized for issuance, aggregated as
follows:




$
    All
      compensation plans previously approved by security holders;
      and


$
    All
      compensation plans not previously approved by security holders.




33







**EQUITY
COMPENSATION PLAN INFORMATION**




**Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights**
      **(a)**
    **Weighted
      average exercise price of outstanding options, warrants and
      rights**
      **(b)**
    **Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))**
      **(c)**Equity
      compensation plans approved by security holders
    408,800
    $2.68
    147,200Equity
      compensation plans not approved by security holders
    -0-
    -0-
    -0-Total
    408,800
    $2.68
    147,200





**ITEM
12.** **** **CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS**




***Sale
of Brentwood Store***




Effective
February 27, 2003, we sold our Brentwood, New York store to Abraham Weinzimer,
one of our principal stockholders, at a purchase price of $115,437 (equal to
approximately 70% of the store = s
commission income during 2002). Concurrently with the purchase, the entity
acquired by Mr. Weinzimer entered into a franchise agreement with DCAP
Management Corp., our franchise subsidiary, on terms similar in most respects to
our standard conversion franchise agreements. The terms of the above sale were
the result of arm = s length
negotiations between us and Mr. Weinzimer that were based upon the terms of
other recent sales of our stores to persons who are not affiliated with us and
then current market conditions. No independent appraisal or valuation was
received in connection with the agreement.




***Purchase
of Pennsylvania Stores***




Effective May 1,
2003, we acquired substantially all of the assets of AIA Acquisition Corp., an
insurance brokerage firm with offices located in eastern Pennsylvania. The
salient terms of the acquisition are as follows:




·
    A
      base purchase price of $904,000 (which represents (i) 69% of AIA's
      includable commission income for the 12 months ended March 31, 2002 or the
      year ended December 31, 2002, whichever was less, plus (ii) an amount
      equal to AIA’s collected accounts receivable and prepaid expenses). The
      base purchase price was payable in Series A preferred shares. The Series A
      preferred shares carry a 5% dividend, are convertible into common shares
      at a conversion price of $2.50 per share and are redeemable on April 30,
      2007 (or sooner under certain
circumstances).




34


·
    Additional
      cash consideration based upon the EBITDA of the combined operations of AIA
      and our wholly-owned subsidiary, Barry Scott Companies, Inc., during the
      five year period ending April 30, 2008. The additional consideration
      cannot exceed an aggregate of $335,000. As of December 31, 2004, the
      aggregate additional cash consideration paid or payable to AIA was
      $134,000.




Mr.
Goldstein, our Chief Executive Officer, served at the time of the acquisition as
President of AIA and members of his family are principal stockholders of AIA.
The terms of the acquisition were the result of arm’s length negotiations
between us and AIA and were based upon the sales price of stores to persons who
are not affiliated with us and current market conditions.




***Guaranty***




Mr.
Goldstein has guaranteed the repayment of $2,500,000 of the $25,000,000 line of
credit from Manufacturers and Traders Trust Co. discussed in Items 1(a) and 6 of
this Annual Report. Subject to certain conditions, Mr. Goldstein’s guaranty is
scheduled to be reduced to $1,250,000 effective April 30, 2005 and to terminate
effective April 30, 2006. In consideration of the guaranty, we have agreed that,
for so long as the guaranty remains in effect, we will pay him $50,000 per annum
and reimburse him for all premiums paid by him on a $2,500,000 insurance policy
on his life. In the event, at the time of his death, the guaranty is still in
effect, the proceeds of the life insurance policy will be used to satisfy the
guaranty. In such event, Mr. Goldstein’s estate would not be entitled to be
indemnified for the amount so paid as a guarantor.




***2003
Subordinated Debt Financing***





Effective
July 10, 2003, in order
to fund our premium finance operations, we obtained $3,500,000 from a private
placement of subordinated debt. The subordinated debt is repayable on January
10, 2006 and provides for interest at the rate of 12.625% per annum, payable
semi-annually. Subject to M&T’s consent, we have the right to prepay the
subordinated debt. In January 2005, we utilized our M&T line of credit to
repay $1,000,000 of the subordinated debt. Effective April 30, 2005, we have the
right to utilize the M&T line of credit to prepay an additional $1,000,000
of the subordinated debt. In consideration of the debt financing, we issued to
the lenders warrants
for the purchase of an aggregate of 105,000 of our common shares at an exercise
price of $6.25 per share. The warrants expire on January 10, 2006. One of the
private placement lenders was a retirement trust established for the benefit of
Jack Seibald which loaned us $625,000 and was issued a warrant for the purchase
of 18,750 of our common shares. Mr. Seibald is one of our principal stockholders
and, effective September 2004, became one of our directors. See “Factors That
May Affect Future Results and Financial Condition” in Item 6 of this Annual
Report with regard to the need to extend the maturity date of our subordinated
debt pursuant to the requirements of our premium finance line of
credit.




35


***Relationship***




Certilman
Balin Adler & Hyman, LLP, a law firm with which Mr. Certilman is affiliated,
serves as our counsel. It is presently anticipated that such firm will continue
to represent us and will receive fees for its services at rates and in amounts
not greater than would be paid to unrelated law firms performing similar
services.


****


****


36


**ITEM
13.**  **EXHIBITS,
LIST AND REPORTS ON FORM 8-K**




**(a)**  **Exhibits**




**Exhibit**


**Number**  **Description
of Exhibit**




2(a)
    Share
      Purchase Agreement, dated as of August 30, 2002, by and between
      Progressive Agency Holdings Corp. and Blast Acquisition Corp.
      (1)




2(b)
    Asset
      Purchase Agreement, dated May 28, 2003, by and among AIA-DCAP Corp., DCAP
      Group, Inc. and AIA Acquisition Corp. (2)




3(a)
    Restated
      Certificate of Incorporation (3)




3(b)
    Certificate
      of Designation of Series A Preferred Stock
(2)




3(c)
    By-laws,
      as amended (4)




10(a)
    1998
      Stock Option Plan, as amended (5)




10(b)
    Subscription
      Agreement, dated as of October 2, 1998, between DCAP Group, Inc. and Eagle
      Insurance Company and amendments thereto
(6)




10(c)
    Stock
      Purchase Agreement dated May 17, 2000 by and between DCAP Group, Inc.,
      Dealers Choice Automotive Planning, Inc., Alyssa Greenvald, Morton
      Certilman, DCAP Ridgewood, Inc., DCAP Bayside, Inc., DCAP Freeport, Inc.
      and MC DCAP, Inc. (7)




10(d)
    Employment
      Agreement, dated as of May 10, 2001, between DCAP Group, Inc. and Barry
      Goldstein (8)




10(e)
    Amendment
      No. 1, dated as of March 18, 2003 (but effective as of January 1, 2003),
      to Employment Agreement between DCAP Group, Inc. and Barry
      Goldstein




10(f)
    Amendment
      No. 2, dated as of June 29, 2004 (but effective as of January 1, 2004), to
      Employment Agreement between DCAP Group, Inc. and Barry Goldstein
      (4)




10(g)
    Amendment
      No. 3, dated as of March 22, 2005, to Employment Agreement between DCAP
      Group, Inc. and Barry Goldstein




10(h)
    Stock
      Option Agreement, dated as of May 10, 2001, between DCAP Group, Inc. and
      Barry Goldstein (8)




10(i)
    Stock
      Option Agreement, dated as of May 15, 2002, between DCAP Group, Inc. and
      Barry Goldstein (5)




37


10(j)
    Stock
      Option Agreement, dated as of May 15, 2002, between DCAP Group, Inc. and
      Morton L. Certilman (5)




10(k)
    Stock
      Option Agreement, dated as of May 15, 2002, between DCAP Group, Inc. and
      Jay M. Haft (5)




10(l)
    Stock
      Purchase Agreement, dated as of February 27, 2003, between DCAP Group,
      Inc. and Abraham Weinzimer with respect to sale of DCAP Brentwood Inc.
      (5)




10(m)
    Financing
      and Security Agreement, dated December 27, 2004, by and among
      Manufacturers and Traders Trust Company and Payments Inc., among
      others




10(n)
    Revolving
      Credit Note, dated December 27, 2004, in the principal amount of
      $25,000,000 issued by Payments Inc. to Manufacturers and Traders Trust
      Company




10(o)
    Security
      Agreement, dated December 27, 2004, by DCAP Group, Inc, DCAP Management
      Corp., AIA-DCAP Corp., Aard-Vark Agency, Ltd., Barry Scott Agency, Inc.,
      Barry Scott Companies, Inc., Barry Scott Acquisition Corp., Baron Cycle,
      Inc., Blast Acquisition Corp., Dealers Choice Automotive Planning, Inc.,
      IAH, Inc. and Intandem Corp. for the benefit of Manufacturers and Traders
      Trust Company in its capacity as “Agent” for itself and other
      “Lenders”




10(p)
    Pledge,
      Assignment and Security Agreement, dated December 27, 2004, by DCAP Group,
      Inc. for the benefit of Manufacturers and Traders Trust Company in its
      capacity as “Agent” for itself and other
“Lenders”




10(q)
    Pledge,
      Assignment and Security Agreement, dated December 27, 2004, by Blast
      Acquisition Corp. for the benefit of Manufacturers and Traders Trust
      Company in its capacity as “Agent” for itself and other
      “Lenders”




10(r)
    Unit
      Purchase Agreement, dated as of July 2, 2003, by and among DCAP Group,
      Inc. and the purchasers named therein (9)




10(s)
    Security
      Agreement, dated as of July 10, 2003, by and among Payments Inc. and the
      secured parties named therein (9)




10(t)
    Pledge
      Agreement, dated as of July 10, 2003, by and among DCAP Group, Inc. and
      the pledgees named therein (9)




10(u)
    Form
      of Secured Subordinated Promissory Note, dated July 10, 2003, issued by
      DCAP Group, Inc. with respect to aggregate principal indebtedness of
      $3,500,000 (9)




10(v)
    Form
      of Warrant, dated July 10, 2003, for the purchase of an aggregate of
      525,000 shares of common stock of DCAP Group, Inc.
(9)




10(w)
    Registration
      Rights Agreement, dated July 10, 2003, by and among DCAP Group, Inc. and
      the purchasers named therein (9)




38


10(x)
    Letter
      agreement, dated October 31, 2003, between DCAP Group, Inc. and Barry
      Goldstein (10)




10(y)
    Letter
      agreement, dated November 1, 2004, between DCAP Group, Inc. and Morton L.
      Certilman




10(z)
    Employment
      Agreement, dated as of September 24, 2004, between DCAP Group, Inc. and
      Jack Willis




10(aa)
    Stock
      Option Agreement, dated as of October 18, 2004, between DCAP Group, Inc.
      and Jack Willis




14
    Code
      of Ethics (10)




21
    Subsidiaries




23
    Consent
      of Holtz Rubenstein Reminick LLP




31
    Rule
      13a-14(a)/15d-14(a) Certification as adopted pursuant to Section 302 of
      the Sarbanes Oxley Act of 2002




32
    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 Current Report on Form 8-K for an
      event dated August 30, 2002 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.




(3)
    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.




(4)
    Denotes
      document filed as an exhibit to our Quarterly Report on Form 10-QSB for
      the period ended June 30, 2004 and incorporated herein by
      reference.




(5)
    Denotes
      document filed as an exhibit to our Annual Report on Form 10-KSB for the
      fiscal year ended December 31, 2002 and incorporated herein by
      reference.




(6)
    Denotes
      document filed as an exhibit to our Quarterly Report on Form 10-QSB for
      the period ended March 31, 2001 and incorporated herein by
      reference.




39


(7)
    Denotes
      document filed as an exhibit to our Quarterly Report on Form 10-QSB for
      the period ended June 30, 2000 and incorporated herein by
      reference.




(8)
    Denotes
      document filed as an exhibit to our Quarterly Report on Form 10-QSB for
      the period ended June 30, 2001 and incorporated herein by
      reference.




(9)
    Denotes
      document filed as an exhibit to Amendment No. 1 to our Current Report on
      Form 8-K for an event dated May 28, 2003 and incorporated herein by
      reference.




(10)
    Denotes
      document filed as an exhibit to our Annual Report on Form 10-KSB for the
      fiscal year ended December 31, 2003 and incorporated herein by
      reference.


****


**(b)**  **Reports
on Form 8-K**




The
following reports on Form 8-K were filed by us during the last quarter of the
fiscal year ended December 31, 2004:


Date of
      Event:
      Items
      Reported:
    October
      4, 2004
      8.01
      and 9.01Date of
      Event:
      Items
      Reported:
    November
      15, 2004
      2.02
      and 9.01Date of
      Event:
      Item
      Reported:
    November
      19, 2004
      1.01Date of
      Event:
      Item
      Reported:
    December
      20, 2004
      1.01







**ITEM
14.**  **PRINCIPAL
ACCOUNTANT FEES AND SERVICES**




The
following is a summary of the fees billed to us by Holtz Rubenstein Reminick
LLP, our independent auditors, for professional services rendered for the fiscal
years ended December 31, 2004 and December 31, 2003:




**Fee
      Category**
    
    
    **Fiscal
      2004 Fees**
    
    
    **Fiscal
      2003 Fees**Audit
      Fees(1)
    
    $
    73,000
    
    $
    44,400Audit-Related
      Fees(2)
    
    
    -
    
    
    1,675Tax
      Fees
    
    
    -
    
    
    -All
      Other Fees(3)
    
    
    12,250
    
    
    9,630Total
      Fees
    
    $
    85,250
    
    $
    55,705





(1)
    Audit
      Fees consist of aggregate fees billed for professional services rendered
      for the audit of our annual financial statements and review of the interim
      financial statements included in quarterly reports or services that are
      normally provided by the independent auditors in connection with statutory
      and regulatory filings or engagements for the fiscal years ended December
      31, 2004 and December 31, 2003, respectively.





40


(2)
    Audit-Related
      Fees consist of aggregate fees billed for assurance and related services
      that are reasonably related to the performance of the audit or review of
      our financial statements and are not reported under “Audit Fees.” These
      fees related to a review of our Current Reports on Form 8-K.


(3)
    All
      Other Fees consist of aggregate fees billed for products and services
      provided by Holtz Rubenstein Reminick LLP, other than those disclosed
      above. These fees related to the audits of our wholly-owned subsidiary,
      DCAP Management Corp., and general accounting consulting
      services.


The Audit
Committee is responsible for the appointment, compensation and oversight of the
work of the independent auditors and approves in advance any services to be
performed by the independent auditors, whether audit-related or not. The Audit
Committee reviews each proposed engagement to determine whether the provision of
services is compatible with maintaining the independence of the independent
auditors. All of the fees shown above were pre-approved by the Audit
Committee.












iManage:1533601.2
 41





**DCAP
      GROUP, INC. AND**
      **SUBSIDIARIES****REPORT
      ON AUDITS OF CONSOLIDATED**
      **FINANCIAL
      STATEMENTS*****Two
      Years Ended December 31, 2004***












**DCAP
GROUP, INC. AND**
**SUBSIDIARIES**





Contents
 
 Two Years
Ended December 31, 2004


Pages


**Financial
      Statements**Report
      of Independent Registered Public Accounting Firm
      Consolidated
      Balance Sheet
      Consolidated
      Statements of Income
      Consolidated
      Statement of Stockholders' Equity
      Consolidated
      Statements of Cash Flows
      Notes
      to Consolidated Financial Statements
    F-2
      F-3
      F-4
      F-5
      F-6
      F-7
      - F-21













**Consolidated
Financial Statements**



















**Report
of Independent Registered Public Accounting Firm**








Board of
Directors and Stockholders


DCAP
Group, Inc. and Subsidiaries


Hewlett,
New York





We have
audited the accompanying consolidated balance sheet of DCAP Group, Inc. and
Subsidiaries as of December 31, 2004 and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 2004. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of DCAP Group, Inc. and
Subsidiaries as of December 31, 2004 and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
2004 in conformity with accounting principles generally accepted in the United
States of America.











Holtz
Rubenstein Reminick LLP





Melville,
New York


February
24, 2005








****
  **DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 **Consolidated
      Balance Sheet***December
      31, 2004*




**Assets**Current
      Assets:Cash
      and cash equivalents
    
    
    
    
    $
    515,899Accounts
      receivable, net of allowance fordoubtful
      accounts of $62,000
    
    
    
    
    
    2,911,240Finance
      contracts receivable
    
    $
    23,283,106Less:
      Deferred interest
    
    
    (1,785,115
    )Less:
      Allowance for finance receivable losses
    
    
    (65,957
    )
    
    21,432,034Prepaid
      expenses and other current assets
    
    
    
    
    
    255,574Deferred
      income taxes
    
    
    
    
    
    51,200Total
      Current Assets
    
    
    
    
    
    25,165,947Property
      and Equipment, net
    
    
    
    
    
    369,313Goodwill
    
    
    
    
    
    1,238,551Other
      Intangibles, net
    
    
    
    
    
    266,444Deferred
      Income Taxes
    
    
    
    
    
    3,600Deposits
      and Other Assets
    
    
    
    
    
    457,340Total
      Assets
    
    
    
    
    $
    27,501,195**Liabilities
      and Stockholders' Equity**Current
      Liabilities:Revolving
      credit line
    
    
    
    
    $
    11,595,659Accounts
      payable and accrued expenses
    
    
    
    
    
    1,708,158Premiums
      payable
    
    
    
    
    
    4,439,379Current
      portion of long-term debt
    
    
    
    
    
    1,125,000Income
      taxes payable
    
    
    
    
    
    430,493Other
      current liabilities
    
    
    
    
    
    188,558Total
      Current Liabilities
    
    
    
    
    
    19,487,247Long-Term
      Debt
    
    
    
    
    
    2,676,200Deferred
      Revenue
    
    
    
    
    
    38,920Mandatorily
      Redeemable Preferred Stock
    
    
    
    
    
    904,000CommitmentsStockholders'
      Equity:Common
      stock, $.01 par value; authorized 10,000,000 shares;issued
      3,449,347
    
    
    
    
    
    34,494Preferred
      stock, $.01 par value; authorized1,000,000
      shares; 0 shares issued and outstanding
    
    
    
    
    
    -Capital
      in excess of par
    
    
    
    
    
    11,040,831Deficit
    
    
    
    
    
    (5,501,942
    )5,573,383Treasury
      stock, at cost, 776,923 shares
    
    
    
    
    
    (1,178,555
    )Total
      Stockholders' Equity
    
    
    
    
    
    4,394,828Total
      Liabilities and Stockholders' Equity
    
    
    
    
    $
    27,501,195
  *See
      notes to consolidated financial statements.*
    
    F-3
 
 
 **DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
  **Consolidated
      Statements of Income***Years
      Ended December 31,*
    **2004**
    2003
 Revenue:Commissions
      and fees
    
    **$**
    **7,126,398**
    
    $
    6,354,920Premium
      finance revenue
    
    
    **7,961,617**
    
    
    2,330,831Total
      Revenue
    
    
    **15,088,015**
    
    
    8,685,751Operating
      Expenses:General
      and administrative expenses
    
    
    **8,586,657**
    
    
    6,463,785Provision
      for finance receivable losses
    
    
    **2,965,796**
    
    
    348,228Depreciation
      and amortization
    
    
    **425,384**
    
    
    282,786Interest
      expense
    
    
    **1,188,990**
    
    
    335,343Total
      Operating Expenses
    
    
    **13,166,827**
    
    
    7,430,142Operating
      Income
    
    
    **1,921,188**
    
    
    1,255,609Other
      (Expense) Income:Interest
      income
    
    
    **10,006**
    
    
    9,085Interest
      expense
    
    
    **(30,230**
    **)**
    
    (54,716
    )Interest
      expense - mandatorily redeemable preferred stock
    
    
    **(45,200**
    **)**
    
    (30,133
    )Gain
      on sale of stores and business
    
    
    **-**
    
    
    178,662Total
      Other (Expense) Income
    
    
    **(65,424**
    **)**
    
    102,898Income
      Before Provision for Income Taxes
    
    
    **1,855,764**
    
    
    1,358,507Provision
      for Income Taxes
    
    
    **481,400**
    
    
    22,608Income
      from Continuing Operations
    
    
    **1,374,364**
    
    
    1,335,899Discontinued
      Operations:Loss
      from operations of discontinued subsidiary, net ofincome
      taxes of $0
    
    
    **-**
    
    
    (46,096
    )Net
      Income
    
    **$**
    **1,374,364**
    
    $
    1,289,803Net
      Income Per Common Share:Basic:Income
      from continuing operations
    
    **$**
    **0.55**
    
    $
    0.54Loss
      from operations of discontinued subsidiary
    
    
    **-**
    
    
    (0.02
    )Net
      Income
    
    **$**
    **0.55**
    
    $
    0.52Diluted:Income
      from continuing operations
    
    **$**
    **0.44**
    
    $
    0.46Loss
      from operations of discontinued subsidiary
    
    
    **-**
    
    
    (0.02
    )Net
      Income
    
    **$**
    **0.44**
    
    $
    0.44Weighted
      Average Number of Shares Outstanding:Basic
    
    
    **2,501,462**
    
    
    2,470,680Diluted
    
    
    **3,225,303**
    
    
    2,949,261
 *See
      notes to consolidated financial statements.*
    
    F-4
 ****
 **DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
  **Consolidated
      Statement of Stockholders' Equity***Years
      Ended December 31, 2004 and 2003*
 CommonStock
    
    
    PreferredStock
    
    
    Capital
      in
      Excess
    
    
    Equity
    
    
    TreasuryStockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    of
      Par
    
    
    (Deficit)
    
    
    Shares
    
    
    Amount
    
    
    TotalBalance,
      January 1, 2003
    
    
    16,068,018
    
    $
    160,680
    
    
    -
    
    $
    -
    
    $
    10,242,409
    
    $
    (8,166,109
    )
    
    3,714,616
    
    $
    (928,655
    )
    $
    1,308,325Effect
      of 1 for 5 Reverse Stock Split
    
    
    (12,854,488
    )
    
    (128,544
    )
    
    -
    
    
    -
    
    
    128,544
    
    
    -
    
    
    (2,971,693
    )
    
    -
    
    
    -Balance,
      January 1, 2003, as adjusted
    
    
    3,213,530
    
    
    32,136
    
    
    -
    
    
    -
    
    
    10,370,953
    
    
    (8,166,109
    )
    
    742,923
    
    
    (928,655
    )
    
    1,308,325Warrants
      Issued with Private Placement
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    147,000
    
    
    -
    
    
    -
    
    
    -
    
    
    147,000Net
      Income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,289,803
    
    
    -
    
    
    -
    
    
    1,289,803Balance,
      December 31, 2003
    
    
    3,213,530
    
    
    32,136
    
    
    -
    
    
    -
    
    
    10,517,953
    
    
    (6,876,306
    )
    
    742,923
    
    
    (928,655
    )
    
    2,745,128Exercise
      of Stock Options and Warrants
    
    
    235,817
    
    
    2,358
    
    
    -
    
    
    -
    
    
    443,318
    
    
    -
    
    
    -
    
    
    -
    
    
    445,676Tax
      Benefit from Exercise of Stock Options
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    79,560
    
    
    -
    
    
    -
    
    
    -
    
    
    79,560Treasury
      Stock Acquired
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    34,000
    
    
    (249,900
    )
    
    (249,900
    )Net
      Income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,374,364
    
    
    -
    
    
    -
    
    
    1,374,364Balance,
      December 31, 2004
    
    
    3,449,347
    
    $
    34,494
    
    
    -
    
    $
    -
    
    $
    11,040,831
    
    $
    (5,501,942
    )
    
    776,923
    
    $
    (1,178,555
    )
    $
    4,394,828
  *See
      notes to consolidated financial statements.*
    
    
    F-5
  
 **DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 **Consolidated
      Statements of Cash Flows***Years
      Ended December 31,*
    **2004**
    2003
 Cash
      Flows from Operating Activities:Net
      income
    
    **$**
    **1,374,364**
    
    $
    1,289,803Adjustments
      to reconcile net income to net cash(used
      in) provided by operating activities:Depreciation
      and amortization
    
    
    **425,384**
    
    
    282,786Bad
      debt expense
    
    
    **7,388**
    
    
    21,408Amortization
      of warrants
    
    
    **58,800**
    
    
    29,400Deferred
      income taxes
    
    
    **(54,800**
    **)**
    
    -Gain
      on sale of stores and business
    
    
    **-**
    
    
    (178,662
    )Changes
      in operating assets and liabilities:Increase
      in assets:Accounts
      receivable
    
    
    **(1,122,268**
    **)**
    
    (1,095,662
    )Prepaid
      expenses and other current assets
    
    
    **(132,172**
    **)**
    
    (30,833
    )Deposits
      and other assets
    
    
    **(64,555**
    **)**
    
    (289,392
    )(Decrease)
      increase in liabilities:Premiums
      payable
    
    
    **(2,090,840**
    **)**
    
    6,530,219Accounts
      payable and accrued expenses
    
    
    **380,629**
    
    
    530,298Income
      taxes payable
    
    
    **510,053**
    
    
    -Other
      current liabilities
    
    
    **(13,487**
    **)**
    
    (11,601
    )Net
      Cash (Used in) Provided by Operating Activities
    
    
    **(721,504**
    **)**
    
    7,077,764Cash
      Flows from Investing Activities:Increase
      in finance contracts receivable - net
    
    
    **(2,347,873**
    **)**
    
    (19,084,161
    )Decrease
      in notes and other receivables - net
    
    
    **16,847**
    
    
    34,945Proceeds
      from disposition of discontinued subsidiary
    
    
    **-**
    
    
    500,000Proceeds
      on sale of stores and business
    
    
    **-**
    
    
    254,308Purchase
      of property and equipment
    
    
    **(110,123**
    **)**
    
    (133,217
    )Business
      acquisitions
    
    
    **(67,000**
    **)**
    
    (106,039
    )Net
      Cash Used in Investing Activities
    
    
    **(2,508,149**
    **)**
    
    (18,534,164
    )Cash
      Flows from Financing Activities:Principal
      payments on long-term debt and capital lease obligations
    
    
    **(161,491**
    **)**
    
    (269,781
    )Proceeds
      from long-term debt
    
    
    **-**
    
    
    3,500,000Proceeds
      from revolving loan
    
    
    **66,178,841**
    
    
    17,769,118Payments
      on revolving loan
    
    
    **(63,551,264**
    **)**
    
    (8,801,036
    )Deferred
      loan costs
    
    
    **(265,614**
    **)**
    
    -Proceeds
      from exercise of stock options and warrants
    
    
    **445,676**
    
    
    -Purchase
      of treasury stock
    
    
    **(249,900**
    **)**
    
    -Net
      Cash Provided by Financing Activities
    
    
    **2,396,248**
    
    
    12,198,301Net
      (Decrease) Increase in Cash and Cash Equivalents
    
    
    **(833,405**
    **)**
    
    741,901Cash
      and Cash Equivalents, beginning of year
    
    
    **1,349,304**
    
    
    607,403Cash
      and Cash Equivalents, end of year
    
    **$**
    **515,899**
    
    $
    1,349,304
 *See
      notes to consolidated financial statements.*
    
    F-6










**DCAP
GROUP, INC. AND**


**SUBSIDIARIES**


N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004


**1.**
    **Organization
      and Nature of Business**DCAP
      Group, Inc. and Subsidiaries (referred to herein as "we" or "us") operate
      a network of retail offices and franchise operations engaged in the sale
      of retail auto, motorcycle, boat, business, and homeowner's insurance, and
      provide premium financing of insurance policies for customers of our
      offices as well as customers of non-affiliated entities. We also provide
      automobile club services for roadside emergencies and tax preparation
      services.
      
      Prior
      to July 14, 2003, our premium finance business entailed the origination of
      premium finance contracts which were sold to third parties, and for which
      we earned a fee. On July 14, 2003, we changed our business model with
      respect to our premium finance operations from selling finance contracts
      to third parties to internally financing those contracts.
      
      In
      addition, we operated the International Airport Hotel in San Juan, Puerto
      Rico (the "Hotel") through our wholly-owned subsidiary, IAH, Inc. The
      lease on the Hotel was terminated in January 2003 and the operations of
      this subsidiary have been presented as discontinued operations in the
      accompanying financial statements.**2.**
    **Summary
      of Significant Accounting Policies*****Principles
      of consolidation -***The accompanying consolidated financial statements include the accounts of
      all subsidiaries and joint ventures in which we have a majority voting
      interest or voting control. All significant intercompany accounts and
      transactions have been eliminated.
      
      ***Commission
      and fee income -*****We
      recognize commission revenue from insurance policies at the beginning of
      the contract period, except for commissions that are receivable annually,
      for which we recognize the commission revenue ratably. Refunds of
      commissions on the cancellation of insurance policies are reflected at the
      time of cancellation.
      
      Franchise
      fee revenue is recognized when substantially all of our contractual
      requirements under the franchise agreement are completed.
      
      Fees
      for income tax preparation are recognized when the services are completed.
      Automobile club dues are recognized equally over the contract
      period.
      
      ***Allowance
      for doubtful accounts -***Management must make estimates of the uncollectability of accounts
      receivable. Management specifically analyzed accounts receivable and
      analyzes historical bad debts, customer concentrations, customer
      credit-worthiness, current economic trends and changes in customer payment
      terms when evaluating the adequacy of the allowance for doubtful
      accounts.
      
      ***Finance
      income, fees and receivables****-*Until
      July 14, 2003, premium financing fee revenue was earned based upon the
      origination of premium finance contracts sold by agreement to third
      parties. The contract fee gave consideration to an estimate as to the
      collectability of the loan amount. Periodically, actual results were
      compared to estimates previously recorded, and adjusted
      accordingly.
      
      On
      July 14, 2003, we changed our business model with respect to our premium
      finance operations from selling finance contracts to third parties to
      internally financing those contracts. In connection with this we obtained
      a credit facility and commenced recording interest and fee-based revenue
      over the life of each loan (generally 9 to 10 months) and expenses of
      operating the finance subsidiary, such as servicing, bad debts and
      interest expense as well as receivables and payables relating to the
      operations of the premium finance subsidiary.
      
      Finance
      income consists of interest, service fees and delinquency fees. Finance
      income, other than delinquency fees, is recognized using the interest
      method or similar methods that produce a level yield over the life of each
      loan in accordance with Statement of Financial Accounting Standard
      ("SFAS") No. 91,
 
 F- 7
   
  **DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004
 
 "Accounting
      for Nonrefundable Fees and Costs Associated with Originating or Acquiring
      Loans and Initial Direct Costs of Leases." Delinquency fees are earned
      when collected. Upon completion of our 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 account. The majority of these shortfalls result in the
      write-off of unrealized interest. 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. As of December 31, 2004, the allowance
      for finance receivable losses was approximately $66,000.
      
      ***Goodwill
      and intangible assets -***In
      January 2002, we adopted SFAS No. 142, "Goodwill and Intangible Assets".
      SFAS No. 142 requires, among other things, that companies no longer
      amortize goodwill, but instead test goodwill for impairment at least
      annually. In addition, SFAS No. 142 requires that we identify reporting
      units for the purpose of assessing potential future impairment of
      goodwill, reassess the useful lives of other existing recognized
      intangible assets and cease amortization of intangible assets with an
      indefinite useful life.
      
      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 December 31,
      2004.
      
      ***Property
      and equipment -***Property and equipment are stated at cost. Depreciation is provided using
      the straight-line method over the estimated useful lives of the related
      assets. Leasehold improvements are being amortized using the straight-line
      method over the estimated useful lives of the related assets or the
      remaining term of the lease.
      
      ***Deferred
      loan costs -***Deferred
      loan costs are amortized on a straight-line basis over the related term of
      the loan.
      
      ***Concentration
      of credit risk -*****We
      invest our excess cash in deposits and money market accounts with major
      financial institutions and have not experienced losses related to these
      investments.
      
      All
      finance contracts receivable are repayable in less than one year. In the
      event of a default by the borrower, we are entitled to cancel the
      underlying insurance policy financed and receive a refund for the unused
      term of such policy from the insurance carrier. We structure the repayment
      terms in an attempt to minimize principal losses on finance contract
      receivables.
      
      We
      perform on going credit evaluations and generally do not require
      collateral.
      
      ***Cash
      and cash equivalents -***We
      consider all highly liquid debt instruments with a maturity of three
      months or less, as well as bank money market accounts, to be cash
      equivalents.
      
      ***Estimates
      -***The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.
      
      ***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
 F-8
  
 **DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004
  reflect, in periods in which they have a dilutive
effect, the impact of common shares issuable upon exercise of stock
options.  The
reconciliation for the years ended December 31, 2004 and 2003 is as
follows:
 **2004**
    2003Weighted
      Average Number of Shares Outstanding
    **2,501,462**
    2,470,680Effect
      of Dilutive Securities, common stock equivalents
    **723,841**
    478,581Weighted
      Average Number of Shares Outstanding, used for
      computing
      diluted earnings per share
    **3,225,303**
    2,949,261
 
 Net
      income available to common shareholders for the computation of diluted
      earnings per share is computed as follows:
 
 *Years
      Ended December 31,*
    **2004**
    2003Net
      Income
    **$****1,374,364**
    $1,289,803Interest
      Expense on Dilutive Convertible Preferred Stock
    **45,200**
    30,133Net
      Income Available to Common Shareholders for
      Diluted
      Earnings Per Share
    **$****1,419,564**
    $1,319,936
 
 ***Advertising
      costs -***Advertising costs are charged to operations when the advertising first
      takes place. Included in general and administrative expenses are
      advertising costs approximating $629,000 and $453,000 for the years ended
      December 31, 2004 and 2003, respectively.
      
      ***Impairment
      of long-lived assets -***We
      review long-lived assets and certain identifiable intangibles to be held
      and used for impairment on an annual basis and whenever events or changes
      in circumstances indicate that the carrying amount of an asset exceeds the
      fair value of the asset. If other events or changes in circumstances
      indicate that the carrying amount of an asset that we expect to hold and
      use may not be recoverable, we will estimate the undiscounted future cash
      flows expected to result from the use of the asset or its eventual
      disposition, and recognize an impairment loss. The impairment loss, if
      determined to be necessary, would be measured as the amount by which the
      carrying amount of the assets exceeds the fair value of the assets. A
      similar evaluation is made in relation to goodwill, with any impairment
      loss measured as the amount by which the carrying value of such goodwill
      exceeds the expected undiscounted future cash flows.
      
      ***Income
      taxes -***Deferred tax assets and liabilities are determined based upon the
      differences between financial reporting and tax bases of assets and
      liabilities, and are measured using the enacted tax rates and laws that
      will be in effect when the differences are expected to
      reverse.
      
      ***New
      accounting pronouncements -***In
      January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
      "Consolidation of Variable Interest Entities, an interpretation of ARB No.
      51," as revised. A Variable Interest Entity ("VIE") is an entity with
      insufficient equity investment or in which the equity investors lack some
      of the characteristics of a controlling financial interest. Pursuant to
      FIN 46, an enterprise that absorbs a majority of the expected losses of
      the VIE must consolidate the VIE. The full adoption of FIN 46 in fiscal
      2004 did not have a material effect on our financial position and results
      of operations.
      
      In
      December 2004, the FASB issued SFAS No. 123(R), "Accounting for
      Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No. 123(R) establishes
      standards for the accounting for transactions in which an entity exchanges
      its equity instruments for goods or services. This statement focuses
      primarily on accounting for transactions in which an entity obtains
      employee services in share-based payment transactions. SFAS No. 123(R)
      requires that the fair value of such equity instruments be recognized as
      an
  F-9
  
 **DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004
 expense in the historical financial statements as
services are performed. Prior to SFAS No. 123(R), only certain pro forma
disclosures of fair value were required. The provisions of this statement are
effective for small business issuers as of the beginning of the first annual or
interim reporting period that begins after December 15, 2005.  On
December 16, 2004, the FASB issued SFAS No. 153, "Exchange of Non-monetary
Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29,
which differed from the International Accounting Standards Board's ("IASB")
method of accounting for exchanges of similar productive assets. Statement No.
153 replaces the exception from fair value measurement in APB No. 29, with a
general exception from fair value measurement for exchanges of non-monetary
assets that do not have commercial substance. The statement is to be applied
prospectively and is effective for non-monetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. We do not believe that SFAS No.
153 will have a material impact on our results of operations or cash
flows.
  ***Website
development costs -*** Technology and content costs are generally expensed as incurred, except for
certain costs relating to the development of internal-use software, including
those relating to operating our website, that are capitalized and depreciated
over two years. A total of $16,746 and $48,163 in such costs were incurred
during the years ended December 31, 2004 and 2003, respectively.
  ***Comprehensive
income (loss) -*** Comprehensive income (loss) refers to revenue, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income but are excluded from net income as these amounts are recorded directly
as an adjustment to stockholders' equity. At December 31, 2004 and 2003, there
were no such adjustments required.
  ***Stock
based compensation -*** We have
elected the disclosure only provisions of Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" ("FASB 123") in
accounting for our employee stock options. Accordingly, no compensation expense
has been recognized. Had we recorded compensation expense for the stock options
based on the fair value at the grant date for awards in the years ended December
31, 2004 and 2003, consistent with the provisions of SFAS 123, our net income
and net income per share would have been adjusted to the following pro forma
amounts:
  **2004**
    
    
    2003Net
      Income, as reported
    
    **$******
    ******1,374,364**
    
    $
    1,289,803Deduct:
      Stock-based employee compensation expense determined under fair value
      based method, net of related tax effect
    
    
    **142,828**
    
    
    104,964Net
      Income, pro forma
    
    
    **1,231,536**
    
    
    1,184,839Basic
      Income Per Share, as reported
    
    
    **.55**
    
    
    .52Basic
      Income Per Share, pro forma
    
    
    **.49**
    
    
    .48Diluted
      Income Per Share, as reported
    
    
    **.44**
    
    
    .44Diluted
      Income Per Share, pro forma
    
    
    **.40**
    
    
    .41
  The
      fair value of each option grant is estimated on the date of grant using
      the Black-Scholes option-pricing model. The following weighted average
      assumptions were used for grants during the years ended
      December 31:
 **2004**
    
    
    2003Dividend
      Yield
    
    
    **0.00**
    **%**
    
    0.00
    %Volatility
    
    
    **81.65**
    **%**
    
    95.88
    %Risk-Free
      Interest Rate
    
    
    **3.50**
    **%**
    
    2.00
    %Expected
      Life
    
    
    **5
      years**
    
    
    5
      years
   F-10









**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004
 
 The
      Black-Scholes option valuation model was developed for use in estimating
      the fair value of traded options, which have no vesting restrictions and
      are fully transferable. In addition, option valuation models require the
      input of highly subjective assumptions including the expected stock price
      volatility. Because our stock options have characteristics significantly
      different from those of traded options, and because changes in the
      subjective input assumptions can materially affect the fair value
      estimate, in management's opinion, the existing models do not necessarily
      provide a reliable single measure of the fair value of our stock
      options.
      
      ***Reclassifications
      -***Certain amounts reported in the prior-year financial statements and notes
      thereto have been reclassified to conform to 2004
      classifications.**3.**
    **Acquisition*****AIA
      Acquisition Corp.***
      
      On
      May 28, 2003, we acquired (effective May 1, 2003) substantially all of the
      assets of AIA Acquisition Corp. ("AIA"), an insurance brokerage firm with
      six offices located in eastern Pennsylvania, for a base purchase price of
      $904,000. The base purchase price was payable with 904 shares of our
      Series A Preferred Stock. The Series A Preferred Stock carries a 5.0%
      dividend, is convertible into our Common Stock at a conversion price of
      $2.50 per share and is redeemable on April 30, 2007 (or sooner under
      certain circumstances). Additional contingent cash consideration based
      upon the EBITDA of the combined operations of AIA and our wholly-owned
      subsidiary, Barry Scott Companies, Inc., during the five year period
      ending April 30, 2008 may be payable. The additional cash consideration
      cannot exceed $67,000 in any one-year, or an aggregate of $335,000 for the
      five year period.
      
      The
      AIA insurance agencies derive substantially all of their income from
      commissions and fees associated with the sale of automobile insurance. The
      acquisition allowed for the expansion of our geographical footprint
      outside New York State and allows us to capitalize on operational and
      administrative efficiencies.
      
      On
      May 28, 2003, we entered into a two-year employment contract with a former
      employee of AIA.
      
      The
      goodwill amount recorded is comprised of the following: (i) the excess of
      the purchase price over the tangible net assets and identified intangibles
      acquired and (ii) the estimated direct transaction costs associated with
      the acquisition.
      
      Our
      consolidated statements of income include the revenues and expenses of AIA
      from May 1, 2003.**4.**
    **Finance
      Contract Receivables**A
      summary of the changes of the allowance for finance receivable losses is
      as follows:
 
 *December
      31,*
    **2004**
    2003Balance,
      beginning of year
    **$****247,509**
    $-Provision
      for Finance Receivable Losses
    **2,965,796**
    348,228Charge-offs
    **(3,147,348)**
    (100,719)Balance,
      end of year
    **$****65,957**
    $247,509
 
 Finance
      receivables are collateralized by the unearned premiums of the related
      insurance policies. These finance receivables have an average remaining
      contractual maturity of approximately four months, with the longest
      contractual maturity being approximately ten
months.
  F-11




**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004
 
 **5.**
    **Goodwill**The
      changes in the carrying value of goodwill are as
  follows:

*December
      31,*
    **2004**
    2003Balance,
      beginning of year
    **$****1,171,551**
    $619,382Additions,
      as a result of business combination
    **-**
    503,130Addition,
      as a result of contingent acquisition and transaction
costs
    **67,000**
    106,039Reduction,
      as a result of sale of stores
    **-**
    (57,000)Balance,
      end of year
    **$****1,238,551**
    $1,171,551

**6.**
    **Other
      Intangibles**At
      December 31, 2004, other intangible assets consist of the
      following:

Gross
      Carrying Amount:Customer
      lists
    
    $253,550Vanity
      phone numbers
    
    204,416457,966Accumulated
      Amortization:Customer
      lists
    
    122,904Vanity
      phone numbers
    
    68,618191,522Balance,
      end of year
    
    $266,444

The
      aggregate amortization expense for the years ended December 31, 2004 and
      2003 was approximately $77,000 and $92,000,
  respectively.

Estimated
      amortization expense for the five years subsequent to December 31, 2004 is
      as follows:

*Years
      Ending December 31,*2005
    
    $77,0002006
    
    68,0002007
    
    26,0002008
    
    14,0002009
    
    14,000

The
      remaining weighted-average amortization period as of December 31, 2004 is
      as follows:

Customer
      Lists
    2.06
      yearsVanity
      Phone Numbers
    10.00
      years4.41
      years

Other
      intangible assets are being amortized using the straight-line method over
      a period of four to fifteen years.
**
 F-12




**DCAP
GROUP, INC. AND**


**SUBSIDIARIES**


N otes
to Consolidated Financial Statements





Two Years Ended December 31, 2004




**7.**
    **Property
      and Equipment**At
      December 31, 2004, property and equipment consists of the
      following:
 
 Useful
      LivesFurniture,
      Fixtures and Equipment
    5
      years
    
    $347,139Leasehold
      Improvements
    3 -
      5 years
    
    235,581Computer
      Hardware, Software and Office Equipment
    2 -
      5 years
    
    1,131,597Entertainment
      Facility
    20
      years
    
    200,5381,914,855Less
      Accumulated Depreciation and Amortization
    
    
    1,545,542$369,313
 
 Depreciation
      expense for the years ended December 31, 2004 and 2003 was approximately
      $113,300 and $78,800, respectively.**8.**
    **Other
      Assets**At
      December 31, 2004, other assets consists of the
  following:
 
 Deferred
      Loan Costs, net
    
    $335,296Website
      Design Costs, net
    
    29,481Deposits
    
    32,658Other
    
    59,905$457,340
 
 **9.**
    **Accounts
      Payable and Accrued Expenses**At
      December 31, 2004, accounts payable and accrued expenses consists of the
      following:
 
 Accounts
      Payable
    
    $1,083,365Interest
    
    207,871Payroll
      and Related Costs
    
    49,741Professional
      Fees
    
    60,250Loan
      Costs
    
    190,000Acquisition
      Costs
    
    67,000Other
    
    49,931$1,708,158
 
 **10.**
    **Debentures
      Payable**In
      1971, pursuant to a plan of arrangement, we issued a series of debentures,
      which matured in 1977. As of December 31, 2004, $154,200 of these
      debentures has not been presented for payment. Accordingly, this balance
      has been included in other current liabilities in the accompanying
      consolidated balance sheet. Interest has not been accrued on the remaining
      debentures payable. In addition, no interest, penalties or other charges
      have been accrued with regard to any escheat
obligation.


F-13





**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004




**11.**
    **Revolving
      Credit Facility**In
      July 2003, we obtained an $18,000,000 revolving line of credit from
      Manufacturers and Traders Trust Co. (the "Bank"). The line bore interest
      at the Bank's prime lending rate plus 1.5%, and was to mature on July 31,
      2005. We could borrow against the line to the extent of 80% of eligible
      premium finance receivables.
      
      On
      December 27, 2004, we entered into a new revolving line of credit ("New
      Revolver") with the Bank, which provides for an increase in the credit
      line to $25,000,000. Subject to certain conditions, the Bank has agreed 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 (5.15% at December 31, 2004) or LIBOR
      (2.35% at December 31, 2004) plus 2.5%, and matures on June 30, 2007. We
      can borrow against the line to the extent of 85% of eligible premium
      finance receivables. As of December 31, 2004, $11,595,659 was outstanding
      under this line.
      
      The
      line is secured by substantially all of the assets of our premium finance
      subsidiary and a $4,000,000 life insurance policy on our Chairman and CEO,
      and is guaranteed by DCAP Group, Inc. and subsidiaries.
      
      Our
      Chairman and CEO has guaranteed the payment of $2,500,000 of the line
      through April 30, 2005. Subject to certain conditions, the guarantee is
      reduced to $1,250,000 effective April 30, 2005 and is eliminated effective
      April 30, 2006.**12.**
    **Long-Term
      Debt**At
      December 31, 2004, long-term debt is comprised of the
      following:
 
 Note
      payable issued in connection with the purchase of Barry Scott Companies,
      due in installments of $125,000 inAugust
      2005 and $235,000 in August 2006, plus interest at 5%.
    
    $360,000Subordinated
      loan, which bears interest at 12.625% per annum, payable monthly. The
      principal balance is due andpayable
      on January 10, 2006. The loan is subordinate to the revolving credit
      facility, and is secured by a security interest in the assets of our
      premium finance subsidiary and a pledge of our subsidiaries'
      stock.
    
    3,500,000Unamortized
      value of stock purchase warrants issued in connection with subordinated
      loan.
    
    (58,800)3,801,200Less
      Current Maturities
    
    1,125,000$2,676,200
 
 In
      January 2005, we repaid $1,000,000 of the subordinated loan with proceeds
      of the new revolving credit line.Long-term
      debt matures as follows:
 
 *Years
      Ending December 31,*2005
    
    $1,125,0002006
    
    2,735,000


F-14





**DCAP
GROUP, INC. AND**


**SUBSIDIARIES**


N otes
to Consolidated Financial Statements





Two Years Ended December 31, 2004


**13.**
    **Sale
      of Stores and Business**During
      the year ended December 31, 2003, we sold two of our retail insurance
      brokerage offices and the book of business relating to an additional store
      for cash consideration aggregating approximately $254,000 and a note
      receivable of approximately $97,000. These sales resulted in a gain of
      approximately $178,000. The assets sold included accounts receivable of
      approximately $97,000, goodwill with a carrying value of $57,000, property
      and equipment with a carrying amount of approximately $10,000, and other
      assets of approximately $10,000.**14.**
    **Related
      Party Transaction*****Professional
      fees -***A
      law firm affiliated with one of our directors was paid legal fees of
      $242,000 and $237,000 for the years ended December 31, 2004 and 2003,
      respectively.
      
      A
      director was paid a fee of $50,000 during the year ended December 31, 2003
      for consulting services in accordance with a consulting agreement. This
      agreement expired on December 31, 2003 and was not renewed. In November
      2004, we entered into a new consulting agreement with the director for an
      annual fee of $59,800 payable in equal monthly installments.
      
      ***Guarantee
      -***Our Chairman and CEO personally guaranteed the repayment of $2,500,000 of
      our revolving credit facility. In consideration of this guaranty, we have
      agreed to pay him $50,000 per annum and reimburse him for all premiums
      paid by him on a $2,500,000 life insurance policy as long as the
      guarantees remains in effect. He was paid $50,000 in each of the years
      ended December 31, 2004 and 2003.**15.**
    **Income
      Taxes**We
      file a consolidated U.S. Federal Income Tax return that includes all
      wholly-owned subsidiaries. State tax returns are filed on a consolidated
      or separate basis depending on applicable laws. The provision for income
      taxes from continuing operations is comprised of the
      following:
 
 *Years
      Ended December 31,*
    
    **2004**
    
    2003Current:Federal
    
    
    
    
    **$******
    ******418,856**
    
    $
    -State
    
    
    
    
    
    **117,344**
    
    
    22,608**536,200**
    
    
    22,608Deferred:Federal
    
    
    
    
    
    **(46,500**
    **)**
    
    -State
    
    
    
    
    
    **(8,300**
    **)**
    
    -**(54,800**
    **)**
    
    -**$******
    ******481,400**
    
    $
    22,608
 
 A
      reconciliation of the federal statutory rate to our effective tax rate is
      as follows:
 
 *Years
      Ended December 31,*
    
    
    **2004**
    
    
    2003Computed
      Expected Tax Expense
    
    
    **34.00**
    **%**
    
    34.00
    %State
      Taxes, net of federal benefit
    
    
    **5.79**
    **%**
    
    10.00
    %Permanent
      Differences
    
    
    **2.35**
    **%**
    
    -Change
      in Valuation Allowance
    
    
    **(16.20**
    **%)**
    
    (42.33
    %)Total
      Tax Expense
    
    
    **25.94**
    **%**
    
    1.67
    %


F-15





**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004
 At
      December 31, 2004, we had net operating loss carryforwards for tax
      purposes, which expire at various dates through 2019, of approximately
      $1,600,000. These****net
      operating loss carryforwards are subject to Internal Revenue Code Section
      382, which places a limitation on the utilization of the federal net
      operating loss to approximately $10,000 per year, as a result of a greater
      than 50% ownership change of DCAP Group, Inc. in 1999. During fiscal 2003,
      approximately $100,000 of available net operating loss carryforwards
      expired as a result of the sale of certain subsidiaries. We utilized net
      operating loss carryforwards of approximately $438,000 and $1,300,000
      during the years ended December 31, 2004 and 2003 to offset current
      taxable income.
      
      The
      tax effects of temporary differences which give rise to deferred tax
      assets at December 31, 2004 consists of the
following:

Deferred
      Tax Assets:Net
      operating loss carryovers
    
    $
    643,434Provision
      for doubtful accounts
    
    
    24,800Allowance
      for loan losses
    
    
    26,383Amortization
      of intangible assets
    
    
    35,822Gross
      Deferred Tax Assets
    
    
    730,439Deferred
      Tax Liabilities:Depreciation
    
    
    32,549Amortization
      of goodwill
    
    
    59,676Gross
      Deferred Tax Liabilities
    
    
    92,225Net
      Deferred Tax Assets Before Valuation Allowance
    
    
    638,214Less
      Valuation Allowance
    
    
    (583,414
    )Net
      Deferred Tax Assets
    
    $
    54,800

We
      recorded a reduction in our valuation allowance against our net deferred
      tax assets of approximately $300,000 for the year ended December 31,
      2004.**16.**
    **Commitments*****Leases
      -***We, and each of our affiliates, lease office space under noncancellable
      operating leases expiring at various dates through August 2011. Many of
      the leases are renewable and include additional rent for real estate taxes
      and other operating expenses. The minimum future rentals under these lease
      commitments for leased facilities and office equipment are as
      follows:

*Years
      Ending December 31,*2005
    
    $407,0002006
    
    333,0002007
    
    254,0002008
    
    206,0002009
    
    67,000Thereafter
    
    115,000

Rental
      expense approximated $507,000 and $492,000 for the years ended December
      31, 2004 and 2003, respectively.
 F-16


**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004
 
 ***Employment
agreements*** *-* **** During
2004, we amended our employment agreement with an officer, increasing the
minimum salary to $350,000 per annum for the remainder of the agreement. The
employment agreement also provides for discretionary bonuses and other
perquisites commonly found in such agreements. The employment agreement was
scheduled to expire on April 1, 2005.
  Subsequent
to year end, we amended the agreement with the officer, pursuant to which, among
other things, the term of the agreement has been extended to April 1, 2007 and
the officer shall be entitled, under certain circumstances, to a payment equal
to one and one-half times his then annual salary in the event of the termination
of his employment following a change of control.
  During
2004, we entered into an employment agreement with an officer, which provides
for minimum salary of $200,000 per annum. In addition, we granted the officer
options to purchase up to 70,000 shares of our Common Stock. The employment
agreement expires on October 18, 2007.
  ***Litigation
-*** From
time to time, we are involved in various lawsuits and claims incidental to our
business. In the opinion of management, the ultimate liabilities, if any,
resulting from such lawsuits and claims will not materially affect our financial
position.





**17.**
    **Mandatorily
      Redeemable Preferred Stock**On
      May 8, 2003, we issued 904 shares of $.01 par value 5.0% Series A
      Preferred Stock in connection with the acquisition of substantially all of
      the assets of AIA Acquisition Corp. The Series A Preferred Stock has a
      liquidation preference of $1,000 per share. Dividends on the Series A
      Preferred Stock are cumulative and are payable in cash.
      
      Each
      share of the Series A Preferred Stock is convertible at the option of the
      holder at any time into shares of our Common Stock, par value $.01 per
      share, at a conversion rate of $2.50 per share.
      
      On
      January 15, 2005, the preferred stockholder converted 124 shares of Series
      A Preferred Stock into 49,600 shares of our Common Stock.
      
      Subject
      to legal availability of funds, the Series A Preferred Stock is
      mandatorily redeemable by us for cash at its liquidation preference on or
      after April 30, 2007 (unless previously converted into our Common Stock).
      Redemption of the Series A Preferred Stock could occur prior to April 30,
      2007 upon a substantial sale by us, as defined.
      
      In
      accordance with SFAS No. 150, "Accounting for Certain Financial
      Instruments with Characteristics of both Liabilities and
      Equity",the Series A Preferred Stock has been reported as a liability, and the
      preferred dividends have been classified as interest expense.**18.**
    **Stockholders'
      Equity*****Reverse
      stock split -***On
      August 23, 2004, our Board of Directors authorized a one for five reverse
      stock split effected at the close of business on August 25, 2004 to
      stockholders of record on such date. The $0.01 par value per share remains
      the same and $128,544 was reclassified from Common Stock to capital in
      excess of par value as of the earliest period presented. Per share
      information for all periods presented have been adjusted to give effect
      for the one for five reverse stock split.
      
      In
      connection with the reverse split, our Certificate of Incorporation was
      amended to reduce the number of authorized shares from 40,000,000 to
      10,000,000.


F-17





**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004




***Preferred
      stock -***During 2001, we amended our Certificate of Incorporation to provide for
      the authority to issue 1,000,000 shares of Preferred Stock, with a par
      value of $.01 per share. Our Board of Directors has the authority to issue
      shares of Preferred Stock from time to time in a series and to fix, before
      the issuance of each series, the number of shares in each series and the
      designation, liquidation preferences, conversion privileges, rights and
      limitations of each series.
      
      ***Warrants
      -*****On
      June 2, 1999, we sold, through a private placement, 33.5 units (each
      consisting of 9,090 shares of Common Stock and 3,030 Class A, 3,030 Class
      B and 3,030 Class C Warrants) at a purchase price of $50,000 per unit for
      net proceeds of $1,360,000, net of closing costs approximating $315,000.
      Each Class A, B, and C Warrant was initially exercisable at $8.25, $10.30,
      and $12.40, respectively, and expired June 2, 2004. Each unit was subject
      to increase, and the exercise prices of the Warrants were subject to
      reduction, based upon the market price of our Common Stock one year after
      June 2, 1999.
      
      On
      June 2, 2000, we issued 152,268 shares of Common Stock, 50,756 Class A,
      50,756 Class B, and 50,756 Class C Warrants to the private placement
      investors pursuant to price protection provisions contained in the
      offering agreement. Pursuant to those provisions, we had agreed to issue
      to the investors additional shares and Warrants based upon the market
      price of our Common Stock one year after the June 2, 1999 offering date
      (if lower than the market price at the time of the offering). As a result,
      the per-share price was reduced from $5.50 to $3.65 (the floor price
      provided for) and the additional shares and warrants were issued. In
      addition, the price protection provision resulted in a reduction of the
      exercise price of the Class A, B, and C Warrants to $5.50, $6.85, and
      $8.25, respectively.
      
      In
      addition, the underwriter was issued an aggregate of 91,361 warrants with
      an exercise price ranging from $3.65 to $8.25.
      
      During
      the year ended December 31, 2004, warrants were exercised for the purchase
      of 22,727 shares of Common Stock at an exercise price of $5.50 per share
      and 19,090 shares of Common Stock at an exercise price of $3.65 per share.
      All remaining Warrants issued in connection with the private placement
      expired on June 2, 2004.
      
      On
      July 10, 2003, in connection with the issuance of the subordinated debt,
      we issued Warrants to purchase 105,000 shares of our Common Stock at an
      exercise price of $6.25 per share. The Warrants were valued at $147,000
      and are being amortized as additional interest expense over the term of
      the associated debt. The Warrants expire on January 10, 2006.
      
      ***Stock
      options -***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.
      
      A
      summary of the status of our stock option plans as of December 31, 2004
      and 2003, and changes during the years then ended, is presented
      below:


F-18







**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004
 *Years
      Ended December 31,*
    
    **2004**
    
    2003Fixed
      Stock Options
    
    
    
    
    
    **Share**
    
    
    **Weighted**
      **Average**
      **Exercise**
      **Price**
    
    
    Share
    
    
    Weighted
      Average
      Exercise
      PriceOutstanding,
      beginning of year
    
    
    
    
    
    **630,500**
    
    **$******
    ******3.31**
    
    
    580,000
    
    $
    3.25Granted
    
    
    
    
    
    **87,300**
    
    
    **6.56**
    
    
    59,000
    
    
    3.55Exercised
    
    
    
    
    
    **(194,000**
    **)**
    
    **1.29**
    
    
    -
    
    
    -Expired
    
    
    
    
    
    **(90,000**
    **)**
    
    **13.45**
    
    
    -
    
    
    -Forfeited
    
    
    
    
    
    **(25,000**
    **)**
    
    **4.10**
    
    
    (8,500
    )
    
    1.50Outstanding,
      end of year
    
    
    
    
    
    **408,800**
    
    **$******
    ******2.68**
    
    
    630,500
    
    $
    3.31Options
      exercisable, end of year
    
    
    
    
    
    **280,950**
    
    **$******
    ******1.99**
    
    
    493,000
    
    $
    3.70Weighted-Average
      Fair Values of
      Options
      Granted During Year
    
    
    
    
    
    
    
    **$******
    ******4.79**
    
    
    
    
    $
    2.55

The
      following table summarizes information about stock options outstanding at
      December 31, 2004:

Options
      Outstanding
    
    Options
      ExercisableExercise
      Price
    Number
      Outstanding
    Weighted
      Average
      Remaining
      Contractual
      Life
    Weighted
      Average
      Exercise
      Price
    
    Number
      Outstanding
    Weighted
      Average
      Exercise
      Price$1.25
      - 1.50
    294,500
    2.24
      yrs.
    $1.47
    
    243,125
    $1.50$2.35
      - 4.10
    27,000
    3.76
      yrs.
    $3.45
    
    16,000
    $3.28$6.35
      - 7.39
    87,300
    4.81
      yrs.
    $6.56
    
    21,825
    $6.56

***Common
      shares reserved***

Warrants
    
    105,000Stock
      Option Plan
    
    556,000

**19.**
    **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.
      
      In
      December 2002, we disposed of our Hotel segment as part of a settlement
      agreement. Accordingly, the segment information shown in the following
      table excludes the activity of this segment for the years ended December
      31, 2004 and 2003.
**
 F-19


**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004




Revenue,
      interest income, interest expense, depreciation and amortization, profit
      and loss, and assets pertaining to the segments in which we operate are
      presented below.
 
 ***Year
      Ended December 31, 2004***
    
    
    Premium
      Finance
    
    
    Insurance
    
    
    Other
      (1
    )
    
    TotalRevenues
      from External Customers
    
    **$******
    ******7,961,617**
    
    **$******
    ******7,125,398**
    
    **$******
    ******-**
    
    **$******
    ******15,088,015**Interest
      Income
    
    
    **-**
    
    
    **10,006**
    
    
    **-**
    
    
    **10,006**Interest
      Expense
    
    
    **1,188,990**
    
    
    **74,267**
    
    
    **1,183**
    
    
    **1,264,420**Depreciation
      and Amortization
    
    
    **212,391**
    
    
    **179,478**
    
    
    **33,515**
    
    
    **425,384**Segment
      Profit (Loss) before Income Taxes
    
    
    **1,586,173**
    
    
    **1,753,282**
    
    
    **(1,483,691**
    **)**
    
    **1,855,764**Segment
      Profit (Loss)
    
    
    **951,704**
    
    
    **1,051,969**
    
    
    **(629,309**
    **)**
    
    **1,374,364**Segment
      Assets
    
    
    **21,742,126**
    
    
    **4,706,150**
    
    
    **1,052,919**
    
    
    **27,501,195**
 
 (1)Column
      represents corporate-related items and, as it relates to segment profit
      (loss), income, expense and assets not allocated to reportable
      segments.
 
 *Year
      Ended December 31, 2003*
    
    
    Premium
      Finance
    
    
    Insurance
    
    
    Other
      (1
    )
    
    TotalRevenues
      from External Customers
    
    $
    2,330,831
    
    $
    6,354,920
    
    $
    -
    
    $
    8,685,751Interest
      Income
    
    
    -
    
    
    1,223
    
    
    7,862
    
    
    9,085Interest
      Expense
    
    
    335,343
    
    
    84,849
    
    
    -
    
    
    420,192Depreciation
      and Amortization
    
    
    101,165
    
    
    175,286
    
    
    6,335
    
    
    282,786Segment
      Profit (Loss)
      before
      Income Taxes
    
    
    839,311
    
    
    1,298,868
    
    
    (779,672
    )
    
    1,358,507Segment
      Profit (Loss)
    
    
    839,311
    
    
    1,298,868
    
    
    (802,280
    )
    
    1,335,899Segment
      Assets
    
    
    20,261,744
    
    
    3,097,098
    
    
    1,260,972
    
    
    24,619,814
 
 (1)Column
      represents corporate-related items and, as it relates to segment profit
      (loss), income, expense and assets not allocated to reportable
      segments.
 
 **20.**
    **Major
      Customers**At
      December 31, 2004, revenue from major customers consisted of the
      following:
 
 **Customer**
    **%
      of Total Revenue**
    **Segment****A**
    **22%**
    **Insurance**
 
 At
      December 31, 2003, revenue from major customers consisted of the
      following:
 
 Customer
    %
      of Total Revenue
    SegmentA
    25%
    Insurance


F-20





**DCAP
GROUP, INC. AND**
 **SUBSIDIARIES**
 N otes
to Consolidated Financial Statements
 
 Two Years Ended December 31, 2004


**21.**
    **Fair
      Value of Financial Instruments**The
      methods and assumptions used to estimate the fair value of the following
      classes of financial instruments were:
      
      *Current
      Assets and Current Liabilities*:
      The carrying values of cash, accounts receivables, finance contract
      receivables and payables and certain other short-term financial
      instruments approximate their fair value.
      
      *Long-Term
      Debt*:
      The fair value of our long-term debt, including the current portion, was
      estimated using a discounted cash flow analysis, based on our assumed
      incremental borrowing rates for similar types of borrowing arrangements.
      The carrying amount of variable and fixed rate debt at December 31, 2004
      approximates fair value.**22.**
    **Retirement
      Plan**Qualified
      employees are eligible to participate in a salary reduction plan under
      Section 401(k) of the Internal Revenue Code. Participation in the plan is
      voluntary, and any participant may elect to contribute up to a maximum of
      $12,000 per year. We will match 25% of the employee's contribution up to
      6%. Contributions for the years ended December 31, 2004 and 2003
      approximated $26,000 and $17,000,
respectively.
 
 **23.**
    **Supplementary
      Information - Statement of Cash Flows**Cash
      paid during the years for:
 
 *Years
      Ended December 31,*
    
    **2004**
    
    2003Interest
    
    
    
    
    **$******
    ******1,160,798**
    
    $
    127,345Income
      Taxes
    
    
    
    
    **$******
    ******30,927**
    
    $
    17,608
 
 During
      the year ended December 31, 2003, we issued 904 shares of Series A
      Preferred Stock with a value of $904,000 in connection with a business
      acquisition.**24.**
    **Discontinued
      Operations**We
      operated the International Airport Hotel in San Juan, Puerto Rico through
      our subsidiary, IAH, Inc., and had been in litigation with the Port
      Authority of Puerto Rico concerning the lease on the hotel. In December
      2002, we agreed in principle to a settlement agreement whereby the Ports
      Authority paid us $500,000. Operations ceased on January 27,
      2003.
      
      Revenues
      from the discontinued operation totaled $64,561 for the year ended
      December 31, 2003. Pretax net loss from the discontinued operation totaled
      $(46,096) for the year ended December 31,
2003.


F-21





**SIGNATURES**




In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
there-unto duly authorized.




**DCAP
      GROUP, INC.**Dated:
      March 30, 2005
    By:
      /s/ Barry B. Goldstein
      Barry B. Goldstein
      Chief Executive Officer







In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.




**Signature**
    **Capacity**
    **Date**/s/
      Barry B. Goldstein
      Barry
      B. Goldstein
    President,
      Chairman of the Board, Chief Executive Officer, Chief Financial Officer,
      Treasurer and Director (Principal Executive, Financial and Accounting
      Officer)
    March
      30, 2005/s/
      Morton L. Certilman
      Morton
      L. Certilman
    Secretary
      and Director
    March
      30, 2005/s/
      Jay M. Haft
      Jay
      M. Haft
    Director
    March
      30, 2005/s/
      Jack D. Seibald
      Jack
      D. Seibald
    Director
    March
      30, 2005/s/
      Robert M. Wallach
      Robert
      M. Wallach
    Director
    March
      30, 2005