United
States Securities and Exchange Commission
 Washington,
D.C. 20549
 FORM
10-K
 (Mark
One)
 (x)
              ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE FISCAL YEAR ENDED DECEMBER 31,
2008
 
 (  )
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE TRANSITION PERIOD FROM      TO
  0-1665
 DCAP
GROUP, INC.
 (Exact
name of registrant as specified 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(Registrant’s
      telephone number, including area
code)
 
 Securities
registered pursuant to Section 12(b) of the Act:
 Title of each class
                  Name of
      each exchange on which registeredCommon
      Stock
                  NASDAQ
 
 Securities
registered pursuant to Section 12(g) of the Act:
 None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.     Yes __ No X
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.     Yes __ No X
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.      Yes XNo __
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. __
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer”” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer __
                Accelerated
      filer __Non-accelerated
      __ (Do not check if a smaller reporting company)
                Smaller
      reporting company  X
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes __ No X
 
 As of
June 30, 2008, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $1,155,744 based on the closing sale
price as reported on the NASDAQ Capital Market.  As of March 20, 2009,
there were 2,972,746 shares of common stock outstanding.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 None
  
  INDEX
 
 Page No.Forward-Looking
      Statements
                                                                    1PART
      IItem
      1.
                                                                    Business.
                                                                    2Item
      1A.
                                                                    Risk
      Factors.
                                                                    9Item
      1B.
                                                                    Unresolved
      Staff Comments.
                                                                    9Item
      2.
                                                                    Properties.
                                                                    10Item
      3.
                                                                    Legal
      Proceedings.
                                                                    10Item
      4.
                                                                    Submission
      of Matters to a Vote of Security Holders.
                                                                    10PART
      IIItem
      5.
                                                                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                                                                    11Item
      6.
                                                                    Selected
      Financial Data.
                                                                    12Item
      7.
                                                                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                                                                    12Item
      7A.
                                                                    Quantitative
      and Qualitative Disclosures About Market Risk.
                                                                    27Item
      8.
                                                                    Financial
      Statements and Supplementary Data.
                                                                    27Item
      9.
                                                                    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                                                                    27Item
      9A.
                                                                    Controls
      and Procedures.
                                                                    27Item
      9B.
                                                                    Other
      Information.
                                                                    29PART
      IIIItem
      10.
                                                                    Directors,
      Executive Officers and Corporate Governance.
                                                                    30Item
      11.
                                                                    Executive
      Compensation.
                                                                    33Item
      12.
                                                                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                                                                    35Item
      13.
                                                                    Certain
      Relationships and Related Transactions, and Director
      Independence.
                                                                    37Item
      14.
                                                                    Principal
      Accountant Fees and Services.
                                                                    40PART
      IVItem
      15.
                                                                    Exhibits
      and Financial Statement Schedules.
                                                                    41Signatures
  
  PART I
  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 7 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.                      BUSINESS.
  (a)           Business
Development
  General
  Our
continuing operations consist of franchising storefront insurance agencies under
the DCAP brand name and earning placement fees based upon premium finance
contracts purchased, assumed and serviced by the purchaser of our loan portfolio
on February 1, 2008.
  Our
discontinued operations consist of the ownership and operation of storefront
insurance agencies under the DCAP, Barry Scott, Atlantic Insurance and Accurate
Agency brand names and premium financing of insurance policies for such agency
clients as well as clients of non-affiliated entities.
  In
December 2008, due to declining revenues and profits, we made a decision to
restructure our network of retail offices (the “Retail Business”). The plan of
restructuring called for the closing of seven of our least profitable locations
during December 2008 and the sale of the remaining 19 Retail Business locations.
On March 30, 2009, as discussed below under “Recent Developments,” an asset
purchase agreement (the “Purchase Agreement”) was fully executed pursuant to
which we agreed to sell substantially all of the assets, including the book of
business, of the 16 remaining Retail Business locations that we own in New York
State (the “Assets”). The closing of the sale of the Assets is subject to a
number of conditions. We are also seeking to sell the three remaining Retail
Business locations that we own in Pennsylvania.  As a result of the
restructuring in December 2008, and the Purchase Agreement on March 30, 2009,
our Retail Business has been reclassified as discontinued operations and prior
periods have been restated.
  On
February 1, 2008, we sold our outstanding premium finance loan portfolio. As a
result of the sale, our business of internally financing insurance contracts has
been reclassified as discontinued operations.
  See
“Business - Commercial Mutual Insurance Company” below for a discussion of the
status of our efforts to acquire ownership of Commercial Mutual Insurance
Company (“Commercial Mutual”), a New York property and casualty insurance
company.
  Recent
      Developments
  The
      following developments have occurred since January 1,
  2009:
  ·
              On
      March 30, 2009, an asset purchase agreement (the “Purchase Agreement”) was
      fully executed pursuant to which our wholly-owned subsidiaries, Barry
      Scott Agency, Inc. and DCAP Accurate, Inc., agreed to sell substantially
      all of their assets, including the book of business, of the 16 Retail
      Business locations that we own in New York State (the “Assets”). The
      closing of the sale of the Assets is subject to a number of conditions.
      The purchase price for the Assets is approximately $2,337,000, of which
      approximately $1,786,000 is to be paid to us at closing, and the remainder
      of the purchase price is to be satisfied by the delivery of promissory
      notes in the aggregate principal amount of $551,000. As additional
      consideration, we will be entitled to receive through September 2010 an
      amount equal to 60% of the net commissions derived from the book of
      business of six New York retail locations that were closed during
      2008.
  
 Developments
During 2008
  ·
              On
      February 1, 2008, our wholly-owned subsidiary, Payments Inc., sold its
      outstanding premium finance loan portfolio. The purchase price for the net
      loan portfolio was approximately $11,845,000, of which approximately
      $268,000 was paid to Payments Inc.  The remainder of the
      purchase price was satisfied by the assumption of liabilities, including
      the satisfaction of Payments Inc.’s premium finance revolving credit line
      obligation to Manufacturers and Traders Trust Company (“M&T”). As
      additional consideration, Payments Inc. received an amount based upon the
      net earnings generated by the loan portfolio as it was collected. The
      purchaser of the portfolio also agreed that, during the five year period
      ending January 31, 2013 (subject to automatic renewal for successive two
      year terms under certain circumstances), it will purchase, assume and
      service all eligible premium finance contracts originated by Payments Inc.
      in the states of New York and Pennsylvania.  In connection with
      such purchases, Payments Inc. will be entitled to receive a fee generally
      equal to a percentage of the amount
financed.
  ·
              In
      April 2008, the holder of our Series B preferred shares exchanged such
      shares for an equal number of Series C preferred shares.  The
      Series C preferred shares provided for dividends at the rate of 10% per
      annum (as compared to 5% per annum for the Series B preferred shares) and
      an outside mandatory redemption date of April 30, 2009 (as compared to
      April 30, 2008 for the Series B preferred shares).  Effective
      August 23, 2008, the outside mandatory redemption date for the preferred
      shares was further extended to July 31, 2009 through the issuance of
      Series D preferred shares in exchange for the Series C preferred shares.
      The outside mandatory redemption date was previously extended in March
      2007 from April 30, 2007 to April 30, 2008.  See Item 13 of this
      Annual Report.
  ·
              In
      August 2008, the holders of $1,500,000 outstanding principal amount of
      notes payable (the “Notes Payable”) agreed to extend the maturity date of
      the debt from September 30, 2008 to the earlier of July 10, 2009 or 90
      days following the conversion of Commercial Mutual to a stock property and
      casualty insurance company and the issuance to us of a controlling
      interest in Commercial Mutual (subject to acceleration under certain
      circumstances).  In exchange for this extension, the holders are
      entitled to receive an aggregate incentive payment equal to $10,000 times
      the number of months (or partial months) the debt is outstanding after
      September 30, 2008 through the maturity date. If a prepayment of principal
      reduces the debt below $1,500,000, the incentive payment for all
      subsequent months will be reduced in proportion to any such reduction to
      the debt. The aggregate incentive payment is due upon full repayment of
      the debt.  The maturity date of the Notes Payable was previously
      extended during 2007 from September 30, 2007 to September 30,
      2008.  See Items 1(b), 7 and 13 of this Annual
      Report.
  3
 ·
              On
      October 23, 2008, Michael R. Feinsod became a member of the board of
      directors.
  ·
              On
      December 5, 2008, Morton L. Certilman retired from the board of
      directors.
  ·
              In
      December 2008, we entered into a plan to restructure our Retail Business.
      The plan of restructuring called for the closing of seven of our least
      profitable locations during December 2008 and the sale of the remaining 19
      Retail Business locations.  See Item 1(b) of this Annual
      Report.
  Developments
During 2007
  ·
              In
      March 2007, Commercial Mutual Insurance Company’s Board of Directors
      adopted a resolution to convert Commercial Mutual from an advance premium
      insurance company to a stock property and casualty insurance
      company.  We hold surplus notes of Commercial Mutual in the
      aggregate principal amount of $3,750,000.  We purchased such
      surplus notes in January 2006.  Based upon the amount payable on
      the surplus notes and the statutory surplus of Commercial Mutual, the plan
      of conversion provides that, in the event of a conversion by Commercial
      Mutual into a stock corporation, in exchange for our relinquishing our
      rights to any unpaid principal and interest under the surplus notes, we
      would receive 100% of the stock of Commercial Mutual.  See Items
      1(b), 7 and 13 of this Annual
Report.
  (b)
              Business
  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.
  Currently
there are 52 store locations owned or franchised by us of which 49 are located
in New York State.  In the New York metropolitan area, there are 33
DCAP franchises.  There are also 12 Barry Scott locations and four
Accurate Agency locations outside the New York metropolitan area (all located in
central and western New York State). There are three Atlantic Insurance
locations in eastern Pennsylvania.  All of the Barry Scott, Atlantic
Insurance and Accurate Agency locations (the “Retail Business”) are wholly-owned
by us. In December 2008, we made a decision to restructure our Retail
Business. The plan of restructuring called for the closing of seven of our least
profitable locations during December 2008 and sale of the remaining 19 Retail
Business locations. As a result of the restructuring, our Retail Business has
been reclassified as discontinued operations and prior periods have been
restated.  See Item 1(a) for a discussion of an agreement to sell our
remaining New York State locations and the contemplated sale of our Pennsylvania
locations.
  4
 Through
our wholly-owned subsidiary, Payments Inc., until February 1, 2008, we provided
insurance premium financing services to our DCAP, Barry Scott, Atlantic
Insurance and Accurate Agency locations as well as non-affiliated insurance
agencies.  Payments Inc. is licensed as an insurance premium finance
agency in the states of New York and Pennsylvania. Effective February 1, 2008,
Payments Inc. sold its outstanding premium finance loan portfolio.  As
a result of the sale, our business of internally financing insurance contracts
has been reclassified as discontinued operations.  Payments Inc. now
receives revenues through placement fees rather than through the internally
financing of contracts.
  Our
continuing operations consist of franchising storefront insurance agencies under
the DCAP brand name and earning placement fees based upon premium finance
contracts purchased, assumed and serviced by the purchaser of our loan portfolio
on February 1, 2008.
  We were
incorporated in 1961 and assumed our current name in 1999.  In the
event the Commercial Mutual conversion occurs, we will change our name to
“Kingstone Companies, Inc.”  We obtained stockholder approval for such
name change in November 2008.
  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.
  Retail
Business Discontinued Operations
  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.
  Our
agencies currently operate under the DCAP, Barry Scott, Atlantic Insurance and
Accurate Agency brand names.  The stores receive commissions from
insurance companies for their services.  We do not currently serve as
an insurance company and therefore do not assume underwriting risks; however, as
discussed below under “Commercial Mutual Insurance Company,” Commercial Mutual
is seeking to convert from an advance premium insurance company to a stock
property and casualty insurance company.  Based upon the amount
payable on the surplus notes and the statutory surplus of Commercial Mutual, the
plan of conversion provides that, in the event of a conversion by Commercial
Mutual into a stock corporation, in exchange for our relinquishing our rights to
any unpaid principal and interest under the surplus notes, we would receive 100%
of the stock of Commercial Mutual.
  In
addition to automobile insurance, in our Retail Business discontinued
operations, we offer:
  ·  property
and casualty insurance for motorcycles, boats and livery/taxis
 ·  life
insurance
 ·  business
insurance
 ·  homeowner’s
insurance
 ·  excess
coverage
  5
 As a
complement to our Retail Business discontinued 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.
  Franchises
  Currently
there are 33 DCAP franchises located in the New York metropolitan
area.  Franchisees 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 six to twelve month period from the date
on which the storefront opens for business.  Monthly fees payable by
franchisees constituted approximately 45% of our revenues from continuing
operations during the year ended December 31, 2008. We received no initial
franchise fees in 2008.
  A number
of our franchise locations provide income tax return preparation
services.  The tax return preparation service allows them to offer an
additional service to the walk-in customers who comprise the bulk of their
customer base, as well as to existing customers.
  Structure
and Operations
  As stated
above, we currently have 52 offices, of which 33 are franchises and 19 are
wholly-owned.  Our franchises 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.  Each franchise is managed by, and is under the
supervision of the franchisee.
  In order
to promote consistency and efficiency, and as a service to our franchisees, we
offer training to office managers.  Our training program
covers:
  ·
              marketing,
      sales and underwriting
 ·
              office
      and logistics
 ·
              computer
      information
  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 franchisees
participate.
  In
addition to the above services, we provide to all of our franchisees 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.
  We also
offer our franchisees the use of an agency software system, AMS 360, in
connection with the management and operations of their retail insurance
stores.
  6
 Internet
  Our
website (www.dcapagents.com) is a secure site for use by personnel of our
company-owned stores as well as our franchisees.  Incorporated within
the website are tools for managing the location’s business, including
comparative quoting, lead generation and tracking.
  Policy
placement generates commission revenue.  Since policy sales can be measured
as they relate to the number of inquiries or leads, increased
marketing will result in more leads.  Our website,
www.dcapinsurance.com, offers the prospective insured the opportunity to provide
our company-owned stores as well as our franchisees the needed information in
the very same manner as provided face to face or over the telephone.  With
the information provided, we and our franchisees can give multiple quotes to the
prospect as well as track the status of the lead from the moment it is
received.
  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 secured by the unearned portion
of the insurance premiums being financed and held by the insurance
carrier.  Our wholly-owned subsidiary, Payments Inc., is licensed as a
premium finance agency in the states of New York and Pennsylvania.
  Prior to
February 1, 2008, Payments Inc. provided premium financing in connection with
the obtaining of insurance policies.  Effective February 1, 2008,
Payments Inc. sold its outstanding premium finance loan
portfolio.  The purchaser of the portfolio has agreed that, during the
five year period following the closing (subject to automatic renewal for
successive two year terms under certain circumstances), it will purchase, assume
and service all eligible premium finance contracts originated by Payments in the
states of New York and Pennsylvania.  In connection with such
purchases, Payments will be entitled to receive a fee generally equal to a
percentage of the amount financed. Our premium financing business currently
consists of the placement fees that Payments will earn from placing contracts.
Placement fees earned from placing contracts constituted approximately 47% of
our revenues from continuing operations during the year ended December 31,
2008.
  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 that may be charged to the
insureds for financing their premiums is limited by these state
statutes.  See “Government Regulation.”
  Commercial
Mutual Insurance Company
  In March
2007, Commercial Mutual Insurance Company’s Board of Directors approved a
resolution to convert Commercial Mutual from an advance premium insurance
company to a stock property and casualty insurance company pursuant to Section
7307 of the New York Insurance Law. Commercial Mutual has advised us that it has
obtained permission from the Superintendent of Insurance of the State of New
York (the “Superintendent of Insurance”) to proceed with the conversion process
(subject to certain conditions as discussed below).
  7
 We hold
two surplus notes issued by Commercial Mutual in the aggregate principal amount
of $3,750,000.  Previously earned but unpaid interest on the notes as
of December 31, 2008 was approximately $2,186,000.  The surplus notes
are past due and provide for interest at the prime rate or 8.5% per annum,
whichever is less.  Payments of principal and interest on the surplus
notes may only be made out of the surplus of Commercial Mutual and require the
approval of the Insurance Department of the State of New York (the “Insurance
Department”).  As of December 31, 2008, the statutory surplus of
Commercial Mutual, as reported to the Insurance Department, was approximately
$7,748,000.
  The
conversion by Commercial Mutual to a stock property and casualty insurance
company is subject to a number of conditions, including the approval of the plan
of conversion, which was filed with the Superintendent of Insurance on April 25,
2008, by both the Superintendent of Insurance and Commercial Mutual’s
policyholders. As part of the approval process, the Superintendent of
Insurance conducted a five year examination of Commercial Mutual as of December
31, 2006 and had an appraisal performed with respect to the fair market value of
Commercial Mutual as of such date. We, as the holder of the Commercial Mutual
surplus notes, at our option, would be able to exchange the surplus notes for an
equitable share of the securities or other consideration, or both, of the
corporation into which Commercial Mutual would be converted.  Based
upon the amount payable on the surplus notes and the statutory surplus of
Commercial Mutual, the plan of conversion provides that, in the event of a
conversion by Commercial Mutual into a stock corporation, in exchange for our
relinquishing our rights to any unpaid principal and interest under the surplus
notes, we would receive 100% of the stock of Commercial Mutual.  Upon
the effectiveness of the conversion, Commercial Mutual’s name will change to
“Kingstone Insurance Company.”  We have obtained stockholder approval
of an amendment to our certificate of incorporation to change our name to
“Kingstone Companies, Inc.”  Such name change would only take place in
the event that the conversion occurs and we obtain a controlling interest in
Kingstone Insurance Company.  No assurances can be given that the
conversion will occur or as to the timing or the terms of the
conversion.
  Competition
  We and
our franchisees 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 or our franchisees
and other agents and brokers.  All must sell a particular carrier’s
policies at exactly the same price; however, we and our franchisees may be able
to offer a different payment plan through the placement of premium
financing.
  In recent
years, extensive competition has come from direct sales entities, such as
Progressive Direct, Esurance and GEICO Insurance, who have concentrated their
advertising efforts on television and radio.  In addition, the
Internet sales effort of some competitors has shown promise.  Further,
legislation that allows banks to offer insurance to their customers has taken
market share from the storefront insurance operators.
  8
 Government
Regulation
  Our
premium finance subsidiary, Payments Inc., is regulated by governmental agencies
in the 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
  ·
              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
  The
offering of franchises is regulated by both the federal government and the State
of New York, in which our franchisees operate.
  Employees
  We
currently employ five persons in our continuing operations and 46 persons in our
discontinued operations.  We believe that our relationship with our
employees is good.
  ITEM
1A.                 RISK
FACTORS.
  Not applicable.
  ITEM
1B.                  UNRESOLVED
STAFF COMMENTS.
  Not applicable.
  9
 ITEM
2.                      PROPERTIES.
  Our
principal executive offices and the administrative offices of Payments Inc. are
located at 1158 Broadway, Hewlett, New York.  Our central processing
offices are located at 1762 Central Avenue, Albany, New York.
  Our 12
Barry Scott offices and four Accurate Agency offices are located in upstate New
York.  Our three Atlantic Insurance offices are located in eastern
Pennsylvania.
  Our 19
wholly-owned storefront locations and our executive and other offices are
operated pursuant to lease agreements that expire from time to time through
2015.  The current yearly aggregate base rental for the offices is
approximately $414,000.
  See Item
1 of this Annual Report for a discussion of a contemplated sale of our Barry
Scott and Accurate Agency operations.
  ITEM
3.                      LEGAL
PROCEEDINGS.
  None.
  ITEM
4.                      SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  Our
Annual Meeting of Stockholders was held on November 26, 2008.  The
following is a listing of the votes cast for or withheld with respect to each
nominee for director and a listing of the votes cast for and against, as well as
abstentions and broker non-votes, with respect to the approval of an amendment
to our Certificate of Incorporation to:
 
 1.           Election
of Board of Directors
 
 Number of SharesFor
                        WithheldBarry
      B. Goldstein
                        2,519,847
                        160,443Morton
      L. Certilman
                        1,097,249
                        939,126Michael
      R. Feinsod
                        2,520,079
                        160,221Jay
      M. Haft
                        1,351,726
                        939,126David
      A. Lyons
                        2,520,039
                        160,251Jack
      D. Seibald
                        2,520,089
                        160,211
 
  2.           Approval
of amendment to Certificate of Incorporation to change our name to “Kingstone
Companies, Inc.”
  For
                    2,074,823Against
                    6,137Abstentions
                    167,470Broker
      Non-Votes
                    0
 
  10
  PART II
  ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES.
  Market Information
  Our
common shares are quoted on The NASDAQ Capital Market under the symbol
“DCAP.”
  Set forth
below are the high and low sales prices for our common shares for the periods
indicated, as reported on The NASDAQ Capital Market.
  High
                                  Low2008
      Calendar YearFirst
      Quarter
                                  $1.75
                                  $1.21Second
      Quarter
                                  1.67
                                  .95Third
      Quarter
                                  1.20
                                  .80Fourth
      Quarter
                                  .80
                                  .25High
                                  Low2007
      Calendar YearFirst
      Quarter
                                  $3.05
                                  $2.33Second
      Quarter
                                  2.70
                                  2.18Third
      Quarter
                                  2.75
                                  1.95Fourth
      Quarter
                                  2.39
                                  1.15
 
 Holders
  As of
April 6, 2009, there were approximately 852 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
currently outstanding 780 Series D preferred shares.  These shares are
entitled to cumulative aggregate dividends of $78,000 per annum (10% of their
liquidation preference of $780,000).  The Series D preferred shares
are mandatorily redeemable on July 31, 2009.  No dividends may be paid
on our common shares unless a payment is made to the holders of the Series D
preferred shares of all dividends accumulated or accrued at such
time.
  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.
  11
 Recent
Sales of Unregistered Securities
  None.
  Issuer
Purchases of Equity Securities
  None.
  ITEM
6.                      SELECTED
FINANCIAL DATA.
  Not applicable.
  ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
  Overview
  Until
December 2008, our continuing operations primarily consisted of the ownership
and operation of 19 storefronts, including 12 Barry Scott locations, three
Atlantic Insurance locations, and four Accurate Agency locations. In December
2008, due to declining revenues and profits, we made a decision to restructure
our network of retail offices (the “Retail Business”). The plan of restructuring
called for the closing of seven of our least profitable locations during
December 2008 and the sale of the remaining 19 Retail Business
locations.  On March 30, 2009, an asset purchase agreement (the
“Purchase Agreement”) was fully executed pursuant to which we agreed to sell
substantially all of the assets, including the book of business, of the 16
remaining Retail Business locations that we own in New York State (the
“Assets”). The closing of the sale of the Assets is subject to a number of
conditions. As a result of the restructuring in December 2008, and the Purchase
Agreement on March 30, 2009, our Retail Business has been reclassified as
discontinued operations and prior periods have been restated.
  In our
continuing operations, we receive fees from 33 franchised locations in
connection with their use of the DCAP name.
  Payments
Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
is licensed within the states of New York and Pennsylvania. Until February 1,
2008, Payments Inc. offered premium financing to clients of DCAP, Barry Scott,
Atlantic Insurance and Accurate Agency offices, as well as non-affiliated
insurance agencies.  On February 1, 2008, Payments Inc. sold its
outstanding premium finance loan portfolio. As a result of the sale, our
business of internally financing insurance contracts has been reclassified as
discontinued operations.  Effective February 1, 2008, revenues from
our premium financing business have consisted of placement fees based upon
premium finance contracts purchased, assumed and serviced by the purchaser of
the loan portfolio.
  In our
Retail Business discontinued operations, the insurance storefronts serve as
insurance agents or brokers and place various types of insurance on behalf of
customers.  Our Retail Business focuses on automobile, motorcycle and
homeowner’s insurance and our customer base is primarily individuals rather than
businesses.
  12
 The
stores also offer automobile club services for roadside assistance and some of
our franchise locations offer income tax preparation services.
  The
stores from our Retail Business discontinued operations receive commissions from
insurance companies for their services.  Neither we nor the stores
have served as an insurance company and therefore we have not assumed
underwriting risks; however, as discussed in Item 1(b) of this Annual Report, in
March 2007, Commercial Mutual Insurance Company’s Board of Directors adopted a
resolution to convert Commercial Mutual from an advance premium insurance
company to a stock property and casualty insurance company.  We hold
surplus notes of Commercial Mutual in the aggregate principal amount of
$3,750,000.  Based upon the amount payable on the surplus notes and
the statutory surplus of Commercial Mutual, the plan of conversion provides
that, in the event of a conversion by Commercial Mutual into a stock
corporation, in exchange for our relinquishing our rights to any unpaid
principal and interest under the surplus notes, we would receive 100% of the
stock of Commercial Mutual.
  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.
  Franchise
fee revenue
  Franchise
fee revenue on initial franchisee fees is recognized when substantially all of
our contractual requirements under the franchise agreement are
completed.  Franchisees also pay a monthly franchise fee plus a
monthly advertising fee.  We are obligated to provide marketing and
training support to each franchisee.
  Commission
revenue (discontinued operations)
  We
recognize commission revenue from insurance policies at the beginning of the
contract period.  Refunds of commissions on the cancellation of
insurance policies are reflected at the time of cancellation.
  Automobile
club dues are recognized equally over the contract period.
  13
 Finance
income, fees and receivables (discontinued operations)
  For our
premium finance operations, we used the interest method to recognize interest
income over the life of each loan in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 91, “Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases.”
  Upon the
establishment of a premium finance contract, we recorded the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest was amortized to interest income using the interest method
over the life of each loan.  The weighted average interest rate
charged with respect to financed insurance policies was approximately 26.1% and
26.4% per annum for the years ended December 31, 2008 and 2007,
respectively.
  Upon
completion of collection efforts, after cancellation of the underlying insurance
policies, any uncollected earned interest or fees were charged off.
  Allowance
for finance receivable losses (discontinued operations)
  Customers
who purchase insurance policies are often unable to pay the premium in a lump
sum and, therefore, require extended payment terms.  Premium finance
involves making a loan to the customer that is backed by the unearned portion of
the insurance premiums being financed.  No credit checks were made
prior to the decision to extend credit to a customer.  Losses on
finance receivables included an estimate of future credit losses on premium
finance accounts. Credit losses on premium finance accounts occurred when the
unearned premiums received from the insurer upon cancellation of a financed
policy were inadequate to pay the balance of the premium finance account. After
collection attempts were exhausted, the remaining account balance, including
unrealized interest, was written off.  We reviewed historical trends
of such losses relative to finance receivable balances to develop estimates of
future losses.
  Goodwill
  The
carrying value of goodwill was initially reviewed for impairment as of
January 1, 2002, and is reviewed annually or whenever events or changes in
circumstances indicate that the carrying amount might not be recoverable. If the
fair value of the reporting unit to which goodwill relates is less than the
carrying amount of those operations, including unamortized goodwill, the
carrying amount of goodwill is reduced accordingly with a charge to impairment
expense. Based on our most recent analysis, our results of operations for the
year ended December 31, 2008 include a charge to impairment expense of
approximately $394,000.
  Stock-based
compensation
  Our stock
option and other equity-based compensation plans are accounted for in accordance
with the recognition and measurement provisions of  SFAS No. 123
(revised 2004), “Share-Based
Payment” (“SFAS 123(R)”). FAS 123(R) requires compensation costs related
to share-based payment transactions, including employee stock options, to be
recognized in the financial statements. In addition, we adhere to the guidance
set forth within Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 107, which provides the Staff's views regarding the
interaction between SFAS 123(R) and certain SEC rules and regulations and
provides interpretations with respect to the valuation of share-based payments
for public companies.
  14
 Recent
Accounting Pronouncements
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141R “Business
Combinations” (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. SFAS 141R also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R is effective for our fiscal year
beginning January 1, 2009.  We are currently evaluating this statement
for the impact, if any, that SFAS 141R will have on our consolidated financial
position and results of operations.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”).  SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure requirements about
fair value measurements. SFAS 157 was effective for us on January 1,
2008. However, in February 2008, the FASB released FASB Staff Position (FSP
FAS 157-2 — Effective Date of FASB Statement No. 157), which
delayed the effective date of SFAS 157 for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The adoption of
SFAS 157 for our financial assets and liabilities did not have a material
impact on our consolidated financial statements. We do not believe the adoption
of SFAS 157 for our nonfinancial assets and liabilities, effective
January 1, 2009, will have a material impact on our consolidated financial
statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting by
providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. Companies are not allowed to
adopt SFAS 159 on a retrospective basis unless they choose early adoption. We
adopted SFAS 159 in 2008, and did not elect the fair value option for eligible
items that existed at the date of adoption.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”
(“SFAS 160”). The new standard changes the accounting and reporting of
noncontrolling interests, which have historically been referred to as minority
interests. SFAS 160 requires that noncontrolling interests be presented in the
consolidated balance sheets within shareholders’ equity, but separate from the
parent’s equity, and that the amount of consolidated net income attributable to
the parent and to the noncontrolling interest be clearly identified and
presented in the consolidated statements of income. Any losses in excess of the
noncontrolling interest’s equity interest will continue to be allocated to the
noncontrolling interest. Purchases or sales of equity interests that do not
result in a change of control will be accounted for as equity transactions. Upon
a loss of control, the interest sold, as well as any interest retained, will be
measured at fair value, with any gain or loss recognized in earnings. In partial
acquisitions, when control is obtained, the acquiring company will recognize, at
fair value, 100% of the assets and liabilities, including goodwill, as if the
entire target company had been acquired. SFAS 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008, with early adoption prohibited. The new standard will be
applied prospectively, except for the presentation and disclosure requirements,
which will be applied retrospectively for all periods presented. We have not yet
determined the impact, if any, that this statement will have on our consolidated
financial statements and we will adopt the standard at the beginning of fiscal
2009.
  15
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“SFAS 161”). SFAS 161 applies to all entities.  SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged.  SFAS 161 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We are
currently evaluating this statement for the impact, if any, that SFAS 161 will
have on our consolidated financial position and results of
operations.
  In April
2008, the FASB issued FASB Staff Position ("FSP") No. 142-3, “Determination of the Useful Life of
Intangible Assets” ("FSP 142-3"). FSP 142-3 removes the requirement under
SFAS 142 to consider whether an intangible asset can be renewed without
substantial cost of material modifications to the existing terms and conditions,
and replaces it with a requirement that an entity consider its own historical
experience in renewing similar arrangements, or a consideration of market
participant assumptions in the absence of historical experience. FSP 142-3 also
requires entities to disclose information that enables users of financial
statements to assess the extent to which the expected future cash flows
associated with the asset are affected by the entity's intent and/or ability to
renew or extend the arrangement. The guidance will become effective as of the
beginning of our fiscal year beginning after December 15, 2008. We are currently
evaluating the impact this standard will have on our financial
statements.
  In June
2008, the FASB ratified Emerging Issues Task Force (“EITF”) No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock” ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
application is not permitted. We are assessing the potential impact of this EITF
on our financial condition and results of operations.
  16
 In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”
(“EITF 03-6-1”).  EITF 03-6-1 clarifies that all outstanding unvested
share-based payment awards that contain rights to non-forfeitable dividends
participate in undistributed earnings with common shareholders. Awards of this
nature are considered participating securities and the two-class method of
computing basic and diluted earnings per share must be applied. EITF 03-6-1 is
effective for fiscal years beginning after December 15, 2008. We are currently
evaluating the potential impact, if any; the new pronouncement will have on our
consolidated financial statements.
  In
October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Is Asset Not Active” (“FSP
157-3”) with an immediate effective date, including prior periods for which
financial statements have not been issued. FSP 157-3 clarifies the application
of fair value in inactive markets and allows for the use of management's
internal assumptions about future cash flows with appropriately risk-adjusted
discount rates when relevant observable market data does not exist. The
objective of SFAS 157 has not changed and continues to be the determination of
the price that would be received in an orderly transaction that is not a forced
liquidation or distressed sale at the measurement date. The adoption of FSP
157-3 did not have a material effect on our results of operations, financial
position or liquidity.
  Results of
Operations
  In
December 2008, due to declining revenues and profits, we made a decision to
restructure our network of retail offices (the “Retail Business”). The plan of
restructuring called for the closing of seven of our least profitable locations
during December 2008 and the sale of the remaining 19 Retail Business locations.
On March 30, 2009, an asset purchase agreement (the “Purchase Agreement”) was
fully executed pursuant to which we agreed to sell substantially all of the
assets, including the book of business, of the 16 remaining Retail Business
locations that we own in New York State (the “Assets”). The closing of the sale
of the Assets is subject to a number of conditions. As a result of the
restructuring in December 2008, and the Purchase Agreement on March 30, 2009,
our Retail Business has been reclassified as discontinued operations and prior
periods have been restated.
  On
February 1, 2008, we sold our outstanding premium finance loan portfolio. As a
result of the sale, our premium financing operations have been reclassified as
discontinued operations.
  Separate
discussions follow for results of continuing operations and discontinued
operations.
  Continuing
Operations
  The
following table summarizes the changes in the significant components of the
results of continuing operations (in thousands) for the periods
indicated:
  17
 December
      31,Change2008
                                        
                                        
                                        2007
                                        
                                        
                                        $
                                        
                                        
                                        
                                        %Commissions
      and fee revenue
                                        
                                        $
                                        911
                                        
                                        
                                        $
                                        649
                                        
                                        
                                        $
                                        262
                                        
                                        
                                        
                                        40
                                        %General
      and administrtaive expenses
                                        
                                        
                                        1,860
                                        
                                        
                                        
                                        2,275
                                        
                                        
                                        
                                        (415
                                        )
                                        
                                        
                                        (18
                                        )
      %Interest
      expense
                                        
                                        
                                        271
                                        
                                        
                                        
                                        432
                                        
                                        
                                        
                                        (161
                                        )
                                        
                                        
                                        (37
                                        )
      %Interest
      income - notes receivable
                                        
                                        
                                        765
                                        
                                        
                                        
                                        1,288
                                        
                                        
                                        
                                        (523
                                        )
                                        
                                        
                                        (41
                                        )
      %(Loss)
      from continuing operations before taxes
                                        
                                        
                                        (587
                                        )
                                        
                                        
                                        (885
                                        )
                                        
                                        
                                        298
                                        
                                        
                                        
                                        34
                                        %(Benefit
      from) income taxes
                                        
                                        
                                        (391
                                        )
                                        
                                        
                                        (419
                                        )
                                        
                                        
                                        28
                                        
                                        
                                        
                                        7
                                        %(Loss)
      from continuing operations
                                        
                                        
                                        (196
                                        )
                                        
                                        
                                        (465
                                        )
                                        
                                        
                                        269
                                        
                                        
                                        
                                        58
                                        %
  During
the year ended December 31, 2008 (“2008”), revenues from continuing operations
were $911,000 as compared to $649,000 for the year ended December 31, 2007
(“2007”).  The 40% net increase of $262,000 in commissions and fees
was a result of $427,000 in premium finance placement fees earned in 2008,
compared to none in 2007. Effective February 1, 2008, we began earning placement
fees in accordance with the terms of the sale of our premium finance portfolio.
The increase in revenue was offset by a reduction of $110,000 in initial
franchise fees, due to a lack of new franchises in 2008 compared to five in
2007.
  Our
general and administrative expenses in 2008 were $1,860,000, as compared to
$2,275,000 in 2007. The 18% decrease of $415,000 was primarily attributable to
decreases in: (i) franchise advertising costs, (ii) executive compensation, and
(iii) fees paid to consultants.
  Our
interest expense in 2008 was $271,000, as compared to $432,000 in 2007. The 37%
decrease of $161,000 was primarily due to: (i) a reduction in the principal
balance of our debt and (ii) our no longer allocating a portion of the interest
on our revolving credit line from our discontinued premium finance business to
continuing operations.
  Our
interest income from notes receivable in 2008 was $765,000, as compared to
$1,288,000 in 2007. The 41% decrease of $523,000 was primarily due to: (i) the
discount on surplus notes and the accrued interest at the time of acquisition
being fully accreted in July 2008, and (ii) a reduction in the variable interest
rate in 2008 due to a decrease in the prime rate.
  Our
continuing operations generated a net loss before income taxes of $587,000 in
2008 as compared to a net loss before income taxes of $885,000 in
2007.  The 34% decrease of $298,000 was primarily due to the
inception of earning premium finance placement fees in 2008 and reductions in
general and administrative and interest expenses, offset by a decrease in
interest income from our surplus notes.
  Discontinued
Operations
  Premium
Finance
  The
following table summarizes the changes in the results of our premium finance
discontinued operations (in thousands) for the periods
indicated:
  18
  Years
      endedDecember
      31,Change2008*
                                                            
                                                            
                                                            2007
                                                            
                                                            
                                                            $
                                                            
                                                            
                                                            
                                                            %Premium
      finance revenue
                                                            
                                                            $
                                                            225
                                                            
                                                            
                                                            $
                                                            3,167
                                                            
                                                            
                                                            $
                                                            (2,942
                                                            )
                                                            
                                                            
                                                            (93
                                                            )
      %Operating
      Expenses:General
      and administrative expenses
                                                            
                                                            
                                                            182
                                                            
                                                            
                                                            
                                                            1,432
                                                            
                                                            
                                                            
                                                            (1,250
                                                            )
                                                            
                                                            
                                                            (87
                                                            )
      %Provision
      for finance receivable losses
                                                            
                                                            
                                                            89
                                                            
                                                            
                                                            
                                                            472
                                                            
                                                            
                                                            
                                                            (383
                                                            )
                                                            
                                                            
                                                            (81
                                                            )
      %Depreciation
      and amortization
                                                            
                                                            
                                                            47
                                                            
                                                            
                                                            
                                                            100
                                                            
                                                            
                                                            
                                                            (53
                                                            )
                                                            
                                                            
                                                            (53
                                                            )
      %Interest
      expense
                                                            
                                                            
                                                            45
                                                            
                                                            
                                                            
                                                            646
                                                            
                                                            
                                                            
                                                            (601
                                                            )
                                                            
                                                            
                                                            (93
                                                            )
      %Total
      operating expenses
                                                            
                                                            
                                                            363
                                                            
                                                            
                                                            
                                                            2,650
                                                            
                                                            
                                                            
                                                            (2,287
                                                            )
                                                            
                                                            
                                                            (86
                                                            )
      %(Loss)
      income from operations
                                                            
                                                            
                                                            (138
                                                            )
                                                            
                                                            
                                                            517
                                                            
                                                            
                                                            
                                                            (655
                                                            )
                                                            
                                                            
                                                            (127
                                                            )
      %Loss
      on sale of premium financing portfolio
                                                            
                                                            
                                                            (102
                                                            )
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (102
                                                            )
                                                            
                                                            
                                                            -
                                                            %(Loss)
      income before provision for income taxes
                                                            
                                                            
                                                            (240
                                                            )
                                                            
                                                            
                                                            517
                                                            
                                                            
                                                            
                                                            (757
                                                            )
                                                            
                                                            
                                                            (146
                                                            )
      %Provision
      for income taxes
                                                            
                                                            
                                                            69
                                                            
                                                            
                                                            
                                                            246
                                                            
                                                            
                                                            
                                                            (177
                                                            )
                                                            
                                                            
                                                            (72
                                                            )
      %(Loss)
      income from discontinued operations
                                                            
                                                            $
                                                            (309
                                                            )
                                                            
                                                            $
                                                            271
                                                            
                                                            
                                                            $
                                                            (580
                                                            )
                                                            
                                                            
                                                            (214
                                                            )
      %
 ___________________
  * Our
premium finance portfolio was sold on February 1, 2008.  Premium
finance revenue for 2008 only includes the period from January 1, 2008 through
January 31, 2008.
  Our
premium finance revenue decreased $2,942,000 in 2008 as compared to
2007. The 93% decrease is due to only including one month of revenue
in 2008 compared to 12 months in 2007.
  Our
general and administrative expenses from discontinued operations decreased
$1,250,000 in 2008 as compared to 2007.  The 87% decrease is due to
only including one month of operating expenses related to revenue in 2008
compared to 12 months in 2007.
  Our
provision for finance receivable losses for 2008 was $383,000 less than for
2007.  The 81% decrease was due to the discontinuance of loan
originations offset by a provision for losses from loans originated in the prior
year.
  Our
premium finance interest expense for 2008 was $601,000 less than for
2007.  The 93% decrease was due to the payment in full of the
outstanding balance of our revolving credit line on February 1,
2008.
  Loss on
sale of premium financing portfolio was $102,000 in 2008, compared to no such
loss in 2007. The 2008 loss was primarily due to $83,000 in fees related to the
sale of our premium finance portfolio, and an adjustment to the selling price as
a result of a change in the estimated collectible amount of the
portfolio.
  Our
discontinued premium finance operations, on a stand-alone basis, generated a net
loss before income taxes of $240,000 in 2008 as compared to a net profit before
income taxes of $517,000 in 2007.  The decrease in profit of $757,000
in 2008 was primarily due to: (i) the cessation of revenues as of January 31,
2008, and (ii) the loss on sale of our premium financing portfolio, offset by
the elimination and reductions in operating expenses.
  19
 Retail
Business
  The
following table summarizes the changes in the results of our Retail Business
discontinued operations (in thousands) for the periods
indicated:
  Years
      endedDecember
      31,Change2008
                                                              
                                                              
                                                              2007
                                                              
                                                              
                                                              $
                                                              
                                                              
                                                              
                                                              %Commissions
      and fee revenue
                                                              
                                                              $
                                                              4,042
                                                              
                                                              
                                                              $
                                                              5,096
                                                              
                                                              
                                                              $
                                                              (1,054
                                                              )
                                                              
                                                              
                                                              (21
                                                              )
      %Operating
      Expenses:General
      and administrative expenses
                                                              
                                                              
                                                              3,895
                                                              
                                                              
                                                              
                                                              4,479
                                                              
                                                              
                                                              
                                                              (584
                                                              )
                                                              
                                                              
                                                              (13
                                                              )
      %Depreciation
      and amortization
                                                              
                                                              
                                                              212
                                                              
                                                              
                                                              
                                                              204
                                                              
                                                              
                                                              
                                                              8
                                                              
                                                              
                                                              
                                                              4
                                                              %Interest
      expense
                                                              
                                                              
                                                              41
                                                              
                                                              
                                                              
                                                              44
                                                              
                                                              
                                                              
                                                              (3
                                                              )
                                                              
                                                              
                                                              (7
                                                              )
      %Impairment
      of goodwill and intangibles
                                                              
                                                              
                                                              394
                                                              
                                                              
                                                              
                                                              95
                                                              
                                                              
                                                              
                                                              299
                                                              
                                                              
                                                              
                                                              315
                                                              %Total
      operating expenses
                                                              
                                                              
                                                              4,542
                                                              
                                                              
                                                              
                                                              4,822
                                                              
                                                              
                                                              
                                                              (280
                                                              )
                                                              
                                                              
                                                              (6
                                                              )
      %(Loss)
      income from operations
                                                              
                                                              
                                                              (500
                                                              )
                                                              
                                                              
                                                              274
                                                              
                                                              
                                                              
                                                              (774
                                                              )
                                                              
                                                              
                                                              (282
                                                              )
      %Gain
      on sale of book of business
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              66
                                                              
                                                              
                                                              
                                                              (66
                                                              )
                                                              
                                                              
                                                              (100
                                                              )
      %(Loss)
      income before provision for income taxes
                                                              
                                                              
                                                              (500
                                                              )
                                                              
                                                              
                                                              340
                                                              
                                                              
                                                              
                                                              (840
                                                              )
                                                              
                                                              
                                                              (247
                                                              )
      %(Benefit
      from) provision for income taxes
                                                              
                                                              
                                                              (28
                                                              )
                                                              
                                                              
                                                              193
                                                              
                                                              
                                                              
                                                              (221
                                                              )
                                                              
                                                              
                                                              (115
                                                              )
      %(Loss)
      income from discontinued operations
                                                              
                                                              $
                                                              (472
                                                              )
                                                              
                                                              $
                                                              147
                                                              
                                                              
                                                              $
                                                              (619
                                                              )
                                                              
                                                              
                                                              (421
                                                              )
      %
 Our
Retail Business revenue was $4,042,000 in 2008 as compared to $5,096,000 in
2007.  The 21% revenue decrease of $1,054,000 was primarily
attributable to a reduction in commissions and fees earned due to the sale of
fewer insurance policies in 2008 than in 2007.  Such reduction in
sales was generally caused by the continued heightened competition from the
voluntary insurance market, which is offering lower premium rates to our main
customer, the non-standard insured.
  Our
Retail Business general and administrative expenses in 2008 were $3,895,000, as
compared to $4,479,000 in 2007. The 13% net decrease of $584,000 was primarily
attributable to decreases in fixed and variable compensation paid to employees
due to a reduction in policies sold at our stores, and a reduction in
advertising expenses, offset by an increase in occupancy costs due to rent
increases and escalations.
  Our
Retail Business impairment of goodwill and intangibles for 2008 was $299,000
greater than for 2007. The increase in 2008 was due to goodwill impairment of
$394,000 in 2008, compared to the cessation of utilization of the vanity
telephone number included in intangible assets in 2007.
  Our gain
on sale of book of business in 2008 was $-0-, as compared to $66,000 in 2007.
The $66,000 decrease in 2008 was due to a sale in 2007, compared to no such
sales in 2008.
  20
 During
2008, we recorded a benefit from income taxes of $28,000 compared to a provision
for income taxes of $193,000 in 2007. The change of $221,000 is due to an
$840,000 decrease in income before taxes in 2008 as compared to
2007.
  Our
discontinued Retail Business operations, on a stand-alone basis, generated a net
loss before income taxes of $500,000 in 2008 as compared to a net profit before
income taxes of $340,000 in 2007.  The decrease in profit of $840,000
in 2008 was primarily due to the $1,054,000 decrease in revenues, and increase
in impairment of intangibles, offset by a decrease in general and administrative
expenses.
  Net Loss
  The
following table summarizes our change in net loss for the periods
indicated.
  Years
      endedDecember
      31,Change2008
                                        
                                        
                                        2007
                                        
                                        
                                        $
                                        
                                        
                                        
                                        %Loss
      from continuing operations
                                        
                                        $
                                        (196
                                        )
                                        
                                        $
                                        (465
                                        )
                                        
                                        $
                                        269
                                        
                                        
                                        
                                        58
                                        %(Loss)
      income from discontinued operations, net of taxes
                                        
                                        
                                        (781
                                        )
                                        
                                        
                                        418
                                        
                                        
                                        
                                        (1,199
                                        )
                                        
                                        
                                        (287
                                        )
      %Net
      loss
                                        
                                        $
                                        (977
                                        )
                                        
                                        $
                                        (47
                                        )
                                        
                                        $
                                        (930
                                        )
                                        
                                        
                                        1,979
                                        %
  Our net
loss for the year ended December 31, 2008 was $977,000 as compared to a net loss
of $47,000 for the year ended December 31, 2007.
  Liquidity
and Capital Resources
  As of
December 31, 2008, we had $142,949 in cash and cash equivalents and a working
capital deficit of $175,105. As of December 31, 2007, we had $1,030,822 in cash
and cash equivalents and a working capital deficit of $1,603,288.
  During
2007, the holders of $1,500,000 outstanding principal amount of notes
payable (the “Notes Payable”) agreed to extend the maturity date of the
debt from September 30, 2007 to September 30, 2008.  In August 2008,
the maturity date of the Notes Payable was further extended from September
30, 2008 to the earlier of July 10, 2009 or 90 days following the conversion of
Commercial Mutual to a stock property and casualty insurance company and the
issuance to us of a controlling interest in Commercial Mutual (subject to
acceleration under certain circumstances).  In exchange for this
extension, the holders are entitled to receive an aggregate incentive payment
equal to $10,000 times the number of months (or partial months) the debt is
outstanding after September 30, 2008 through the maturity date. If a prepayment
of principal reduces the debt below $1,500,000, the incentive payment for all
subsequent months will be reduced in proportion to any such reduction to the
debt. The aggregate incentive payment is due upon full repayment of the debt.
 The $1,500,000 principal balance of the Notes Payable is included in our
December 31, 2008 balance sheet under “Current portion of long-term
debt.”
  21
 Effective
April 16, 2008, the holder of our Series B preferred shares (which provided for
dividends at the rate of 5% per annum and an outside mandatory redemption date
of April 30, 2008) exchanged such shares for an equal number of Series C
preferred shares (which provided for dividends at the rate of 10% per annum and
an outside mandatory redemption date of April 30, 2009).  Effective
August 23, 2008, the outside mandatory redemption date for the preferred shares
was further extended to July 31, 2009 through the issuance of Series D preferred
shares in exchange for the Series C preferred shares. The mandatorily
redeemable balance of $780,000 is included in our December 31, 2008 balance
sheet under “Current Liabilities”.
  On March
30, 2009, an asset purchase agreement (the “Purchase Agreement”) was fully
executed pursuant to which our wholly-owned subsidiaries, Barry Scott Agency,
Inc. and DCAP Accurate, Inc. agreed to sell substantially all of their assets,
including the book of business, of the 16 Retail Business locations that we own
in New York State (the “Assets”).  The closing of the sale of the
Assets is subject to a number of conditions.  We expect to satisfy the
conditions and complete the sale of the Assets in April 2009. The purchase price
for the Assets is approximately $2,337,000, of which approximately $1,786,000 is
to be paid to us at closing, and the remainder of the purchase price is to be
satisfied by the delivery of promissory notes in the aggregate principal amount
of $551,000. As additional consideration, we will be entitled to receive through
September 2010 an amount equal to 60% of the net commissions derived from the
book of business of six retail locations that were closed in 2008. The proceeds
from the sale of the Assets that we expect to receive in April 2009 will not be
sufficient to fully satisfy the Notes Payable and preferred stock obligations on
their respective maturity dates.  We plan to seek to further extend
the maturity dates and/or refinance the Notes Payable and preferred stock
obligations.
  We
believe that, based on our present cash resources, and assuming that our efforts
to further extend the maturity dates of the Notes Payable and preferred stock
obligations, as discussed above, are successful and that we complete the sale of
the Assets as contemplated, including the collection of the $551,000 of
promissory notes discussed above in accordance with their terms, we will have
sufficient cash on a short-term basis and over the next 12 months to fund our
working capital needs.  No definitive arrangements are in place with
regard to any further extension of the maturity dates and/or refinancing the
Notes Payable and preferred stock obligations and no assurances can be given
that any will occur on commercially reasonable terms or otherwise. No assurances
can be given that we will complete the sale of the Assets as
contemplated.
  During
2008, cash and cash equivalents decreased by approximately $888,000 primarily
due to the following:
  ·
              Net
      cash used in operating activities during 2008 was $753,000 due primarily
      to the net loss of $977,000.  Non-cash items totaling $820,000
      increased the net cash used in operating activities to
      $1,797,000.  These non-cash items included depreciation and
      amortization, bad debt expense, accretion of discount on notes receivable,
      amortization of warrants, stock-based payments, and deferred income taxes.
      The use of cash was offset by: (i) the receipt  of a $368,000
      Federal tax refund claim resulting from the carry-back of our 2007 net
      operating loss, (ii) an increase in accounts payable and accrued expenses
      of $252,000, and (iii) cash provided by the operating activities of our
      discontinued operations of
$498,000.
  22
 ·
              Net
      cash provided by investing activities during 2008 was $1,034,000 primarily
      due to the $1,008,000 cash flow from finance contracts receivable included
      in discontinued operations.
  ·
              Net
      cash used in financing activities during 2008 was $1,169,000 due to: (i) a
      $562,000 decrease in our revolving credit line utilized in our
      discontinued operations prior to the sale of our premium finance portfolio
      on February 1, 2008, and (ii) principal payments on long-term debt and
      lease obligations of $607,000.
  We
have no current commitments for capital expenditures.  However, we
may, from time to time, consider acquisitions of complementary businesses,
products or technologies.
  Off-Balance
Sheet Arrangements
  We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
  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 revenue is derived from personal automobile insurance, our business may
be adversely affected by negative developments in the conditions in this
industry.
  All of
our revenues from continuing operations for 2008 related to 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 operations are derived from sources located in New York
and Pennsylvania, our business may be adversely affected by conditions in these
states.
  All of
our revenue is derived from sources located in the states of New York and
Pennsylvania and, accordingly, is 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.
  23
 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.  The loss of Mr. Goldstein 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.  We have an employment agreement with Mr.
Goldstein that expires on June 30, 2009.  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.
  If
we obtain a controlling interest in Commercial Mutual Insurance Company, we will
face new risks and uncertainties.
  As
discussed in Item 1 hereof, in March 2007, Commercial Mutual Insurance Company’s
Board of Directors adopted a resolution to convert Commercial Mutual from an
advance premium insurance company to a stock property and casualty insurance
company.  We hold surplus notes of Commercial Mutual in the aggregate
principal amount of $3,750,000.  Based upon the amount payable on the
surplus notes and the statutory surplus of Commercial Mutual, the plan of
conversion provides that, in the event of a conversion by Commercial Mutual into
a stock corporation, in exchange for our relinquishing our rights to any unpaid
principal and interest under the surplus notes, we would receive 100% of the
stock of Commercial Mutual.  We have never operated as an insurance
company and would face all of the risks and uncertainties that come with
operating such a company, including underwriting risks.
  As
a holding company, we are dependent on the results of operations of our
operating subsidiaries; there would be restrictions on the payment of dividends
by Commercial Mutual.
  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.  Consequently, we must rely on our
subsidiaries for our ability to repay debts, pay expenses and pay cash dividends
to our shareholders.  In connection with the plan of conversion of
Commercial Mutual, we have agreed with the New York State Insurance Department
that, for a period of two years following the conversion, without the approval
of the Insurance Department, no dividend may be paid by Commercial Mutual to
us.
  We have determined to discontinue
our Retail Business operations prior to our obtaining a controlling interest in
Commercial Mutual.
  We have
determined to close or sell our Retail Business locations and such operations
are reflected as discontinued operations in our financial
statements.  Such action has taken in anticipation of a change in
business strategy from operating storefront insurance agencies to operating an
insurance company through Commercial Mutual.  To date, the conditions
to the conversion of Commercial Mutual to a stock property and casualty
insurance company, namely the approval of the plan of conversion by the
Insurance Department and Commercial Mutual’s policyholders, have not yet been
satisfied.  No assurances can be given that the conversion will
occur.
  24
 Reductions
in the New York involuntary automobile insurance market may adversely affect our
premium finance revenue.
  Prior to
the sale of our premium finance loan portfolio, our primary source of premium
finance loans had been the assigned risk, or involuntary, automobile insurance
market.  In New York, since mid-2003, there has been a
significant 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. Beginning in
2004, we began to finance certain voluntary auto insurance
policies.  We are now entitled to a placement fee based upon the
amount of new premium finance loans made by the purchaser of our loan portfolio
in the states of New York and Pennsylvania.  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 revenue from commissions paid by insurance
companies.  In addition, our franchisees rely on such
revenue.  The commission is usually a percentage of the premium billed
to an insured. 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 such commission revenue is based on
insurance premiums, a decline in premium levels will have an adverse effect on
our discontinued operations and our franchisees. 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 discontinued operations or
our franchisees.
  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 place premium contracts and
generate placement fees.
  In
addition, there are currently 33 DCAP franchises.  The offering of
franchises is regulated by both the federal government and some states,
including New York.
  25
 We
may seek to expand through acquisitions of complementary businesses or other
assets which involve additional risks that may adversely affect us.
  We
continually evaluate the possible expansion of our operations through the
acquisition of 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
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.  We rely
on these systems to support our operations.  The failure of these
systems could interrupt our operations and result in a material adverse effect
on our business.
  We
have incurred, and will continue to incur, increased costs as a result of being
an SEC reporting company.
  The
Sarbanes-Oxley Act of 2002, as well as a variety of related rules implemented by
the SEC, have required changes in corporate governance practices and generally
increased the disclosure requirements of public companies.  As a
reporting company, we incur significant legal, accounting and other expenses in
connection with our public disclosure and other obligations.  Based
upon SEC regulations currently in effect, we are required to establish, evaluate
and report on our internal control over financial reporting and will be required
to have our registered independent public accounting firm issue an attestation
as to such reports commencing with our financial statements for the year ending
December 31, 2009.  We believe that, based upon SEC regulations
currently in effect, our general and administrative expenses, including amounts
that will be spent on outside legal counsel, accountants and professionals and
other professional assistance, will increase in 2009 over 2008, which could
require us to allocate what may be limited cash resources away from our
operations and business growth plans.  We also believe that compliance
with the myriad of rules and regulations applicable to reporting companies and
related compliance issues will divert time and attention of management away from
operating and growing 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 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.
  26
 ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
  RISK.
  Not
applicable.
  ITEM
8.                 FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
  The
financial statements required by this Item 8 are included in this Annual Report
following Item 15 hereof.  As a smaller reporting company, we are not
required to provide supplementary financial information.
  ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
      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,
2008.
  ITEM
9A.              CONTROLS
AND PROCEDURES.
  Disclosure
Controls and Procedures
  We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to assure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosures.
  As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered by
this Annual Report, under the supervision and with the participation of our
principal executive officer and principal financial officer, we evaluated the
effectiveness of our disclosure controls and procedures.  Based on
this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of that
date.
  Internal Control
over Financial Reporting
  Management’s Annual Report on
Internal Control over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Exchange Act. Internal control over financial reporting is a process designed
by, or under the supervision of, our principal executive officer and principal
financial officer, and effected by the board of directors, management, and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with US GAAP including those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets,
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with US
GAAP and that receipts and expenditures are being made only in accordance with
authorizations of our management and directors, and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect
on the financial statements.
  27
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies and procedures may deteriorate.
  Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our
internal control over financial reporting was not effective as of
December 31, 2008.
  A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. Management identified the
following material weaknesses in our internal control over financial reporting
as of December 31, 2008:
  Information
Technology Applications and Infrastructure
  We
did not maintain effective controls over financial reporting related to
information technology applications and infrastructure. Specifically, the
following deficiencies in the aggregate constituted a material
weakness:
  ·
              We
      did not maintain effective design of controls over access to financial
      reporting applications and data. Controls did not limit access to programs
      and data to only authorized users. In addition, controls lack the
      requirement of periodic reviews and monitoring of such
    access.
  ·
              We
      did not maintain effective controls to communicate policies and procedures
      governing information technology security and access. Furthermore, we did
      not maintain effective logging and monitoring of servers and databases to
      ensure that access was both appropriate and
  authorized.
  These
deficiencies have had a pervasive impact on our information technology control
environment. Additionally, these deficiencies could result in a misstatement of
account balances or disclosure to substantially all accounts that could result
in a material misstatement to the consolidated financial statements that would
not be prevented or detected.
  28
 Remediation
of Material Weaknesses
  In
January 2009, we effectively implemented controls to rectify the weaknesses
discussed above. These controls have been tested by an independent consulting
firm and, based on the favorable results, management believes that these issues
have been successfully remediated.
  This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this Annual
Report.
  Changes
in Internal Control Over Financial Reporting
  There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
  ITEM
9B.                    OTHER
INFORMATION.
  None.
  
  29
 
 PART III
 
 ITEM10.
              DIRECTORS,
      EXECUTIVE OFFICERSAND CORPORATE GOVERNANCE.
  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
  HeldBarry
      B. Goldstein
                56
                President,
      Chairman of the Board, Chief Executive Officer, Treasurer and
      DirectorMichael
      R. Feinsod
                38
                DirectorJay
      M. Haft
                73
                DirectorDavid
      A. Lyons
                59
                DirectorJack
      D. Seibald
                48
                Director
 
 Barry
B. Goldstein
  Mr.
Goldstein was elected our President, Chief Executive Officer, Chairman of the
Board, and a director in March 2001 and our Treasurer in May 2001. He served as
our Chief Financial Officer from March 2001 to November 2007.  Since
January 2006, Mr. Goldstein has served as Chairman of the Board of Commercial
Mutual Insurance Company, a New York property and casualty insurer, as well as
Chairman of its Executive Committee. In August 2008, Mr. Goldstein was appointed
Chief Investment Officer of COMMERCIAL MUTUAL. 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.
  Michael
R. Feinsod
 Mr.
Feinsod has been Chief Executive Officer of Ameritrans Capital Corporation, a
closed-end investment company, since October 10, 2008. Mr. Feinsod has been
President of Ameritrans Capital since November 2006 and also serves as its Chief
Compliance Officer. He serves as Senior Vice President of Elk Associates Funding
Corporation, a subsidiary of Ameritrans Capital, and has served as a director of
Ameritrans Capital and Elk Associates Funding Corporation since December
2005.  Since January 1999, Mr. Feinsod has been Managing Member of
Infinity Capital, LLC, an investment management company.  He served as
an investment analyst and portfolio manager at Mark Boyar & Company, Inc., a
broker-dealer, from June 1997 to January 1999.  He is admitted to
practice law in New York and served as an associate in the Corporate Law
Department of Paul, Hastings, Janofsky & Walker LLP from 1996 to 1997. Mr.
Feinsod holds a Juris Doctorate degree from Fordham University School of Law and
a Bachelor of Arts degree from George Washington University.
  30
 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. Mr. Haft has been a partner of
Columbus Nova, a private investment firm, since 2000. He is a director of a
number of public and private corporations, including DUSA Pharmaceuticals, Inc.,
whose securities are traded on Nasdaq, 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 past trustee of Florida International
University Foundation and previously served 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.
  David
A. Lyons
  Mr. Lyons
has served since 2004 as a principal of Den Ventures, LLC, a consulting firm
focused on business, financing, and merger and acquisition strategies for public
and private companies. From 2002 until 2004, Mr. Lyons served as a managing
partner of the Nacio Investment Group, and President of Nacio Systems, Inc., a
managed hosting company that provides outsourced infrastructure and
communication services for mid-size businesses. Prior to forming the Nacio
Investment Group, Mr. Lyons served as Vice President of Acquisitions for
Expanets, Inc., a national provider of converged communications solutions.
Previously, he was Chief Executive Officer of Amnex, Inc. and held various
executive management positions at Walker Telephone Systems, Inc. and Inter-tel,
Inc. He has served as one of our directors since July 2005.
  Jack
D. Seibald
  Mr.
Seibald is a Managing Director of Concept Capital, a division of SMH Capital,
Inc., a broker-dealer. Mr. Seibald has been affiliated with SMH Capital, Inc.
and its predecessor firms since 1995 and is a registered representative with
extensive experience in equity research and investment management dating back to
1983. Since 1997, Mr. Seibald has also been a Managing Member of Whiteford
Advisors, LLC, an investment management firm. He began his career at Oppenheimer
& Co. and has also been affiliated with Salomon Brothers, Morgan Stanley
& Co. and Blackford Securities. Mr. Seibald is a member of the Board of
Directors of Commercial Mutual Insurance Company, a New York property and
casualty insurer, and serves as Chairman of its Investments Committee. He holds
an M.B.A. from Hofstra University and a B.A. from George Washington University.
He has served as one of our directors since 2004.
  31
 Family
Relationships
  There are
no family relationships among any of our executive officers and
directors.
  Term
of Office
  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
  The Audit
Committee of the Board of Directors is responsible for overseeing our accounting
and financial reporting processes and the audits of our financial
statements.  The members of the Audit Committee are Messrs. Lyons,
Haft and Seibald.
  Audit
Committee Financial Expert
  Our Board
of Directors has determined that Mr. Lyons is an “audit committee financial
expert,” as that is defined in Item 401(e)(2) of Regulation S-B.  Mr.
Lyons is an “independent director” based on the definition of independence in
Rule 4200(a)(15) of the listing standards of The Nasdaq Stock
Market.
  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, 2008.  To our knowledge, based solely
on a review of copies of Forms 4 filed with the Securities and Exchange
Commission and written representations that no other reports were required,
during the fiscal year ended December 31, 2008, our officers, directors and 10%
stockholders complied with all Section 16(a) filing requirements applicable to
them, except that Mr. Haft filed a Form 4 late on two occasions and each of
Messrs. Lyons and Seibald, and Morton L. Certilman, a former director, filed a
Form 4 late on one occasion.  Each filing reported one
transaction.
  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 is
posted on our website, www.dcapgroup.com.  We intend to satisfy the
disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or a
waiver from, our Code of Ethics by posting such information on our website,
www.dcapgroup.com.
  32
 ITEM
11.                  EXECUTIVE
COMPENSATION.
  Summary
Compensation Table
  The
following table sets forth certain information concerning the compensation for
the fiscal years ended December 31, 2008 and 2007 for certain executive
officers, including our Chief Executive Officer:
  Name
      and
                  Principal Position
                Year
                Salary
                Option
                  Awards
                All
      Other
                  Compensation
                TotalCountry
      ClubDues
                OtherBarry
      B. Goldstein
                  Chief
      Executive Officer
                2008
                $275,000
                -
                -
                $15,770
                $290,7702007
                $350,000
                $148,070
                $21,085
                $15,770
                $534,925Curt
      Hapward (1)
                  President,
      DCAP Management Corp.
                2008
                $115,107
                -
                -
                $6,000
                $121,1072007
                $82,374
                $84,122
                -
                $4,430
                $170,926
 ___________
 
 (1)  Mr.
Hapward served as President of our subsidiary, DCAP Management Corp., until July
3, 2008.
 
 Employment
Contracts
  Mr.
Goldstein is employed as our President, Chairman of the Board and Chief
Executive Officer pursuant to an employment agreement dated October 16, 2007
(the “Employment Agreement”) that expires on June 30, 2009. The Employment
Agreement will automatically renew for a one-year term if Mr. Goldstein is in
our employ on June 30, 2009.  Pursuant to the Employment Agreement,
Mr. Goldstein is entitled to receive an annual base salary of $350,000 (which
base salary has been in effect since January 1, 2004) (“Base Salary”) and annual
bonuses based on our net income.  On August 25, 2008, we and Mr. Goldstein
entered into an amendment (the “Amendment”) to the Employment Agreement. The
Amendment entitles Mr. Goldstein to devote up to 750 hours per year, as
currently provided for in an employment contract with Commercial Mutual, to
fulfill his duties and responsibilities as Chairman of the Board and Chief
Investment Officer of Commercial Mutual. Such permitted activity is subject to a
reduction in Base Salary under the Employment Agreement on a dollar-for-dollar
basis to the extent of the salary payable by Commercial Mutual to Mr. Goldstein
pursuant to the Commercial Mutual employment contract, which is currently
$150,000 per year. Commercial Mutual is a New York property and casualty
insurer.
   33
  OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
 
 Option
      AwardsName
                  
                  Number
      of Securities Underlying
                    Unexercised Options
                  
                  
                  Number
      of Securities Underlying
                    Unexercised Options
                  
                  
                  Option
      Exercise
                    Price
                  
                  Option
      Expiration DateExercisable
                  
                  
                  UnexercisableBarry
      B. Goldstein
                  
                  
                  65,000
                  
                  
                  
                  65,000
                  (1)
                  
                  $
                  2.06
                  
                  10/16/12Curt
      Hapward
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  -
 _______________
  (1) Such
options are exercisable to the extent of 32,500 shares effective as of October
16, 2009 and 2010.
  Termination of Employment
and Change-in-Control
Arrangements
  Pursuant
to the Employment Agreement with Mr. Goldstein and as provided for in his prior
employment agreement which expired on April 1, 2007, Mr. Goldstein 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.  In addition, in the event Mr.
Goldstein’s employment is terminated by us without cause or he resigns with good
reason (each as defined in the Employment Agreement), Mr. Goldstein will be
entitled to receive his base salary and bonuses for the remainder of the
term.
  Compensation
of Directors
  The
following table sets forth certain information concerning the compensation of
our directors for the fiscal year ended December 31, 2008:
  DIRECTOR
COMPENSATION
  Name
                Fees
      Earned or
                  Paid in Cash
                Stock Awards
                OptionAwards
                TotalMorton
      L. Certilman(1)
                $4,271
                $10,125
                -
                $14,396Michael
      R. Feinsod
                $2,822
                -
                -
                $2,822Jay
      M. Haft
                $4,475
                $7,500
                -
                $11,975David
      A. Lyons
                $5,725
                $10,125
                -(2)
                $15,850Jack
      D. Seibald
                $6,225
                $12,750
                -
                $18,975
 _______________
  (1)
              Mr.
      Certilman retired as a director effective December 5,
  2008.
  34
 (2)
              As
      of December 31, 2008, Mr. Lyons held options for the purchase of 20,000
      common shares.
  Our
non-employee directors are entitled to receive compensation for their services
as directors as follows:
  ·
              $8,333
      per annum (1)·
              additional
      $3,500 per annum for committee chair (1)·
              $350
      per Board meeting attended ($175 if telephonic)·
              $200
      per committee meeting attended ($100 if
  telephonic)
 _______________
 
 (1)           One-half
payable in stock; other one-half payable in stock or, at the director’s option,
in cash.
 
 ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT
      AND RELATED STOCKHOLDER
MATTERS.
  Security
Ownership
  The
following table sets forth certain information as of March 31, 2009 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.
  Name
      and Address
                  of Beneficial Owner
                Number
      of Shares
                  Beneficially Owned
                Approximate
                  Percent of ClassBarry
      B. Goldstein
                  1158
      Broadway
                  Hewlett,
      New York
                763,078
                  (1)(2)
                25.1
      %Michael
      R. Feinsod
                  Infinity
      Capital Partners, L.P.
                  767
      Third Avenue, 16th Floor
                  New
      York, New York
                487,495
                  (1)(3)
                16.4%AIA
      Acquisition Corp
                  6787
      Market Street
                  Upper
      Darby, Pennsylvania
                361,600
                  (4)
                11.0%Jack
      D. Seibald
                  1336
      Boxwood Drive West
                  Hewlett
      Harbor, New York
                238,065
                  (1)(5)
                8.0%
 
 35
  Morton
      L. Certilman
                    90
      Merrick Avenue
                    East
      Meadow, New York
                  179,829
                    (1)
                  6.0%Jay
      M. Haft
                    69
      Beaver Dam Road
                    Salisbury,
      Connecticut
                  165,797
                    (1)(6)
                  5.6%David
      A. Lyons
                    252
      Brookdale Road
                    Stamford,
      Connecticut
                  29,581
                    (7)
                  1.0%All
      executive officers
                    and
      directors as a group
                    (5
      persons)
                  1,684,016
                    (1)(2)(3)(5)(6)(7)
                  55.1%
 
 (1)
                Based
      upon Schedule 13D filed under the Securities Exchange Act of 1934, as
      amended, and other information that is publicly
  available.(2)
                Includes
      (i) 8,500 shares held by Mr. Goldstein’s children, (ii) 11,900 shares held
      in a retirement trust for the benefit of Mr. Goldstein and (iii) 65,000
      shares issuable upon the exercise of options that are
      currently exercisable.  Excludes shares beneficially owned by
      AIA Acquisition Corp. (“AIA ”) of which members of Mr. Goldstein’s family
      are principal stockholders.  Mr. Goldstein disclaims beneficial
      ownership of the shares held by his children and retirement trust and the
      shares owned by AIA.(3)
                Shares
      are owned by Infinity Capital Partners, L.P. (“Partners”). Each of (i)
      Infinity Capital, LLC (“Capital”), as the general partner of Partners,
      (ii) Infinity Management, LLC (“Management”), as the Investment Manager of
      Partners, and (iii) Michael Feinsod, as the Managing Member of Capital and
      Management, the General Partner and Investment Manager, respectively, of
      Partners, may be deemed to be the beneficial owners of the shares held by
      Partners. Pursuant to the Schedule 13D filed under the Securities Exchange
      Act of 1934, as amended, by Partners, Capital, Management and Mr. Feinsod,
      each has sole voting and dispositive power over the
  shares.(4)
                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.(5)
                Includes
      (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) 3,000 shares owned by Stewart
      Spector IRA (“S. Spector”); (v) 3,000 shares owned by Barbara Spector
      IRA Rollover (“B. Spector”); and (vi) 4,000 shares owned by Karen
      Dubrowsky IRA (“Dubrowsky”).   Mr.
      Seibald has voting and dispositive power over the shares
      owned by SDS, Boxwood, S. Spector, B. Spector and
      Dubrowsky.
  36
 (6)
                Includes
      3,076 shares held in a retirement trust for the benefit of Mr.
      Haft.(7)
                Includes
      20,000 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, 2008 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.
 
 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
                                            177,400
                                            $2.40
                                            367,724Equity
      compensation plans not approved by security holders
                                            -0-
                                            -0-
                                            -0-Total
                                            177,400
                                            $2.40
                                            367,724
  ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS,
      AND DIRECTOR INDEPENDENCE.
  Debt
Financing
  Effective
July 10, 2003, in order to fund our premium finance operations, we obtained
$3,500,000 from a private placement of debt. The debt was initially repayable on
January 10, 2006 and provides for interest at the rate of 12.625% per annum,
payable semi-annually.  We have the right to prepay the debt. During
2005, we utilized our bank line of credit then in effect to repay $2,000,000 of
the 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 were initially scheduled to expire on January 10,
2006. Effective May 25, 2005, the holders of the remaining $1,500,000 of debt
agreed to extend the maturity date of the debt to September 30, 2007. The debt
extension was given to satisfy a requirement of a lender that arose in
connection with a December 2004 increase in the lender’s revolving line of
credit and an extension of the line to June 30, 2007. In consideration for the
extension of the due date for the debt, we extended the expiration date of
warrants held by the debtholders for the purchase of 97,500 common shares to
September 30, 2007. Between March 2007 and September 2007, the holders of the
outstanding debt agreed to a further extension of the due date to September 30,
2008. In consideration for such further extension, we further extended the
expiration date of the warrants held by the debtholders to September 30,
2008.
  37
 In August
2008, the maturity date was further extended from September 30, 2008 to July 10,
2009 (or earlier if certain conditions are met). In exchange for this extension,
the holders will receive an aggregate incentive payment equal to $10,000 times
the number of months (or partial months) the debt is outstanding after September
30, 2008 through the maturity date. If a prepayment of principal reduces the
debt below $1,500,000, the incentive payment for all subsequent months will be
reduced in proportion to any such reduction to the debt. The aggregate incentive
payment is due upon full repayment of the debt.
  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. Mr.
Seibald’s retirement trust currently holds approximately $288,000 of the
debt.
  In
September 2007, a limited liability company of which Mr. Goldstein is a minority
member purchased from a debtholder a note in the approximate principal amount of
$115,000 and a warrant for the purchase of 7,500 shares.  In
connection with the purchase, the maturity date of the debt and the expiration
date of the warrant were extended as discussed above.
  The
warrants expired on September 30, 2008.
  Commercial
Mutual Insurance Company
  On
January 31, 2006, we purchased two surplus notes in the aggregate principal
amount of $3,750,000 issued by Commercial Mutual Insurance
Company.  Commercial Mutual is a New York property and casualty
insurer.
  Concurrently
with the purchase, the new Commercial Mutual Board of Directors elected Barry
Goldstein, our President, Chairman of the Board and Chief Executive Officer, as
its Chairman. Mr. Goldstein had been elected as a director of Commercial Mutual
in December 2005.
  In March
2007, Commercial Mutual’s Board of Directors adopted a resolution to convert
Commercial Mutual from an advance premium cooperative insurance company to a
stock property and casualty insurance company.  Commercial Mutual has
advised us that it has obtained permission from the Superintendent of Insurance
of the State of New York (the “Superintendent of Insurance”) to proceed with the
conversion process (subject to certain conditions as discussed
below).
  38
 The
conversion by Commercial Mutual to a stock property and casualty insurance
company is subject to a number of conditions, including the approval of the plan
of conversion, which was filed with the Superintendent of Insurance on April 25,
2008, by both the Superintendent of Insurance and Commercial Mutual’s
policyholders.  As part of the approval process, the Superintendent of
Insurance had an appraisal performed with respect to the fair market value of
Commercial Mutual as of December 31, 2006.  In addition, the Insurance
Department conducted a five year examination of Commercial Mutual as of December
31, 2006. We, as the holder of the Commercial Mutual surplus notes, at our
option, would be able to exchange the surplus notes for an equitable share of
the securities or other consideration, or both, of the corporation into which
Commercial Mutual would be converted.  Based upon the amount payable
on the surplus notes and the statutory surplus of Commercial Mutual, the plan of
conversion provides that, in the event of a conversion by Commercial Mutual into
a stock corporation, in exchange for our relinquishing our rights to any unpaid
principal and interest under the surplus notes, we would receive 100% of the
stock of Commercial Mutual.  No assurances can be given that the
conversion will occur or as to the timing or terms of the
conversion.
  Exchange
of Preferred Stock
  Effective
March 23, 2007, the outside mandatory redemption date for the preferred shares
held by AIA Acquisition Corp. (“AIA”) was extended from April 30, 2007 to April
30, 2008 through the issuance of Series B preferred shares in exchange for an
equal number of Series A preferred shares held by AIA.
  Effective
April 16, 2008, the outside mandatory redemption date for the preferred shares
held by AIA was further extended to April 30, 2009 through the issuance of
Series C preferred shares in exchange for an equal number of Series B preferred
shares held by AIA.  In addition, the Series C preferred shares
provide for dividends at the rate of 10% per annum (as compared to 5% per annum
for the Series B preferred shares).
  Effective
August 23, 2008, the outside mandatory redemption date for the preferred shares
held by AIA was further extended to July 31, 2009 through the issuance of Series
D preferred shares in exchange for an equal number of Series C preferred shares
held by AIA.
  The
current aggregate redemption amount for the Series D preferred shares held by
AIA is $780,000, plus accumulated and unpaid dividends. The Series D preferred
shares are convertible into our common shares at a price of $2.50 per share.
Members of the family of Barry Goldstein, our Chief Executive Officer, are
principal stockholders of AIA.
  Relationship
  Certilman
Balin Adler & Hyman, LLP, a law firm with which Morton L. Certilman, a
principal stockholder, 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.
  39
 Director
Independence
  Board
of Directors
  Our Board
of Directors is currently comprised of Barry B. Goldstein, Michael R. Feinsod,
Jay M. Haft, David A. Lyons and Jack D. Seibald.  Each of Messrs.
Feinsod, Haft, Lyons and Seibald is currently an “independent director” based on
the definition of independence in Rule 4200(a)(15) of the listing standards at
The Nasdaq Stock Market.
  Audit
Committee
  The
members of our Board’s Audit Committee currently are Messrs. Lyons, Haft and
Seibald, each of whom is an “independent director” based on the definition of
independence in Rule 4200(a)(15) of the listing standards of The Nasdaq Stock
Market and Rule 10A-3(b)(1) under the Securities Exchange Act of
1934.
  Nominating
Committee
  The
members of our Board’s Nominating Committee currently are Messrs. Feinsod, Haft,
Lyons and Seibald, each of whom is an “independent director” based on the
definition of independence in Rule 4200(a)(15) of the listing standards of The
Nasdaq Stock Market.
  Compensation
Committee
  The
members of our Board’s Compensation Committee currently are Messrs. Seibald,
Haft and Lyons, each of whom is an “independent director” based on the
definition of independence in Rule 4200(a)(15) of the listing standards of The
Nasdaq Stock Market.
  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, 2008 and December 31, 2007:
  Fee
      Category
                    
                    Fiscal
      2008 Fees
                    
                    
                    Fiscal
      2007 FeesAudit
      Fees(1)
                    
                    $
                    110,000
                    
                    
                    $
                    116,000Audit-Related
      Fees(2)
                    
                    
                    -
                    
                    
                    
                    -Tax
      Fees(3)
                    
                    
                    47,600
                    
                    
                    
                    28,000All
      Other Fees(4)
                    
                    
                    8,910
                    
                    
                    
                    8,419Total
      Fees
                    
                    $
                    166,510
                    
                    
                    $
                    152,419
 __________
  (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, 2008 and December 31, 2007,
  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.”(3)
                Tax
      Fees consist of aggregate fees billed for preparation of our federal and
      state income tax returns and other tax compliance
    activities.(4)
                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 review of the Uniform Franchise Offering
      Circular of our wholly-owned subsidiary, DCAP Management Corp., and other
      general accounting 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.
  PART IV
  ITEM
15.                EXHIBITSAND
FINANCIAL STATEMENT SCHEDULES.
  Exhibit
                Number
              Description of Exhibit2(a)
              Amended
      and Restated Purchase and Sale Agreement, dated as of February 1, 2008, by
      and among Premium Financing Specialists, Inc., Payments Inc. and DCAP
      Group, Inc. (1)2(b)
              Asset
      Purchase Agreement, dated as of March 27, 2009, by and among NII BSA LLC,
      Barry Scott Agency, Inc., DCAP Accurate, Inc. and DCAP Group,
      Inc.3(a)
              Restated
      Certificate of Incorporation (2)3(b)
              Certificate
      of Designations of Series A Preferred Stock (3)3(c)
              Certificate
      of Designations of Series B Preferred Stock (4)3(d)
              Certificate
      of Designations of Series C Preferred Stock (5)3(e)
              Certificate
      of Designations of Series D Preferred Stock (6)3(f)
              By-laws,
      as amended (7)10(a)
              1998
      Stock Option Plan, as amended (8)   41
  10(b)
              Unit
      Purchase Agreement, dated as of July 2, 2003, by and among DCAP Group,
      Inc. and the purchasers named therein (9)10(c)
              Form
      of Secured Subordinated Promissory Note, dated July 10, 2003, issued by
      DCAP Group, Inc. with respect to indebtedness in the original aggregate
      principal amount of $3,500,000 (9)10(d)
              Letter
      agreement, dated May 25, 2005, between DCAP Group, Inc. and Jack Seibald
      as representative and attorney-in-fact with respect to the outstanding
      debt (6)10(e)
              Letter
      agreement, dated March 23, 2007, between DCAP Group, Inc. and Jack Seibald
      as representative and attorney-in-fact with respect to the outstanding
      debt (6)10(f)
              Letter
      agreement, dated September 30, 2007, between DCAP Group, Inc. and Jack
      Seibald as representative and attorney-in-fact with respect to the
      outstanding debt (10)10(g)
              Letter
      agreement, dated August 13, 2008, between DCAP Group, Inc. and Jack
      Seibald as representative and attorney-in-fact with respect to the
      outstanding debt (6)10(h)
              Registration
      Rights Agreement, dated July 10, 2003, by and among DCAP Group, Inc. and
      the purchasers named therein (9)10(i)
              2005
      Equity Participation Plan (11)10(j)
              Surplus
      Note, dated April 1, 1998, in the principal amount of $3,000,000 issued by
      Commercial Mutual Insurance Company to DCAP Group, Inc.
    (11)10(k)
              Surplus
      Note, dated March 12, 1999, in the principal amount of $750,000 issued by
      Commercial Mutual Insurance Company to DCAP Group, Inc.
    (11)10(l)
              Employment
      Agreement, dated as of October 16, 2007, between DCAP Group, Inc.
      and  Barry B. Goldstein (12)10(m)
              Amendment
      No. 1, dated as of August 25, 2008, to Employment Agreement between DCAP
      Group, Inc. and Barry B. Goldstein (6)10(n)
              Stock
      Option Agreement, dated as of October 16, 2007, between DCAP Group, Inc.
      and  Barry B. Goldstein (12)14
              Code
      of Ethics (13)21
              Subsidiaries23
              Consent
      of Holtz Rubenstein Reminick LLP  42
  31(a)
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive Officer as
      Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231(b)
              Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial Officer as
      Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 __________
 
 (1)
              Denotes
      document filed as an exhibit to our Current Report on Form 8-K for an
      event dated February 1, 2008 and incorporated herein by
      reference.(2)
              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.(3)
              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.(4)
              Denotes
      document filed as an exhibit to our Annual Report on Form 10-KSB for the
      fiscal year ended December 31, 2006 and incorporated herein by
      reference.(5)
              Denotes
      document filed as an exhibit to our Quarterly Report on Form 10-QSB for
      the period ended March 31, 2008 and incorporated herein by
      reference.(6)
              Denotes
      document filed as an exhibit to our Quarterly Report on Form 10-Q for the
      period ended September 30, 2008 and incorporated herein by
      reference.(7)
              Denotes
      document filed as an exhibit to our Current Report on Form 8-K for an
      event dated December 26, 2007 and incorporated herein by
      reference.(8)
              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.(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, 2007 and incorporated herein by
      reference.(11)
              Denotes
      document filed as an exhibit to our Annual Report on Form 10-KSB for the
      fiscal year ended December 31, 2005 and incorporated herein by
      reference.(12)
              Denotes
      document filed as an exhibit to our Current Report on Form 8-K for an
      event dated October 16, 2007 and incorporated herein by
      reference.  43
 (13)
              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.


44


DCAP
GROUP, INC. AND


SUBSIDIARIES





Contents


Years
Ended December 31, 2008 and 2007





Consolidated
      Financial StatementsReport
      of Independent Registered Public Accounting Firm
                              F-2Consolidated
      Balance Sheets
                              F-3Consolidated
      Statements of Operations
                              F-4Consolidated
      Statement of Stockholders' Equity
                              F-5Consolidated
      Statements of Cash Flows
                              F-6 - F-7Notes
      to Consolidated Financial Statements
                              F-8 -
F-29















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 sheets of DCAP Group, Inc. and
Subsidiaries as of December 31, 2008 and 2007 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, audits of its internal control
over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.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, 2008 and 2007 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.








/s/ Holtz
Rubenstein Reminick LLP





Melville,
New York


April 13,
2009













DCAP
      GROUP, INC. ANDSUBSIDIARIESConsolidated
      Balance SheetsDecember
      31,
                                              2008
                                              
                                              
                                              2007AssetsCurrent
      Assets:Cash
      and cash equivalents
                                              
                                              $
                                              142,949
                                              
                                              
                                              $
                                              1,030,822Accounts
      receivable, net of allowance for doubtful accounts of$40,000
      at December 31, 2008 and $50,000 at December 31, 2007
                                              
                                              
                                              201,787
                                              
                                              
                                              
                                              215,179Prepaid
      expenses and other current assets
                                              
                                              
                                              130,457
                                              
                                              
                                              
                                              290,885Assets
      from discontinued operations
                                              
                                              
                                              2,913,147
                                              
                                              
                                              
                                              16,352,308Total
      current assets
                                              
                                              
                                              3,388,340
                                              
                                              
                                              
                                              17,889,194Property
      and equipment, net
                                              
                                              
                                              90,493
                                              
                                              
                                              
                                              155,679Notes
      receivable
                                              
                                              
                                              5,935,704
                                              
                                              
                                              
                                              5,170,804Deposits
      and other assets
                                              
                                              
                                              6,096
                                              
                                              
                                              
                                              29,649Total
      assets
                                              
                                              $
                                              9,420,633
                                              
                                              
                                              $
                                              23,245,326Liabilities
      and Stockholders' EquityCurrent
      Liabilities:Accounts
      payable and accrued expenses
                                              
                                              $
                                              822,350
                                              
                                              
                                              $
                                              570,449Current
      portion of long-term debt
                                              
                                              
                                              1,593,210
                                              
                                              
                                              
                                              2,098,989Other
      current liabilities
                                              
                                              
                                              154,200
                                              
                                              
                                              
                                              154,200Liabilities
      from discontinued operations
                                              
                                              
                                              213,685
                                              
                                              
                                              
                                              12,682,268Mandatorily
      redeemable preferred stock
                                              
                                              
                                              780,000
                                              
                                              
                                              
                                              780,000Total
      current liabilities
                                              
                                              
                                              3,563,445
                                              
                                              
                                              
                                              16,285,906Long-term
      debt
                                              
                                              
                                              415,618
                                              
                                              
                                              
                                              499,065Deferred
      income taxes
                                              
                                              
                                              184,000
                                              
                                              
                                              
                                              303,000CommitmentsStockholders'
      Equity:Common
      stock, $.01 par value; authorized 10,000,000 shares;
issued3,788,771
      at December 31, 2008 and 3,750,447 shares at December 31,
    2007
                                              
                                              
                                              37,888
                                              
                                              
                                              
                                              37,505Preferred
      stock, $.01 par value; authorized1,000,000
      shares; 0 shares issued and outstanding
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Capital
      in excess of par
                                              
                                              
                                              11,962,512
                                              
                                              
                                              
                                              11,850,872Deficit
                                              
                                              
                                              (5,522,448
                                              )
                                              
                                              
                                              (4,545,242
                                              )6,477,952
                                              
                                              
                                              
                                              7,343,135Treasury
      stock, at cost, 816,025 shares at December 31, 2008 and781,423
      shares at December 31, 2007
                                              
                                              
                                              (1,220,382
                                              )
                                              
                                              
                                              (1,185,780
                                              )Total
      stockholders' equity
                                              
                                              
                                              5,257,570
                                              
                                              
                                              
                                              6,157,355Total
      liabilities and stockholders' equity
                                              
                                              $
                                              9,420,633
                                              
                                              
                                              $
                                              23,245,326





See notes to consolidated financial
statements


F-3




DCAP
      GROUP, INC. ANDSUBSIDIARIESConsolidated
      Statements of OperationsYears
      Ended December 31,
                                                  
                                                  2008
                                                  
                                                  
                                                  2007Commissions
      and fee revenue
                                                  
                                                  $
                                                  911,225
                                                  
                                                  
                                                  $
                                                  649,246Operating
      expenses:General
      and administrative expenses
                                                  
                                                  
                                                  1,860,485
                                                  
                                                  
                                                  
                                                  2,275,441Depreciation
      and amortization
                                                  
                                                  
                                                  69,624
                                                  
                                                  
                                                  
                                                  84,422Total
      operating expenses
                                                  
                                                  
                                                  1,930,109
                                                  
                                                  
                                                  
                                                  2,359,863Operating
      loss
                                                  
                                                  
                                                  (1,018,884
                                                  )
                                                  
                                                  
                                                  (1,710,617
                                                  )Other
      (expense) income:Interest
      income
                                                  
                                                  
                                                  4,338
                                                  
                                                  
                                                  
                                                  9,633Interest
      income - notes receivable
                                                  
                                                  
                                                  764,899
                                                  
                                                  
                                                  
                                                  1,287,819Interest
      expense
                                                  
                                                  
                                                  (270,646
                                                  )
                                                  
                                                  
                                                  (432,351
                                                  )Interest
      expense - mandatorily redeemable preferred stock
                                                  
                                                  
                                                  (66,625
                                                  )
                                                  
                                                  
                                                  (39,000
                                                  )Total
      other income
                                                  
                                                  
                                                  431,966
                                                  
                                                  
                                                  
                                                  826,101Loss
      from continuing operations before benefit from income
taxes
                                                  
                                                  
                                                  (586,918
                                                  )
                                                  
                                                  
                                                  (884,516
                                                  )Benefit
      from income taxes
                                                  
                                                  
                                                  (391,225
                                                  )
                                                  
                                                  
                                                  (419,232
                                                  )Loss
      from continuing operations
                                                  
                                                  
                                                  (195,693
                                                  )
                                                  
                                                  
                                                  (465,284
                                                  )(Loss)
      income from discontinued operations, net of income taxes
                                                  
                                                  
                                                  (781,513
                                                  )
                                                  
                                                  
                                                  417,839Net
      loss
                                                  
                                                  $
                                                  (977,206
                                                  )
                                                  
                                                  $
                                                  (47,445
                                                  )Basic
      and Diluted Net (Loss) Income Per Common Share:Loss
      from continuing operations
                                                  
                                                  $
                                                  (0.07
                                                  )
                                                  
                                                  $
                                                  (0.16
                                                  )(Loss)
      income from discontinued operations
                                                  
                                                  $
                                                  (0.26
                                                  )
                                                  
                                                  $
                                                  0.14Loss
      per common share
                                                  
                                                  $
                                                  (0.33
                                                  )
                                                  
                                                  $
                                                  (0.02
                                                  )Number
      of weighted average shares used in computationof
      basic and diluted loss per common share
                                                  
                                                  
                                                  2,972,597
                                                  
                                                  
                                                  
                                                  2,963,036







See
notes to consolidated financial statements





F-4




DCAP
      GROUP, INC. ANDSUBSIDIARIESConsolidated
      Statement of Stockholders' EquityYears
      Months Ended December 31, 2007 and 2008CapitalCommon
      Stock
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Preferred
      Stock
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          in
      Excess
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Treasury
      StockShares
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Amount
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Shares
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Amount
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          of
      Par
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (Deficit)
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Shares
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Amount
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          TotalBalance,
      December 31, 2006
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,672,947
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          36,730
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          11,633,884
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (4,497,797
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          776,923
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (1,178,555
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          5,994,262Exercise
      of stock options
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          74,500
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          745
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          111,455
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          112,200Stock-based
      payments
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,000
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          30
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          105,533
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          105,563Return
      of stock as settlement of liability
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4,500
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (7,225
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (7,225
                                                                                                                                                                          )Net
      loss
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (47,445
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (47,445
                                                                                                                                                                          )Balance,
      December 31, 2007
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,750,447
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          37,505
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          11,850,872
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (4,545,242
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          781,423
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (1,185,780
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6,157,355Stock-based
      payments
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          38,324
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          383
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          111,640
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          112,023Return
      of stock as settlement of liability
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          34,602
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (34,602
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (34,602
                                                                                                                                                                          )Net
      loss
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (977,206
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (977,206
                                                                                                                                                                          )Balance,
      December 31, 2008
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,788,771
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          37,888
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          11,962,512
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (5,522,448
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          816,025
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (1,220,382
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          5,257,570





See notes to consolidated financial
statements






F-5




DCAP
      GROUP, INC. ANDSUBSIDIARIESConsolidated
      Statements of Cash FlowsYears
      Ended December 31,
                                      
                                      2008
                                      
                                      
                                      2007Cash
      Flows from Operating Activities:Net
      loss
                                      
                                      $
                                      (977,206
                                      )
                                      
                                      $
                                      (47,445
                                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                      
                                      
                                      69,624
                                      
                                      
                                      
                                      121,555Bad
      debt expense
                                      
                                      
                                      44,091
                                      
                                      
                                      
                                      37,070Accretion
      of discount on notes receivable
                                      
                                      
                                      (576,228
                                      )
                                      
                                      
                                      (987,818
                                      )Amortization
      of warrants
                                      
                                      
                                      17,731
                                      
                                      
                                      
                                      40,120Stock-based
      payments
                                      
                                      
                                      112,023
                                      
                                      
                                      
                                      105,563Deferred
      income taxes
                                      
                                      
                                      (487,000
                                      )
                                      
                                      
                                      (34,000
                                      )Changes
      in operating assets and liabilities:Decrease
      (increase) in assets:Accounts
      receivable
                                      
                                      
                                      (104,221
                                      )
                                      
                                      
                                      41,382Prepaid
      expenses and other current assets
                                      
                                      
                                      7,500
                                      
                                      
                                      
                                      (208,622
                                      )Deposits
      and other assets
                                      
                                      
                                      23,553
                                      
                                      
                                      
                                      (26,990
                                      )Increase
      (decrease) in liabilities:Accounts
      payable, accrued expenses and taxes payable
                                      
                                      
                                      251,901
                                      
                                      
                                      
                                      126,180Other
      current liabilities
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (11,946
                                      )Deferred
      taxes payable
                                      
                                      
                                      368,000
                                      
                                      
                                      
                                      -Net
      cash used in operating activities of continuing operations
                                      
                                      
                                      (1,250,232
                                      )
                                      
                                      
                                      (844,951
                                      )Operating
      activities of discontinued operations
                                      
                                      
                                      497,592
                                      
                                      
                                      
                                      470,575Net
      Cash Used in Operating Activities
                                      
                                      
                                      (752,640
                                      )
                                      
                                      
                                      (374,376
                                      )Cash
      Flows from Investing Activities:Decrease
      in notes and other receivables - net
                                      
                                      
                                      3,176
                                      
                                      
                                      
                                      2,374Purchase
      of property and equipment
                                      
                                      
                                      (4,438
                                      )
                                      
                                      
                                      (58,937
                                      )Net
      cash used in investing activities of continuing operations
                                      
                                      
                                      (1,262
                                      )
                                      
                                      
                                      (56,563
                                      )Investing
      activities of discontinued operations
                                      
                                      
                                      1,035,163
                                      
                                      
                                      
                                      2,190,386Net
      Cash Provided by Investing Activities
                                      
                                      
                                      1,033,901
                                      
                                      
                                      
                                      2,133,823Cash
      Flows from Financing Activities:Principal
      payments on long-term debt
                                      
                                      
                                      (606,957
                                      )
                                      
                                      
                                      (570,589
                                      )Proceeds
      from exercise of options and warrants
                                      
                                      
                                      -
                                      
                                      
                                      
                                      112,200Net
      cash used in financing activities of continuing operations
                                      
                                      
                                      (606,957
                                      )
                                      
                                      
                                      (458,389
                                      )Financing
      activities of discontinued operations
                                      
                                      
                                      (562,177
                                      )
                                      
                                      
                                      (1,466,648
                                      )Net
      Cash Used in Financing Activities
                                      
                                      
                                      (1,169,134
                                      )
                                      
                                      
                                      (1,925,037
                                      )





See
notes to consolidated financial statements




F-6





DCAP
      GROUP, INC. ANDSUBSIDIARIESConsolidated
      Statements of Cash Flows (continued)Years
      Ended December 31,
                                                  
                                                  2008
                                                  
                                                  
                                                  2007Net
      Decrease in Cash and Cash Equivalents
                                                  
                                                  
                                                  (887,873
                                                  )
                                                  
                                                  
                                                  (165,590
                                                  )Cash
      and Cash Equivalents, beginning of year
                                                  
                                                  
                                                  1,030,822
                                                  
                                                  
                                                  
                                                  1,196,412Cash
      and Cash Equivalents, end of year
                                                  
                                                  $
                                                  142,949
                                                  
                                                  
                                                  $
                                                  1,030,822Supplemental
      Schedule of Non-Cash Investing and Financing Activities:Liabilties
      assumed by purchaser of premium finance portfolio
                                                  
                                                  $
                                                  11,229,060
                                                  
                                                  
                                                  $
                                                  -Computer
      equipment acquired under capital leases
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  89,819





See
notes to consolidated financial statements




F-7


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007




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 until February
1, 2008 provided premium financing of insurance policies for customers of our
offices as well as customers of non-affiliated entities. On February 1, 2008, we
sold our outstanding premium finance loan portfolio (see Note 13). As a result
of the sale, our premium financing operations have been classified as
discontinued operations and prior periods have been restated. The purchaser of
the premium finance portfolio has agreed that, during the five year period
ending January 31, 2013 (subject to automatic renewal for successive two year
terms under certain circumstances), it will purchase, assume and service premium
finance contracts originated by us in the states of New York and
Pennsylvania. In connection with such purchases, we will be entitled to
receive a fee generally equal to a percentage of the amount
financed.  Our continuing operations of the premium financing business
will consist of the revenue earned from placement fees and any related
expenses.  We also provide automobile club services for roadside
emergencies and tax preparation services.




In
December 2008, due to declining revenues and profits, we made a decision to
restructure our network of retail offices (the “Retail Business”). The plan of
restructuring called for closing seven of our least profitable locations during
the month of December 2008, and to enter into negotiations to sell the remaining
19 locations in our Retail Business. On March 30, 2009, an asset purchase
agreement (the “APA”) was fully executed pursuant to which we agreed to sell
substantially all of the assets, including the book of business, of our 16
remaining Retail Business locations (the “Assets”) that we own in New York State
(see Notes 13 and 17). The closing of the sale of the Assets is subject to a
number of conditions. As a result of the restructuring in December 2008, and the
APA on March 30, 2009, our Retail Business has been reclassified as discontinued
operations and prior periods have been restated.




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 -Franchise fee revenue
on initial franchisee fees is recognized when substantially all of our
contractual requirements under the franchise agreement are completed.
Franchisees also pay a monthly franchise fee plus an applicable percentage of
advertising expense. We are obligated to provide marketing and training support
to each franchisee.  During the years ended December 31, 2008 and
2007, approximately $-0- and $110,000, respectively, was recognized as initial
franchise fee income.





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 creditworthiness, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts.





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.





F-8


DCAP
GROUP, INC. AND


SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


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.





We
perform ongoing 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 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. The most
significant estimates include the allowance for finance receivable losses. It is
reasonably possible that events could occur during the upcoming year which could
change such estimates.





Net earnings
(loss) per share - Basic net earnings per share is computed by dividing
income (loss) available to common shareholders by the weighted-average number of
common shares outstanding. Diluted earnings per share reflect, in periods in
which they have a dilutive effect, the impact of common shares issuable upon
exercise of stock options, warrants and conversion of mandatorily redeemable
preferred shares.  The computation of diluted earnings per share
excludes those options and warrants with an exercise price in excess of the
average market price of our common shares during the periods presented. During
the year ended December 31, 2008, we recorded a loss available to common
shareholders and, as a result, the weighted average number of common shares used
in the calculation of basic and diluted loss per share is the same, and have not
been adjusted for the effects of 489,400 potential common shares from
unexercised stock options and the conversion of convertible preferred shares,
which were anti-dilutive for such period. During the year ended December 31,
2007, we recorded a loss available to common shareholders and, as a result, the
weighted average number of shares of common shares used in the calculation of
basic and diluted loss per share is the same, and have not been adjusted for the
effects of 678,124 potential common shares from unexercised stock options and
warrants, and the conversion of convertible preferred shares, which were
anti-dilutive for such period.





Advertising costs
- Advertising costs are charged to operations when the advertising first
takes place. Included in general and administrative expenses are advertising
costs approximating $66,000 and $262,000 for the years ended December 31, 2008
and 2007, 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.






F-9


DCAP
GROUP, INC. AND


SUBSIDIARIES
 
  Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


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.





In July
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, "Accounting for
Uncertainty in Income Taxes," (“FIN 48”). This interpretation, among
other things, creates a two-step approach for evaluating uncertain tax
positions. Recognition (step one) occurs when an enterprise concludes that a tax
position, based solely on its technical merits, is more-likely-than-not to be
sustained upon examination. Measurement (step two) determines the amount of
benefit that more-likely-than-not will be realized upon settlement.
Derecognition of a tax position that was previously recognized would occur when
a company subsequently determines that a tax position no longer meets the
more-likely-than-not threshold of being sustained. FIN 48 specifically
prohibits the use of a valuation allowance as a substitute for derecognition of
tax positions, and it has expanded disclosure requirements. The adoption of
FIN 48 had no impact on the Company’s consolidated financial
statements.





Share-based
compensation -We record compensation expense associated with stock
options and other equity-based compensation in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123(R)”). In addition, we adhere to the guidance set forth
within  Securities and Exchange Commission (“SEC”) Staff
Accounting Bulletin (“SAB”) No. 107, which provides the Staff's views regarding
the interaction between SFAS 123(R) and certain SEC rules and regulations and
provides interpretations with respect to the valuation of share-based payments
for public companies.Stock
option compensation expense in 2008 and 2007 is the estimated fair value of
options granted amortized on a straight-line basis over the requisite service
period for entire portion of the award less an estimate for anticipated
forfeitures.





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 approximately $3,000
and $53,000 in such costs were incurred during the years ended December 31, 2008
and 2007, 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, 2008 and 2007, there were no such adjustments
required.





New
accounting pronouncements





In
December 2007, the FASB issued SFAS No. 141R “Business Combinations” (“SFAS
141R”). SFAS 141R establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  SFAS
141R is effective for our fiscal year beginning January 1, 2009.  We
are in the process of evaluating this statement for the impact, if any, that
SFAS 141R will have on our consolidated financial position and results of
operations.





F-10


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007




In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure requirements about fair value measurements. SFAS
No. 157 was effective for us on January 1, 2008. However, in February
2008, the FASB released FASB Staff Position (FSP FAS 157-2 — Effective
Date of FASB Statement No. 157), which delayed the effective date of SFAS
No. 157 for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The adoption of SFAS No. 157 for our financial
assets and liabilities did not have a material impact on our consolidated
financial statements. We do not believe the adoption of SFAS No. 157 for
our nonfinancial assets and liabilities, effective January 1, 2009, will
have a material impact on our consolidated financial statements.





In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
companies to choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting by
providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. Companies are not allowed to
adopt SFAS 159 on a retrospective basis unless they choose early adoption. We
adopted SFAS 159 in 2008, and did not elect the fair value option for eligible
items that existed at the date of adoption.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”
(“SFAS 160”). The new standard changes the accounting and reporting of
noncontrolling interests, which have historically been referred to as minority
interests. SFAS 160 requires that noncontrolling interests be presented in the
consolidated balance sheets within shareholders’ equity, but separate from the
parent’s equity, and that the amount of consolidated net income attributable to
the parent and to the noncontrolling interest be clearly identified and
presented in the consolidated statements of income. Any losses in excess of the
noncontrolling interest’s equity interest will continue to be allocated to the
noncontrolling interest. Purchases or sales of equity interests that do not
result in a change of control will be accounted for as equity transactions. Upon
a loss of control, the interest sold, as well as any interest retained, will be
measured at fair value, with any gain or loss recognized in earnings. In partial
acquisitions, when control is obtained, the acquiring company will recognize, at
fair value, 100% of the assets and liabilities, including goodwill, as if the
entire target company had been acquired. SFAS 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008, with early adoption prohibited. The new standard will be
applied prospectively, except for the presentation and disclosure requirements,
which will be applied retrospectively for all periods presented. We have
not yet determined the impact, if any, that this statement will have on our
consolidated financial statements and we will adopt the standard at the
beginning of fiscal 2009.





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




F-11


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007




In April
2008, the FASB issued FASB Staff Position ("FSP") No. 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP 142-3"). FSP 142-3 removes the requirement under
SFAS 142 to consider whether an intangible asset can be renewed without
substantial cost of material modifications to the existing terms and conditions,
and replaces it with a requirement that an entity consider its own historical
experience in renewing similar arrangements, or a consideration of market
participant assumptions in the absence of historical experience. This FSP also
requires entities to disclose information that enables users of financial
statements to assess the extent to which the expected future cash flows
associated with the asset are affected by the entity's intent and/or ability to
renew or extend the arrangement. The guidance will become effective as of the
beginning of the Company's fiscal year beginning after December 15, 2008. We
are currently evaluating the impact this standard will have on our
financial statements.





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





In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” This FSP clarifies that all outstanding unvested share-based
payment awards that contain rights to non-forfeitable dividends participate in
undistributed earnings with common shareholders. Awards of this nature are
considered participating securities and the two-class method of computing basic
and diluted earnings per share must be applied. This FSP is effective for fiscal
years beginning after December 15, 2008. We are currently evaluating the
potential impact, if any, the new pronouncement will have on our consolidated
financial statements.





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





3.
Notes Receivable





Purchase
of Notes Receivable




On
January 31, 2006, we purchased from Eagle Insurance Company (“Eagle”) two
surplus notes issued by Commercial Mutual Insurance Company (“CMIC”) in the
aggregate principal amount of $3,750,000 (the “Surplus Notes”), plus accrued
interest of $1,794,688. The aggregate purchase price for the Surplus Notes was
$3,075,141, of which $1,303,434 was paid to Eagle by delivery of a six month
promissory note which provided for interest at the rate of 7.5% per
annum.  The promissory note was paid in full on July 28,
2006.  CMIC is a New York property and casualty insurer. The Surplus
Notes acquired by us are past due and provide for interest at the prime rate or
8.5% per annum, whichever is less.  Payments of principal and interest
on the Surplus Notes may only be made out of the surplus of CMIC and require the
approval of the New York State Department of Insurance.  During the
years ended December 31, 2008 and 2007, interest payments totaling $-0- and
$125,000, respectively, were received. The discount on the Surplus Notes and the
accrued interest at the time of acquisition were accreted over a 30 month period
through July 31, 2008, the estimated period to collect such
amounts.  Such accretion amount, together with interest on the Surplus
Notes for the years ended December 31, 2008 and 2007, are included in our
consolidated statement of operations as “Interest income-notes
receivable.”





F-12


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


Possible
Future Conversion of Notes Receivable




In March
2007, CMIC’s Board of Directors adopted a resolution to convert CMIC from an
advance premium cooperative insurance company to a stock property and casualty
insurance company.  CMIC has advised us that it has obtained
permission from the Superintendent of Insurance of the State of New York (the
“Superintendent”) to proceed with the conversion process (subject to certain
conditions as discussed below).




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




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




4.
Property and Equipment





Property
and equipment consists of the following:






F-13


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007
  December
      31,
                                            Useful
      Lives
                                            
                                            2008
                                            
                                            
                                            2007Furniture,
      fixtures & equipment
                                            5
      years
                                            
                                            $
                                            186,889
                                            
                                            
                                            $
                                            184,581Leasehold
      improvements
                                            3
      - 5 years
                                            
                                            
                                            61,465
                                            
                                            
                                            
                                            60,227Computer
      hardware, software and office equipment
                                            2
      - 5 years
                                            
                                            
                                            526,595
                                            
                                            
                                            
                                            487,097Entertainment
      facility
                                            20
      years
                                            
                                            
                                            200,538
                                            
                                            
                                            
                                            200,538975,487
                                            
                                            
                                            
                                            932,443Less
      accumulated depreciation
                                            
                                            
                                            
                                            884,994
                                            
                                            
                                            
                                            776,764$
                                            90,493
                                            
                                            
                                            $
                                            155,679
  Depreciation
expense for the years ended December 31, 2008 and 2007 was approximately $69,000
and $102,000, respectively.





5.
Accounts Payable and Accrued Expenses





Accounts
payable and accrued expenses consists of the following:




December
      31,
                                        
                                        2008
                                        
                                        
                                        2007Accounts
      payable
                                        
                                        $
                                        314,249
                                        
                                        
                                        $
                                        257,710Interest
                                        
                                        
                                        115,903
                                        
                                        
                                        
                                        85,902Payroll
      and related costs
                                        
                                        
                                        26,032
                                        
                                        
                                        
                                        16,978Professional
      fees
                                        
                                        
                                        366,166
                                        
                                        
                                        
                                        209,859$
                                        822,350
                                        
                                        
                                        $
                                        570,449


6.
Debentures Payable





In 1971,
pursuant to a plan of arrangement, we issued a series of debentures, which
matured in 1977. As of December 31, 2008 and 2007, $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.





7.
Long-Term Debt





Long-term
debt and capital lease obligations consist of:






F-14


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007




December
      31,
                                      
                                      2008
                                      
                                      
                                      2007Note
      payable, Accurate acquisition
                                      
                                      $
                                      450,695
                                      
                                      
                                      $
                                      517,113Term
      loan from Manufacturers & Traders Trust Co.
                                      
                                      
                                      -
                                      
                                      
                                      
                                      520,000Capitalized
      lease
                                      
                                      
                                      58,133
                                      
                                      
                                      
                                      78,672Notes
      payable
                                      
                                      
                                      1,500,000
                                      
                                      
                                      
                                      1,500,000Unamortized
      value of stock purchase warrants issued in connection with notes
      payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (17,731
                                      )2,008,828
                                      
                                      
                                      
                                      2,598,054Less
      current maturities
                                      
                                      
                                      1,593,210
                                      
                                      
                                      
                                      2,098,989$
                                      415,618
                                      
                                      
                                      $
                                      499,065





Note Payable,
Accurate Acquisition- Note issued in connection with the purchase of Accurate, payable in
monthly installments of $9,255 through December 2009 and $11,111 from January
2010 through maturity date of December 10, 2012. In September 2008, the
installment payments due in September 2008 through April 2009 were reduced to
$6,800, with the remaining $2,455 due for such months being payable during the
eight months following the scheduled maturity on December 10, 2012. Payments on
the note commenced in January 2007.  Interest has been imputed at the
rate of 7% per annum.





Term Loan from
Manufacturers and Traders Trust Company (“M&T”)-The M&T term loan was
payable in quarterly principal installments of $130,000 through March 1, 2008.
In June 2008, the maturity date of the M&T term loan was extended to
December 31, 2008. Principal payments of $55,714 were due on the first day of
each month and one final payment on the maturity date. Interest at the rate of
LIBOR plus 2.75% was payable monthly.  The M&T term loan was paid
in full in December 2008.





Capitalized
Lease-
Capitalized lease payable for computer equipment, payable in monthly
installments of $2,241 per month, including interest at 9.1% per annum. The term
of the capitalized lease is through June 30, 2011. The capitalized lease is
collateralized by computer equipment with a carrying cost and accumulated
depreciation approximating $90,000 and $42,000, respectively, at December 31,
2008.





Notes
Payable- The
notes payable bear interest at 12.625% per annum, payable semi-annually. The
notes were subordinate to the revolving credit facility included in discontinued
operations, and were secured by a security interest in the assets of our premium
finance subsidiary and a pledge of our subsidiary's stock. Effective February 1,
2008, upon the sale of the premium finance portfolio, the notes were no longer
subordinated to the revolving credit facility and there is no longer a security
interest in the assets of our premium financing subsidiary; however, the notes
were subordinated to the above term loan from M&T. In December 2008, such
term loan was paid in full.





In August
2008, the maturity date of our $1,500,000 notes payable was extended from
September 30, 2008 to the earlier of July 10, 2009 or 90 days following the
conversion of CMIC to a stock property and casualty insurance company and the
issuance to us of a controlling interest in CMIC (see Note 3) (subject to
acceleration under certain circumstances). In exchange for this extension, the
holders will receive an aggregate incentive payment equal to $10,000 times the
number of months (or partial months) the debt is outstanding after September 30,
2008 through the maturity date. If a prepayment of principal reduces the debt
below $1,500,000, the incentive payment for all subsequent months will be
reduced in proportion to any such reduction to the debt. The aggregate incentive
payment is due upon full repayment of the debt. As of December 31, 2008, $30,000
of such incentive payments were included in accrued expenses.





F-15


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007




Jack
Seibald, one of our directors and a principal stockholder, indirectly holds
approximately $288,000 of the principal amount of the notes
payable.  In addition, a limited liability company of which Barry
Goldstein, our Chief Executive Officer, is a minority member holds $115,000 of
the principal amount of the notes payable.




Long-term
debt matures as follows:




Years
      ended December 31,2009
                              
                              $
                              1,593,2102010
                              
                              
                              134,0312011
                              
                              
                              129,0412012
                              
                              
                              126,4712013
                              
                              
                              26,075$
                              2,008,828
  8.
Related Party Transactions





Professional fees
– A law firm affiliated with one of our former directors was paid legal
fees of $91,000 and $123,000 for the years ended December 31, 2008 and 2007,
respectively.





Guaranty –Under our revolving line of credit entered into in July 2006, our
Chairman and CEO was obligated on an unlimited wind-down guaranty as long as the
loan was in effect. Upon the sale of the premium finance portfolio on February
1, 2008, the wind-down guaranty was terminated.





Note receivable –Included in other current assets as of December 31, 2008 and 2007 was a
note receivable of $39,000 (non-interest bearing) and $161,000 (interest
bearing), respectively, from a franchisee who is affiliated with one of our
former directors. Interest income from the interest bearing note was
approximately $5,000 for the year ended December 31, 2007. In February 2008, the
interest bearing note was paid in full.





9.
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 (benefit) provision for income taxes from
continuing operations is comprised of the following:




F-16


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


Years
      ended December 31,
                                              
                                              2008
                                              
                                              
                                              2007Current:Federal
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (306,000
                                              )State
                                              
                                              
                                              95,775
                                              
                                              
                                              
                                              (79,232
                                              )95,775
                                              
                                              
                                              
                                              (385,232
                                              )Deferred:Federal
                                              
                                              
                                              (390,000
                                              )
                                              
                                              
                                              (27,000
                                              )State
                                              
                                              
                                              (97,000
                                              )
                                              
                                              
                                              (7,000
                                              )(487,000
                                              )
                                              
                                              
                                              (34,000
                                              )$
                                              (391,225
                                              )
                                              
                                              $
                                              (419,232
                                              )




A
reconciliation of the federal statutory rate to our effective tax rate from
continuing operations is as follows:





Years
      ended December 31,
                                                
                                                2008
                                                
                                                
                                                2007Computed
      expected tax expense
                                                
                                                
                                                (34.00
                                                )
       %
                                                
                                                
                                                (34.00
                                                )
       %State
      taxes, net of Federal benefit
                                                
                                                
                                                (5.48
                                                )
                                                
                                                
                                                (5.79
                                                )Tax
      benefit from current year loss of discontinued operations
                                                
                                                
                                                (56.78
                                                )
                                                
                                                
                                                -Permanent
      differences
                                                
                                                
                                                29.60
                                                
                                                
                                                
                                                (7.61
                                                )Total
      tax (benefit)
                                                
                                                
                                                (66.66
                                                )
       %
                                                
                                                
                                                (47.40
                                                )
       %


At
December 31, 2008, we had net operating loss carryforwards for tax purposes,
which expire at various dates through 2019, of approximately $1,589,000. 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 (“Annual Limitation”), as a result of a
greater than 50% ownership change of DCAP Group, Inc. in 1999. The net operating
loss of $1,136,000 from 2007 was carried back to 2005, resulting in a refund of
$368,000. Our taxable loss for the year ended December 31, 2008 was
approximately $1,879,000. This loss will be available for future years, expiring
through December 31, 2028.





The tax
effects of temporary differences which give rise to deferred tax assets and
liabilities from continuing operations consist of the following:




F-17




DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007





December
      31,
                                                    
                                                    2008
                                                    
                                                    
                                                    2007Deferred
      tax assets:Net
      operating loss carryovers subject to Annual Limitation
                                                    
                                                    $
                                                    544,000
                                                    
                                                    
                                                    $
                                                    544,000Other
      net operating loss carryovers
                                                    
                                                    
                                                    846,000
                                                    
                                                    
                                                    
                                                    452,000Provision
      for doubtful accounts
                                                    
                                                    
                                                    16,000
                                                    
                                                    
                                                    
                                                    20,000Depreciation
                                                    
                                                    
                                                    21,000
                                                    
                                                    
                                                    
                                                    -Stock
      compensation expense
                                                    
                                                    
                                                    67,000
                                                    
                                                    
                                                    
                                                    39,000Gross
      deferred tax assets
                                                    
                                                    
                                                    1,494,000
                                                    
                                                    
                                                    
                                                    1,055,000Deferred
      tax liabilities:Interest
      on note
                                                    
                                                    
                                                    1,144,000
                                                    
                                                    
                                                    
                                                    838,000Depreciation
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    8,000Prepaid
      expenses
                                                    
                                                    
                                                    41,000
                                                    
                                                    
                                                    
                                                    16,000Gross
      deferred tax liabilities
                                                    
                                                    
                                                    1,185,000
                                                    
                                                    
                                                    
                                                    862,000Net
      deferred tax assets before valuation allowance
                                                    
                                                    
                                                    309,000
                                                    
                                                    
                                                    
                                                    193,000Less
      valuation allowance due to Annual Limitation of net operating loss
      carryover
                                                    
                                                    
                                                    (493,000
                                                    )
                                                    
                                                    
                                                    (496,000
                                                    )Net
      deferred tax liability
                                                    
                                                    $
                                                    (184,000
                                                    )
                                                    
                                                    $
                                                    (303,000
                                                    )


10.
Commitments





Leases -
We, and each of our affiliates, lease office space under noncancellable
operating leases expiring at various dates through December 31, 2015. 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
      ended December 31,2009
                                
                                $
                                383,3762010
                                
                                
                                221,5392011
                                
                                
                                136,7342012
                                
                                
                                36,4932013
                                
                                
                                37,200Thereafter
                                
                                
                                74,400$
                                889,742


Rental
expense from continuing operations approximated $78,000 and $76,000 for the
years ended December 31, 2008 and 2007, respectively.





The APA
for the sale of our 16 New York State locations contemplates the assignment of
the real estate leases for such locations to the buyer.





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




F-18


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 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.





Tax audits -Our state income tax returns for the years ended December 31, 2005, 2006
and 2007 are currently under audit by New York State. The final results of this
audit cannot be estimated by management. It is anticipated that the audit will
be concluded in 2009. The audit of our federal income tax return for the year
ended December 31, 2005 was completed in 2008. The audit resulted in no changes
to our tax return as filed.





11.
Mandatorily Redeemable Preferred Stock





On May 8,
2003, we issued 904 shares of Series A Preferred Stock in connection with the
acquisition of substantially all of the assets of AIA.  The Series A
Preferred Stock had a liquidation preference of $1,000 per share. Dividends on
the Series A Preferred Stock at the rate of 5% per annum were cumulative and
were payable in cash. Each share of the Series A Preferred Stock was convertible
at the option of the holder at any time into shares of our Common Stock at a
conversion rate of $2.50 per share.  Subject to legal availability of
funds, the Series A Preferred Stock was mandatorily redeemable by us for cash at
its liquidation preference on April 30, 2007, or earlier under certain
circumstances (unless previously converted into our Common Stock).





On
January 15, 2005, the preferred stockholder converted 124 shares of Series A
Preferred Stock into 49,600 shares of our Common Stock.





Effective
March 23, 2007, the holder of the Series A Preferred Stock exchanged such shares
for an equal number of shares of Series B Preferred Stock, the terms of which
were substantially identical to the shares of Series A Preferred Stock, except
the outside date for mandatory redemption was April 30, 2008.





Effective
April 16, 2008, the holder of the Series B Preferred Stock exchanged such shares
for an equal number of shares of Series C Preferred Stock, the terms of which
were substantially identical to those of the shares of Series B Preferred Stock,
except that the outside date for mandatory redemption was April 30, 2009 and the
Series C Preferred Stock provided for dividends at the rate of 10% per
annum.




Effective
August 23, 2008, the holder of the Series C Preferred Stock exchanged such
shares for an equal number of shares of Series D Preferred Stock, the terms of
which are substantially identical to those of the shares of Series C Preferred
Stock, except that the outside date for mandatory redemption is July 31, 2009.
The current aggregate redemption amount for the Series D Preferred Stock held by
AIA is $780,000, plus accumulated and unpaid dividends.  Members of
the family of Barry B. Goldstein, our Chief Executive Officer, are principal
stockholders of AIA.




F-19


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


In
accordance with SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", the
various series of Preferred Stock have been reported as a liability, and the
preferred dividends have been classified as interest expense.





12.
Stockholders' Equity





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.





Other Equity
Compensation –Other equity compensation for the periods indicated is as
follows:




Years
      ended December 31,
                                          
                                          2008
                                          
                                          
                                          2007Class
                                          
                                          Number
      of shares granted
                                          
                                          
                                          Valuation
                                          
                                          
                                          Number
      of shares granted
                                          
                                          
                                          ValuationDirectors
                                          
                                          
                                          38,324
                                          
                                          
                                          $
                                          40,500
                                          
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          -Consultants
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3,000
                                          
                                          
                                          
                                          8,82038,324
                                          
                                          
                                          $
                                          40,500
                                          
                                          
                                          
                                          3,000
                                          
                                          
                                          $
                                          8,820


Treasury Stock
-In June
2007, a shareholder tendered 4,500 shares of Common Stock to us to settle an
obligation due us of approximately $7,200. In August 2008, three shareholders
tendered an aggregate of 34,602 shares of Common Stock to us to settle
obligations due us of approximately $35,000. The tendered shares were recorded
as an increase in treasury stock, valued at the balance of the
obligation.





Warrants -
On July 10, 2003, in connection with the issuance of debt, we issued warrants to
purchase 105,000 shares of our Common Stock at an exercise price of $6.25 per
share (the "Warrants"). The Warrants were valued at $147,000 and were being
amortized as additional interest expense over the term of the associated debt.
The Warrants were scheduled to expire on January 10, 2006. Effective May 25,
2005, the holders of $1,500,000 outstanding principal amount of the debt agreed
to extend the maturity date of the debt from January 10, 2006 to September 30,
2007. This extension was given to satisfy a requirement of our premium finance
lender that arose in connection with the increase in our revolving line of
credit to $25,000,000 and the extension of the line to June 30, 2007. In
consideration for the extension of the due date of the debt, we extended the
expiration date of Warrants held by the debt holders for the purchase of 97,500
shares of our Common Stock from January 10, 2006 to September 30, 2007. The
extension of the Warrants was valued at approximately $148,000 and was being
amortized as additional interest expense over the extension
period.  In March 2007 and September 2007, holders of approximately
$1,385,000 and $115,000, respectively, of the principal amount of the debt
agreed to extend the maturity date from September 30, 2007 to September 30,
2008.  In consideration for the extension of the due date of the debt,
we extended the expiration date of Warrants held by the debt holders for the
purchase of 97,500 shares of our Common Stock, with a fair value of $195,000,
from September 30, 2007 to September 30, 2008.




F-20


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


Stock Options
- In November 1998, we adopted the 1998 Stock Option Plan (the “1998
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 Plan to 750,000. Incentive stock
options granted under the 1998 Plan expire no later than ten years from date of
grant (except no later than five years for a grant to a 10% stockholder). Our
Board of Directors or the Stock Option Committee will determine the expiration
date with respect to non-statutory options granted under the 1998 Plan. The 1998
Plan terminated in November 2008.





In
December 2005, our shareholders ratified the adoption of the 2005 Equity
Participation Plan (the “2005 Plan” and together with the 1998 Plan, the
“Plans”), which provides for the issuance of incentive stock options,
non-statutory stock options and restricted stock. Under the 2005 Plan, a maximum
of 300,000 shares of Common Stock may be issued pursuant to options granted and
restricted stock issued. Incentive stock options granted under the 2005 Plan
expire no later than ten years from date of grant (except no later than five
years for a grant to a 10% stockholder). Our Board of Directors or the Stock
Option Committee will determine the expiration date with respect to
non-statutory options, and the vesting provisions for restricted stock, granted
under the 2005 Plan.





Our
results of continuing operations for the years ended December 31, 2008 and 2007
include share-based compensation expense totaling approximately $72,000 and
$97,000, respectively.  Such compensation amounts have been included
in the Consolidated Statement of Income within general and administrative
expenses.





No stock
options were granted during the year ended December 31, 2008. The weighted
average estimated fair value of stock options granted during the year ended
December 31, 2007 was $1.22 per share.  The fair value of options at
the date of grant was estimated using the Black-Scholes option pricing model.
During 2007, we took into consideration the guidance under SFAS 123(R) and SAB
No. 107 when reviewing and updating assumptions. The expected volatility is
based upon historical volatility of our stock and other contributing factors.
The expected term is based upon observation of actual time elapsed between date
of grant and exercise of options for all employees. Previously such assumptions
were determined based on historical data.





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 year ended December 31, 2007:





Dividend
      Yield
            0.00%Volatility
            60.79%Risk-Free
      Interest Rate
            5.00%Expected
      Life
            5
      years





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.




F-21


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


A summary
of option activity under the Plans as of December 31, 2008, and changes during
the year then ended is as follows:




Stock
      Options
                                                                                                                          
                                                                                                                          Number
      of Shares
                                                                                                                          
                                                                                                                          
                                                                                                                          Weighted
      Average Exercise Price per Share
                                                                                                                          
                                                                                                                          
                                                                                                                          Weighted
      Average Remaining Contractual Term
                                                                                                                          
                                                                                                                          
                                                                                                                          Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2008
                                                                                                                          
                                                                                                                          
                                                                                                                          268,624
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          2.55
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          -
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          -Forfeited
                                                                                                                          
                                                                                                                          
                                                                                                                          (91,224
                                                                                                                          )
                                                                                                                          
                                                                                                                          $
                                                                                                                          2.84
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          -
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          -Outstanding
      at December 31, 2008
                                                                                                                          
                                                                                                                          
                                                                                                                          177,400
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          2.40
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3.35
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          -Vested
      and Exercisable at December 31, 2008
                                                                                                                          
                                                                                                                          
                                                                                                                          112,921
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          2.60
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          3.11
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          -




The
aggregate intrinsic value of options outstanding and options exercisable at
December 31, 2008 is calculated as the difference between the exercise price of
the underlying options and the market price of our Common Stock for the shares
that had exercise prices that were lower than the $0.48 closing price of our
Common Stock on December 31, 2008. The total intrinsic value of options
exercised in the years ended December 31, 2008 and 2007 was $-0- and $96,750,
respectively, determined as of the date of exercise. We received cash proceeds
from options exercised in the years ended December 31, 2008 and 2007 of
approximately $-0- and $112,000, respectively.





A summary
of the status of our non-vested options as of December 31, 2008 and the changes
during the year ended December 31, 2008, is as follows:




Options
                          
                          
                          Weighted
      Average Grant Date Fair ValueNonvested
      at December 31, 2007
                          
                          
                          142,756
                          
                          
                          $
                          1.21Vested
                          
                          
                          (44,854
                          )
                          
                          
                          1.16Forfeited
                          
                          
                          (33,423
                          )
                          
                          
                          1.41Nonvested
      at December 31, 2008
                          
                          
                          64,479
                          
                          
                          $
                          1.10




As of
December 31, 2008 and 2007, the fair value of unamortized compensation cost
related to unvested stock option awards was approximately $71,000 and $141,000,
respectively. Unamortized compensation cost as of December 31, 2008 is expected
to be recognized over a remaining weighted-average vesting period of 1.8 years.
For the year ended December 31, 2007, the weighted average fair value of options
exercised was $1.10.




F-22


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


The total
fair value of shares vested during the year ended December 31, 2008 and 2007 was
approximately $52,000 and $77,000, respectively.





Common shares
reserved -As of December 31, 2008, there were 327,400 shares reserved
under the Plans.





13.
Discontinued Operations





Premium
Financing





On
February 1, 2008, our wholly-owned subsidiary, Payments Inc. (“Payments”), sold
its outstanding premium finance loan portfolio to Premium Financing Specialists,
Inc. (“PFS”). The purchase price for the acquired net loan portfolio was
approximately $11,845,000, of which approximately $268,000 was paid to Payments,
and the remainder of the purchase price was satisfied by the assumption of
liabilities, including the satisfaction of our premium finance revolving credit
line obligation to M&T. Simultaneously with the closing, our revolving line
of credit with M&T was terminated.





As
additional consideration, Payments will be entitled to receive an amount based
upon the net earnings generated by the acquired loan portfolio as it is
collected. For the year ended December 31, 2008, Payments received approximately
$255,000 based on the net earnings generated from collections of the acquired
loan portfolio. Under the terms of the sale, PFS has agreed that, during the
five year period ending January 31, 2013 (subject to automatic renewal for
successive two year terms under certain circumstances), it will purchase, assume
and service all eligible premium finance contracts originated by us in the
states of New York and Pennsylvania.  In connection with such
purchases, we will be entitled to receive a fee generally equal to a percentage
of the amount financed.





As a
result of the sale of the premium finance portfolio on February 1, 2008, the
operating results of the premium financing operations for the years ended
December 31, 2008 and 2007 have been presented as discontinued
operations.  Net assets and liabilities to be disposed of or
liquidated, at their book value, have been separately classified in the
accompanying balance sheets at December 31, 2008 and 2007. Continuing operations
of our premium financing operations will only consist of placement fee revenue
and any related expenses.





Retail
Business




In
December 2008, due to declining revenues and profits we decided to restructure
our network of retail offices (the “Retail Business”). The plan of restructuring
called for closing seven of our least profitable locations during the month of
December 2008, and to enter into negotiations to sell the remaining 19 locations
in our Retail Business.




On March
30, 2009, an asset purchase agreement (the “APA”) was fully executed pursuant to
which we agreed to sell substantially all of the assets, including the book of
business, of our 16 remaining Retail Business locations that we own in New York
State (the “Assets”). The closing of the sale of the Assets is subject to a
number of conditions.  As a result of the restructuring in December
2008, and the APA on March 30, 2009, the operating results of the Retail
Business operations for the years ended December 31, 2008 and 2007 have
been presented as discontinued operations.  Net assets and liabilities
to be disposed of or liquidated, at their book value, have been separately
classified in the accompanying balance sheets at December 31, 2008 and
2007.




F-23


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


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





Summarized
Financial Information of Discontinued Operations





Summarized
financial information of discontinued operations for the years ended December
31, 2008 and 2007 follows (in thousands):





Years
      Ended December 31,
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      2008
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      2007Retail
                                                                                      
                                                                                      
                                                                                      Premium
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      Retail
                                                                                      
                                                                                      
                                                                                      PremiumBusiness
                                                                                      
                                                                                      
                                                                                      Finance
                                                                                      
                                                                                      
                                                                                      Total
                                                                                      
                                                                                      
                                                                                      Business
                                                                                      
                                                                                      
                                                                                      Finance
                                                                                      
                                                                                      
                                                                                      TotalCommissions
      and fee revenue
                                                                                      
                                                                                      $
                                                                                      4,042
                                                                                      
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      4,042
                                                                                      
                                                                                      
                                                                                      $
                                                                                      5,096
                                                                                      
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      5,096Premium
      finance revenue
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      225
                                                                                      
                                                                                      
                                                                                      
                                                                                      225
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,167
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,167Total
      revenue
                                                                                      
                                                                                      
                                                                                      4,042
                                                                                      
                                                                                      
                                                                                      
                                                                                      225
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,267
                                                                                      
                                                                                      
                                                                                      
                                                                                      5,096
                                                                                      
                                                                                      
                                                                                      
                                                                                      3,167
                                                                                      
                                                                                      
                                                                                      
                                                                                      8,263Operating
      Expenses:General
      and administrative expenses
                                                                                      
                                                                                      
                                                                                      3,895
                                                                                      
                                                                                      
                                                                                      
                                                                                      182
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,077
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,479
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,432
                                                                                      
                                                                                      
                                                                                      
                                                                                      5,911Provision
      for finance receivable losses
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      89
                                                                                      
                                                                                      
                                                                                      
                                                                                      89
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      472
                                                                                      
                                                                                      
                                                                                      
                                                                                      472Depreciation
      and amortization
                                                                                      
                                                                                      
                                                                                      212
                                                                                      
                                                                                      
                                                                                      
                                                                                      47
                                                                                      
                                                                                      
                                                                                      
                                                                                      259
                                                                                      
                                                                                      
                                                                                      
                                                                                      204
                                                                                      
                                                                                      
                                                                                      
                                                                                      100
                                                                                      
                                                                                      
                                                                                      
                                                                                      304Interest
      expense
                                                                                      
                                                                                      
                                                                                      41
                                                                                      
                                                                                      
                                                                                      
                                                                                      45
                                                                                      
                                                                                      
                                                                                      
                                                                                      86
                                                                                      
                                                                                      
                                                                                      
                                                                                      44
                                                                                      
                                                                                      
                                                                                      
                                                                                      646
                                                                                      
                                                                                      
                                                                                      
                                                                                      690Impairment
      of intangibles
                                                                                      
                                                                                      
                                                                                      394
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      394
                                                                                      
                                                                                      
                                                                                      
                                                                                      95
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      95Total
      operating expenses
                                                                                      
                                                                                      
                                                                                      4,542
                                                                                      
                                                                                      
                                                                                      
                                                                                      363
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,905
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,822
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,650
                                                                                      
                                                                                      
                                                                                      
                                                                                      7,472(Loss)
      income from operations
                                                                                      
                                                                                      
                                                                                      (500
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (138
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (638
                                                                                      )
                                                                                      
                                                                                      
                                                                                      274
                                                                                      
                                                                                      
                                                                                      
                                                                                      517
                                                                                      
                                                                                      
                                                                                      
                                                                                      791(Loss)
      gain on sale of business
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (102
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (102
                                                                                      )
                                                                                      
                                                                                      
                                                                                      66
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      66(Loss)
      income before (benefit) provisionfor
      income taxes
                                                                                      
                                                                                      
                                                                                      (500
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (240
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (740
                                                                                      )
                                                                                      
                                                                                      
                                                                                      340
                                                                                      
                                                                                      
                                                                                      
                                                                                      517
                                                                                      
                                                                                      
                                                                                      
                                                                                      857(Benefit
      from) provision forincome
      taxes
                                                                                      
                                                                                      
                                                                                      (28
                                                                                      )
                                                                                      
                                                                                      
                                                                                      69
                                                                                      
                                                                                      
                                                                                      
                                                                                      41
                                                                                      
                                                                                      
                                                                                      
                                                                                      193
                                                                                      
                                                                                      
                                                                                      
                                                                                      246
                                                                                      
                                                                                      
                                                                                      
                                                                                      439(Loss)
      income from discontinuedoperations,
      net of income taxes
                                                                                      
                                                                                      $
                                                                                      (472
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (309
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (781
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      147
                                                                                      
                                                                                      
                                                                                      $
                                                                                      271
                                                                                      
                                                                                      
                                                                                      $
                                                                                      418





F-24


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


The
components of assets and liabilities of discontinued operations as of December
31, 2008 and 2007 are as follows (in thousands):




December
      31,
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2008
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        2007Retail
                                                                        
                                                                        
                                                                        Premium
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        
                                                                        Retail
                                                                        
                                                                        
                                                                        PremiumBusiness
                                                                        
                                                                        
                                                                        Finance
                                                                        
                                                                        
                                                                        Total
                                                                        
                                                                        
                                                                        Business
                                                                        
                                                                        
                                                                        Finance
                                                                        
                                                                        
                                                                        TotalAccounts
      receivable
                                                                        
                                                                        $
                                                                        404
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        404
                                                                        
                                                                        
                                                                        $
                                                                        587
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        587Finance
      contracts receivable, net
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        12,499
                                                                        
                                                                        
                                                                        
                                                                        12,499Due
      from purchaser of premiumfinance
      portfolio
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        18
                                                                        
                                                                        
                                                                        
                                                                        18
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -Other
      current assets
                                                                        
                                                                        
                                                                        32
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        32
                                                                        
                                                                        
                                                                        
                                                                        5
                                                                        
                                                                        
                                                                        
                                                                        32
                                                                        
                                                                        
                                                                        
                                                                        37Deferred
      income taxes
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        69
                                                                        
                                                                        
                                                                        
                                                                        69Property
      and equipment, net
                                                                        
                                                                        
                                                                        145
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        145
                                                                        
                                                                        
                                                                        
                                                                        309
                                                                        
                                                                        
                                                                        
                                                                        3
                                                                        
                                                                        
                                                                        
                                                                        312Goodwill
                                                                        
                                                                        
                                                                        2,208
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2,208
                                                                        
                                                                        
                                                                        
                                                                        2,601
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2,601Other
      intangibles, net
                                                                        
                                                                        
                                                                        75
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        75
                                                                        
                                                                        
                                                                        
                                                                        151
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        151Other
      assets
                                                                        
                                                                        
                                                                        31
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        31
                                                                        
                                                                        
                                                                        
                                                                        48
                                                                        
                                                                        
                                                                        
                                                                        48
                                                                        
                                                                        
                                                                        
                                                                        96Total
      assets
                                                                        
                                                                        $
                                                                        2,895
                                                                        
                                                                        
                                                                        $
                                                                        18
                                                                        
                                                                        
                                                                        $
                                                                        2,913
                                                                        
                                                                        
                                                                        $
                                                                        3,701
                                                                        
                                                                        
                                                                        $
                                                                        12,651
                                                                        
                                                                        
                                                                        $
                                                                        16,352Revolving
      credit line
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        9,488
                                                                        
                                                                        
                                                                        $
                                                                        9,488Accounts
      payable and accrued expenses
                                                                        
                                                                        
                                                                        137
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        137
                                                                        
                                                                        
                                                                        
                                                                        60
                                                                        
                                                                        
                                                                        
                                                                        140
                                                                        
                                                                        
                                                                        
                                                                        200Premiums
      payable
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2,889
                                                                        
                                                                        
                                                                        
                                                                        2,889Deferred
      income taxes
                                                                        
                                                                        
                                                                        77
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        77
                                                                        
                                                                        
                                                                        
                                                                        105
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        105Total
      liabilities
                                                                        
                                                                        $
                                                                        214
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        214
                                                                        
                                                                        
                                                                        $
                                                                        165
                                                                        
                                                                        
                                                                        $
                                                                        12,517
                                                                        
                                                                        
                                                                        $
                                                                        12,682




Summary
of Significant Accounting Policies of Discontinued Operations





Finance
income, fees and receivables-For our premium finance
operations, we used the interest method to recognize interest income over the
life of each loan in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."





Upon the
establishment of a premium finance contract, we recorded the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest was amortized to interest income using the interest method
over the life of each loan. The weighted average interest rate charged with
respect to financed insurance policies was approximately 26.1% and 26.4% per
annum for the years ended December 31, 2008 and 2007, respectively.





Upon
completion of collection efforts, after cancellation of the underlying insurance
policies, any uncollected earned interest or fees were charged off.





Allowance
for finance receivable losses- Customers who purchase
insurance policies are often unable to pay the premium in a lump sum and,
therefore, require extended payment terms. Premium financing involves making a
loan to the customer that is backed by the unearned portion of the insurance
premiums being financed. No credit checks were made prior to the decision to
extend credit to a customer. Losses on finance receivables included an estimate
of future credit losses on premium finance accounts. Credit losses on premium
finance accounts occur when the unearned premiums received from the insurer upon
cancellation of a financed policy are inadequate to pay the balance of the
premium finance account. After collection attempts were exhausted, the remaining
account balance, including unrealized interest, was written off. We reviewed
historical trends of such losses relative to finance receivable balances to
develop estimates of future losses. However, actual write-offs may differ
materially from the write-off estimates that we used. For the years ended
December 31, 2008 and 2007, the provision for finance receivable losses was
approximately $89,000 and $472,000, respectively, and actual principal
write-offs for such periods, net of actual and anticipated recoveries of
previous write-offs, were approximately $50,000 and $522,000,
respectively.




F-25


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


Deferred
loan costs-Deferred loan costs were amortized on a straight-line basis over the
related term of the loan.





Concentration
of credit risk–All
finance contracts receivable were repayable in less than one year. In the event
of a default by the borrower, we were 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.





Finance
contract receivables - A summary of the changes of the allowance for
finance receivable losses is as follows:




December
      31,
                                
                                2008
                                
                                
                                2007Balance,
      beginning of year
                                
                                $
                                173,612
                                
                                
                                $
                                205,269Provision
      for finance receivable losses
                                
                                
                                85,672
                                
                                
                                
                                472,266Charge-offs
                                
                                
                                (52,920
                                )
                                
                                
                                (503,923
                                )Sale
      of portfolio
                                
                                
                                (206,364
                                )
                                
                                
                                -Balance,
      end of year
                                
                                $
                                -
                                
                                
                                $
                                173,612


Finance
receivables were collateralized by the unearned premiums of the related
insurance policies.





Revolving
credit facility- On
July 28, 2006, we and our premium finance subsidiary, Payments, Inc., entered
into a revolving line of credit (the “Revolver”) with M&T, which provided
for a credit line to $20,000,000. The Revolver bore interest, at our option, at
either M&T’s prime lending rate or LIBOR plus 2.25%, and was scheduled to
mature on June 30, 2008. The Revolver was paid in full and terminated on
February 1, 2008 upon the closing of the sale of our premium finance loan
portfolio.





The line
of credit also allowed for a $2,500,000 term loan (of the $20,000,000 credit
line availability) to be used to provide liquidity for ongoing working capital
purposes (the “Term Loan”).  Any draws against the term line bore
interest at LIBOR plus 2.75%.  In July 2006, we made our first draw
against the term line of $1,300,000.  The draw was repayable in
quarterly principal installments of $130,000 each, commencing September 1,
2006.  The remaining principal balance of the Term Loan was payable on
June 30, 2008. In June 2008, the maturity date of the Term Loan was extended to
December 31, 2008. Principal payments of $55,174 were due on the first day of
each month and one final payment on the maturity date. Interest was payable
monthly.  The Term Loan was paid in full in December
2008.




F-26


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


The
Revolver provided for our CEO’s obligation on an unlimited wind-down guaranty
and his personal guaranty as to misrepresentations that relate to dishonest or
fraudulent acts committed by him or known but not timely reported by him. The
Revolver was secured by substantially all of the assets of our premium finance
subsidiary, Payments, Inc., and was guaranteed by DCAP Group, Inc. and its
subsidiaries.





Commission
and fee income–In our discontinued
operations, we recognize commission revenue from insurance policies at the
beginning of the contract period. Refunds of commissions on the cancellation of
insurance policies are reflected at the time of cancellation. Fees for income
tax preparation are recognized when the services are completed. Automobile club
dues are recognized equally over the contract period.





Property
and equipment-In our
discontinued operations, 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.





Goodwill
and intangible assets- Goodwill represents the excess of the purchase price over fair value of
identifiable net assets acquired from business acquisitions. In accordance with
Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets,”goodwill is no longer amortized, but is reviewed for impairment
on an annual basis and between annual tests in certain circumstances. We conduct
our annual impairment test for goodwill at the beginning of the first quarter.
If the fair value of the reporting unit to which goodwill relates is less than
the carrying amount of those operations, including unamortized goodwill, the
carrying amount of goodwill is reduced accordingly with a charge to impairment
expense. The fair value of the reporting unit is a multiple of annual revenue,
which is the accepted industry standard for valuing storefront insurance
agencies. We performed the required impairment test for fiscal years 2008 and
2007 and found the carrying value of goodwill at December 31, 2008 to be
approximately $394,000 in excess of the fair value of the reporting unit.
Accordingly, our results of discontinued operations for the year ended December
31, 2008 includes an impairment charge to goodwill of $394,000. There can be no
assurance that future goodwill impairment tests will not result in a charge to
earnings.





Other
intangibles-SFAS No. 142 requires purchased intangible assets other than
goodwill to be amortized over their useful lives unless those lives are
determined to be indefinite. Purchased intangible assets are carried at cost
less accumulated amortization. In our discontinued operations, definite-lived
intangible assets, which include customer and phone lists, have been assigned an
estimated finite life and are amortized on a straight-line basis over periods
ranging from 3 to 15 years. If the value of the intangible asset is determined
to be impaired, the asset is written down to the current fair
value.





Other
intangible assets in our discontinued operations consist of the
following:





December
      31,
                                    
                                    2008
                                    
                                    
                                    2007Customer
      lists
                                    
                                    $
                                    554,425
                                    
                                    
                                    $
                                    554,425Accumulated
      amortization
                                    
                                    
                                    479,425
                                    
                                    
                                    
                                    403,515Balance,
      end of year
                                    
                                    $
                                    75,000
                                    
                                    
                                    $
                                    150,910
  F-27


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


The
aggregate amortization expense for the years ended December 31, 2008 and 2007
was approximately $75,000 and $103,000, respectively. As of December 31, 2007,
we no longer utilized the vanity telephone numbers included in intangible
assets. The balance of $94,914 was written off and is included in impairment of
intangible assets in our discontinued operations for the year ended December 31,
2007.





Estimated
amortization expense for the five years subsequent to December 31, 2008 is as
follows:





Years
      Ending December 31,2009
              75,000





The
remaining weighted-average amortization period as of December 31, 2008 is 1.0
year.





Advertising
costs-
Advertising costs are charged to discontinued operations when the advertising
first takes place. Included in general and administrative expenses of
discontinued operations are advertising costs approximating $144,000 and
$333,000 for the years ended December 31, 2008 and 2007,
respectively.





Income
taxes-
Deferred tax assets and liabilities of discontinued operations 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.





Major
insurance carriers-For the
year ended December 31, 2008, revenue from major insurance carriers in excess of
10% of net revenues from our discontinued Retail Business consisted of the
following:





Carrier
              %
      of Total RevenueA
              33%B
              17%





For the
year ended December 31, 2007, revenue from major insurance carriers in excess of
10% of net revenues from our discontinued Retail Business consisted of the
following:





Carrier
              %
      of Total RevenueA
              40%B
              14%





14.
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.




F-28


DCAP
GROUP, INC. AND
 SUBSIDIARIES
 
 Notes
to Financial Statements
 Years
Ended December 31, 2008 and 2007


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, 2008 and
2007 approximates fair value.





15.
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 $15,000 per year. For
the years ended December 31, 2008 and 2007, we matched 25% of the employees’
contribution up to 6%. Effective January 1, 2009, we no longer match employees’
contributions. Contributions for the years ended December 31, 2008 and 2007
approximated $18,000 and $25,000, respectively.





16.
Supplementary Information - Statement of Cash Flows





Cash paid
during the years for:





Years
      Ended December 31,
                      
                      2008
                      
                      
                      2007Interest
                      
                      $
                      375,883
                      
                      
                      $
                      463,305Income
      Taxes
                      
                      $
                      23,350
                      
                      
                      $
                      3,033





17.        Subsequent
Event





On March
30, 2009, an asset purchase agreement (the “APA”) was fully executed pursuant to
which our wholly-owned subsidiaries,Barry Scott Agency, Inc. andDCAP Accurate, Inc. (collectively “Seller”), agreed to sell substantially
all of their assets, including the book of business of the 16 Retail Business
locations that we own in New York State (the “Assets”) to NII BSA LLC (“Buyer”).
The closing of the sale of the Assets is subject to a number of
conditions.  The purchase price for the Assets is approximately
$2,337,000, of which approximately $1,786,000 is to be paid to Seller at
closing, and the remainder of the purchase price is to be satisfied by the
delivery of promissory notes in the aggregate amount of $551,000. As additional
consideration, Seller will be entitled to receive through September 2010 an
amount equal to 60% of the net commissions derived from the book of business of
six retail locations that were closed in 2008.





As a
result of our December 2008 plan of restructuring to close or sell our Retail
Business locations, and the APA on March 30, 2009, our Retail Business has been
presented as discontinued operations.





See Note
13.




F-29




SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, there­unto duly authorized.
  DCAP
      GROUP, INC.Dated:  April
      13, 2009
              By:/s/ Barry B.
      Goldstein
                Barry B.
      Goldstein
                Chief Executive Officer
  Pursuant
to the requirements of 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, Treasurer and Director
      (Principal Executive Officer)
                                April
      13, 2009/s/ Victor
      Brodsky
                                  Victor
      Brodsky
                                Chief
      Accounting Officer
                                  (Principal
      Financial and Accounting Officer) and Secretary
                                April
      13, 2009/s/ Michael R. Feinsod
                                  Michael
      R. Feinsod
                                Directors
                                April
      13, 2009/s/ Jay M.
      Haft
                                  Jay
      M. Haft
                                Director
                                April
      13, 2009/s/ David A.
      Lyons
                                  David
      A. Lyons
                                Director
                                April
      13, 2009/s/ Jack D.
      Seibald
                                  Jack
      D. Seibald
                                Director
                                April
      13,
2009