**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-Q**




**x
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





**FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2006**


**OR**





**o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





**FOR
      THE TRANSITION PERIOD FROM ___________________TO
      _______________________.**




Commission
      file number 0-2500111




21 st Century Holding Company


(Exact
      name of registrant as specified in its charter)




**Florida**
            **65-0248866**(State
                or Other Jurisdiction ofIncorporation or Organization)
            (IRS
                  Employer
                Identification
                  No.)




3661
      West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida
      33311


(Address
      of principal executive offices) (Zip Code)




954-581-9993


(Registrant's
      telephone number, including area code)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such period that the registrant was required to
      file
      such reports), and (2) has been subject to such filing requirements for the
      past
      90 days.





Yes
x
      Noo





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
                accelerated filer o
            Accelerated
                filer x
            Non-accelerated
                filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).





Yes
o
      No x





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





Common
      Stock, $. 0 1 par
      value
      - 7,692,074 outstanding as of August 11, 2006










**21** **ST** **CENTURY HOLDING COMPANY**





**INDEX**


**PART
                  I: FINANCIAL INFORMATION**
              **PAGE****ITEM
                  1**
              Financial
                  Statements and Supplementary Data
              3**ITEM
                  2**
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              21**ITEM
                  3**
              Quantitative
                  and Qualitative Disclosures about Market Risk
              39**ITEM
                  4**
              Controls
                  and Procedures
              40**PART
                  II: OTHER INFORMATION****ITEM
                  1**
              Legal
                  Proceedings
              41**ITEM
                  1A**
              Risk
                  Factors
              41**ITEM
                  2**
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              41**ITEM
                  3**
              Defaults
                  Upon Senior Securities
              42**ITEM
                  4**
              Submission
                  of Matters to a Vote of Security Holders
              43**ITEM
                  5**
              Other
                  Information
              43**ITEM
                  6**
              Exhibits
              43**Signatures**
              
              45




-2-


**PART
      I: FINANCIAL INFORMATION**


**Item
      1**




21 ST CENTURY
        HOLDING COMPANY
 CONSOLIDATED
        BALANCE SHEETS


**June
                  30, 2006**
              ****
              **December
                  31, 2005**ASSETSInvestmentsFixed
                  maturities, available for sale, at fair value
              
              $
              99,377,423
              
              $
              69,787,809Fixed
                  maturities, held to maturity, at amoritized cost
              
              
              19,679,749
              
              
              19,691,937Equity
                  securities, available for sale, at fair value
              
              
              14,699,165
              
              
              10,606,663Total
                  investments
              
              
              133,756,337
              
              
              100,086,409Cash
                  and cash equivalents
              
              
              9,958,979
              
              
              6,071,460Receivable
                  for investments sold
              
              
              17,022,140Finance
                    contracts, net of allowance for credit losses of $221,066 in
                    2006 and
                    $419,445 in 2005, and net of unearned finance charges of $170,594
                    in 2006
                    and $379,212 in 2005
              
              
              3,723,486
              
              
              7,312,736Prepaid
                  reinsurance premiums
              
              
              2,869,073
              
              
              12,133,734Premiums
                  receivable, net of allowance for credit losses of $192,596 and
                  $158,151,
                  respectively
              
              
              10,231,312
              
              
              7,505,631Reinsurance
                  recoverable, net
              
              
              16,167,555
              
              
              136,675,703Deferred
                  policy acquisition costs
              
              
              11,944,450
              
              
              9,183,654Deferred
                  income taxes, net
              
              
              4,995,491
              
              
              2,703,978Property,
                  plant and equipment, net
              
              
              1,421,273
              
              
              3,901,385Other
                  assets
              
              
              5,371,150
              
              
              4,580,063Total
                  assets
              
              $
              217,461,246
              
              $
              290,154,753LIABILITIES
                  AND SHAREHOLDERS' EQUITYUnpaid
                  losses and LAE
              
              $
              31,344,127
              
              $
              154,038,543Unearned
                  premiums
              
              
              85,016,274
              
              
              61,839,051Premiums
                  deposits
              
              
              3,402,861
              
              
              2,144,863Revolving
                  credit outstanding
              
              
              -
              
              
              196,943Bank
                  overdraft
              
              
              10,291,955
              
              
              12,237,735Funds
                  held under reinsurance treaties
              
              
              1,568,871
              
              
              1,544,544Income
                  taxes payable
              
              
              7,718,037
              
              
              3,019,696Subordinated
                  debt
              
              
              6,875,000
              
              
              10,208,333Deferred
                  gain from sale of property
              
              
              2,680,940
              
              
              -Accounts
                  payable and accrued expenses
              
              
              5,644,948
              
              
              4,157,675Total
                  liabilities
              
              
              154,543,013
              
              
              249,387,383Shareholders'
                  equity:Common
                  stock, $0.01 par value. Authorized 37,500,000 shares; issued 8,102,298
                  and7,468,713
                  shares, respectively; Outstanding 7,405,449 and 6,771,864,
                  respectively
              
              
              81,022
              
              
              74,688Additional
                  paid-in capital
              
              
              40,517,377
              
              
              31,825,053Accumulated
                  other comprehensive (deficit)
              
              
              (1,757,766
              )
              
              (1,537,243
              )Retained
                  earnings
              
              
              24,077,600
              
              
              10,404,872Total
                  shareholders' equity
              
              
              62,918,233
              
              
              40,767,370Total
                  liabilities and shareholders' equity
              
              $
              217,461,246
              
              $
              290,154,753




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





-3-




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(UNAUDITED)




**Three
                  Months Ended**
              ****
              **Six
                  Months Ended**
              ********
              ****
              **June
                  30, 2006**
              ****
              **June
                  30, 2005**
              ****
              **June
                  30, 2006**
              ****
              **June
                  30, 2005**Revenue:Gross
                  premiums written
              
              $
              50,752,672
              
              $
              31,362,908
              
              $
              86,361,745
              
              $
              61,459,952Gross
                  premiums ceded
              
              
              (3,371,781
              )
              
              (2,053,152
              )
              
              (3,371,781
              )
              
              (4,954,443
              )Net
                  premiums written
              
              
              47,380,891
              
              
              29,309,756
              
              
              82,989,964
              
              
              56,505,509Decrease
                  in prepaid reinsurance premiums
              
              
              (593,089
              )
              
              (2,835,083
              )
              
              (9,264,661
              )
              
              (5,510,378
              )(Increase)
                  in unearned premiums
              
              
              (18,047,162
              )
              
              (4,585,523
              )
              
              (23,177,223
              )
              
              (10,271,083
              )Net
                  change in prepaid reinsurance premiums and unearned
                  premiums
              
              
              (18,640,251
              )
              
              (7,420,606
              )
              
              (32,441,884
              )
              
              (15,781,461
              )Net
                  premiums earned
              
              
              28,740,640
              
              
              21,889,150
              
              
              50,548,080
              
              
              40,724,048Finance
                  revenue
              
              
              496,117
              
              
              937,681
              
              
              1,132,143
              
              
              2,042,211Managing
                  general agent fees
              
              
              723,020
              
              
              620,378
              
              
              1,380,988
              
              
              1,252,693Net
                  investment income
              
              
              1,612,014
              
              
              910,925
              
              
              2,808,279
              
              
              1,803,796Net
                  realized investment gains
              
              
              283,341
              
              
              125,510
              
              
              479,552
              
              
              285,033Other
                  income
              
              
              486,962
              
              
              161,913
              
              
              1,107,761
              
              
              404,381Total
                  revenue
              
              
              32,342,094
              
              
              24,645,557
              
              
              57,456,803
              
              
              46,512,162Expenses:Loss
                  and loss adjustment expense
              
              
              9,343,158
              
              
              12,308,775
              
              
              16,912,001
              
              
              19,218,772Operating
                  and underwriting expenses
              
              
              2,308,331
              
              
              2,206,281
              
              
              4,612,576
              
              
              3,788,812Salaries
                  and wages
              
              
              1,772,511
              
              
              1,580,120
              
              
              3,610,472
              
              
              3,158,701Interest
                  expense
              
              
              181,403
              
              
              379,787
              
              
              410,287
              
              
              809,931Policy
                  acquisition costs, net of amortization
              
              
              4,126,985
              
              
              3,222,441
              
              
              8,045,037
              
              
              7,048,042Total
                  expenses
              
              
              17,732,388
              
              
              19,697,404
              
              
              33,590,373
              
              
              34,024,258Income
                  from continuing operations before provision for income tax expense
              
              
              14,609,706
              
              
              4,948,153
              
              
              23,866,430
              
              
              12,487,904Provision
                  for income tax expense
              
              
              5,705,147
              
              
              1,924,612
              
              
              8,948,559
              
              
              4,678,687Net
                  income from continuing operations
              
              
              8,904,559
              
              
              3,023,541
              
              
              14,917,871
              
              
              7,809,217Discontinued
                  operations:Income
                  from discontinued operations (including gain on disposal of $0
                  and
                  $1,630,000, respectively)
              
              
              -
              
              
              -
              
              
              -
              
              
              1,630,000Provision
                  for income tax expense
              
              
              -
              
              
              -
              
              
              -
              
              
              595,396Income
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              1,034,604Net
                  income
              
              $
              8,904,559
              
              $
              3,023,541
              
              $
              14,917,871
              
              $
              8,843,821Basic
                  net income per share from continuing operations
              
              $
              1.20
              
              $
              0.48
              
              $
              2.02
              
              $
              1.27Basic
                  net income per share from discontinued operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              0.16Basic
                  net income per share
              
              $
              1.20
              
              $
              0.48
              
              $
              2.02
              
              $
              1.43Fully
                  diluted net income per share from continuing operations
              
              $
              1.19
              
              $
              0.46
              
              $
              1.89
              
              $
              1.19Fully
                  diluted net income per share from discontinued operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              0.16Fully
                  diluted net income per share
              
              $
              1.19
              
              $
              0.46
              
              $
              1.89
              
              $
              1.35Weighted
                  average number of common shares outstanding
              
              
              7,427,765
              
              
              6,349,182
              
              
              7,370,592
              
              
              6,171,134Weighted
                  average number of common shares outstanding (assuming
                  dilution)
              
              
              7,465,896
              
              
              6,620,510
              
              
              7,880,251
              
              
              6,550,789Dividends
                  declared per share
              
              $
              0.12
              
              $
              0.08
              
              $
              0.24
              
              $
              0.16




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




-4-





21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)


**Six
                  months ended June 30**
              ********
              ****
              **2006**
              ****
              **2005**Cash
                  flow from operating activities:
              
              
              
              Restated
                  - See note 10Net
                  income
              
              $
              14,917,871
              
              $
              7,809,217Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Amortization
                  of investment discount, net
              
              
              (142,788
              )
              
              (56,786
              )Depreciation
                  and amortization of property plant and equipment, net
              
              
              170,013
              
              
              240,073Net
                  realized investment gains
              
              
              479,552
              
              
              179,744Common
                  Stock issued for interest on Notes
              
              
              128,125
              
              
              315,625Provision
                  for credit losses, net
              
              
              95,375
              
              
              495,881(Recovery)
                  for uncollectible premiums receivable
              
              
              (60
              )
              
              (370,887
              )Non-cash
                  compensation
              
              
              280,000
              
              
              -Changes
                  in operating assets and liabilities:Premiums
                  receivable
              
              
              (2,725,621
              )
              
              (663,746
              )Prepaid
                  reinsurance premiums
              
              
              9,264,661
              
              
              5,510,379Due
                  from reinsurers, net
              
              
              120,508,148
              
              
              3,285,572Income
                  taxes recoverable
              
              
              -
              
              
              6,151,767Deferred
                  income tax expense
              
              
              (2,291,513
              )
              
              740,252Policy
                  acquisition costs, net of amortization
              
              
              (2,760,796
              )
              
              (1,681,114
              )Finance
                  contracts receivable
              
              
              3,493,875
              
              
              (885,049
              )Other
                  assets
              
              
              1,889,853
              
              
              664,143Unpaid
                  losses and loss adjustment expenses
              
              
              (122,694,416
              )
              
              (20,544,863
              )Unearned
                  premiums
              
              
              23,177,223
              
              
              10,271,082Premium
                  deposits
              
              
              1,257,998
              
              
              1,237,826Funds
                  held under reinsurance treaties
              
              
              24,327Income
                  taxes payable
              
              
              4,698,341
              
              
              -Bank
                  overdraft
              
              
              (1,945,780
              )
              
              3,844,824Accounts
                  payable and accrued expenses
              
              
              1,487,273
              
              
              (1,255,321
              )Net
                  cash provided by operating activities - continuing
                  operations
              
              
              49,311,661
              
              
              15,288,619Net
                  cash (used for) operating activities - discontinued
                  operations
              
              
              -
              
              
              (1,380,265
              )Net
                  cash provided by operating activities
              
              
              49,311,661
              
              
              13,908,354Cash
                  flow (used in) investing activities:Proceeds
                  from sale of investment securities available for
                  sale
              
              
              192,229,141
              
              
              31,747,952Purchases
                  of investment securities available for sale
              
              
              (226,456,356
              )
              
              (31,624,260
              )Receivable
                  for investments sold
              
              
              (17,022,140
              )Purchases
                  of property and equipment
              
              
              (352,831
              )
              
              (138,196
              )Proceeds
                  from sale of assets
              
              
              2,662,930
              
              
              -Net
                  cash (used in) investing activities - continuing
                  operations
              
              
              (48,939,256
              )
              
              (14,504
              )Net
                  cash provided by investing activities - discontinued
                  operations
              
              
              -
              
              
              1,689,129Net
                  cash (used in) provided by investing activities
              
              
              (48,939,256
              )
              
              1,674,625Cash
                  flow provided by financing activities:Subordinated
                  debt repaid
              
              
              (1,666,667
              )
              
              (1,894,792
              )Acquisition
                  of common stock
              
              
              (2,000,862
              )Exercised
                  stock options
              
              
              1,417,095
              
              
              1,387,719Dividends
                  paid
              
              
              (1,856,057
              )
              
              (1,015,214
              )Exercised
                  warrants, net
              
              
              6,060,797
              
              
              -Tax
                  benefit related to non-cash compensation
              
              
              1,757,751
              
              
              -Revolving
                  credit outstanding
              
              
              (196,943
              )
              
              (1,562,570
              )Net
                  cash provided by (used in) financing activities - continuing
                  operations
              
              
              3,515,114
              
              
              (3,084,857
              )Net
                  increase in cash and cash equivalents
              
              
              3,887,519
              
              
              12,498,122Cash
                  and cash equivalents at beginning of period
              
              
              6,071,460
              
              
              6,127,706Cash
                  and cash equivalents at end of period
              
              $
              9,958,979
              
              $
              18,625,828




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




-5-




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)


**Six
                  months ended June 30,**(continued)
              
              
              
              **2006**
              ****
              **2005**Supplemental
                  disclosure of cash flow information:Cash
                    paid during the period for:Interest
              
              
              
              
              $
              160,215
              
              $
              292,338Non-cash
                  investing and finance activities:Accrued
                  dividends payable
              
              
              
              
              $
              972,276
              
              $
              446,579Retirement
                  of subordinated debt by Common Stock issuance
              
              
              
              
              $
              1,666,667
              
              $
              1,666,667Stock
                  issued to pay interest on subordinated debt
              
              
              
              
              $
              128,125
              
              $
              315,625




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


-6-




**21** **st** **Century Holding Company**
 **Notes
        to Consolidated Financial Statements**




**(1)** **Organization
        and Business**





The
      accompanying unaudited consolidated financial statements of 21 st Century
      Holding Company have been prepared in accordance with generally accepted
      accounting principles (“GAAP”) for interim financial information and with the
      instructions for Form 10-Q and Rule 10-01 of Regulation S-X. These financial
      statements do not include all information and notes required by GAAP for
      complete financial statements, and should be read in conjunction with the
      audited consolidated financial statements and notes thereto included in the
      Company's annual report on Form 10-K for the year ended December 31, 2005.
      The
      December 31, 2005 year-end balance sheet data was derived from audited financial
      statements but does not include all disclosures required by GAAP. The financial
      information furnished reflects all adjustments, consisting only of normal
      recurring accruals, which are, in the opinion of management, necessary for
      a
      fair presentation of the financial position, results of operations and cash
      flows for the periods presented. The results of operations are not necessarily
      indicative of the results of operations that may be achieved in the
      future. ****





21 st Century
      Holding Company (“21 st Century,” “the Company”, “we,” “us”) is an insurance holding company, which,
      through our subsidiaries and our contractual relationships with our independent
      agents and general agents, controls substantially all aspects of the insurance
      underwriting, distribution and claims process. We are authorized to underwrite
      homeowners’ property and casualty insurance, commercial general liability
      insurance, and personal automobile insurance in various states with various
      lines of authority through our wholly owned subsidiaries, Federated National
      Insurance Company (“Federated National”) and American Vehicle Insurance Company
      (“American Vehicle”).





Federated
      National is authorized to underwrite personal automobile insurance, homeowners’
property and casualty insurance and mobile home property and casualty insurance
      in Florida as an admitted carrier. American Vehicle is authorized to underwrite
      personal and commercial automobile insurance and commercial general liability
      insurance in Florida as an admitted carrier. In addition, American Vehicle
      is
      authorized to underwrite commercial general liability insurance in Georgia,
      Kentucky, South Carolina and Virginia as a surplus lines carrier and in Texas,
      Louisiana and Alabama as an admitted carrier. American Vehicle operations in
      Florida, Georgia, Louisiana, Texas, South Carolina and Virginia are on-going.
      American Vehicle operations in Alabama and Kentucky are expected to begin this
      year. American Vehicle has pending applications, in various stages of approval,
      to be authorized as a surplus lines carrier in the states of Missouri,
      California and Arkansas.





During
      the six months ended June 30, 2006, 75.2%, 19.1% and 5.7% of the premiums we
      underwrote were for homeowners’ property and casualty insurance, commercial
      general liability insurance and personal automobile insurance, respectively.
      During the six months ended June 30, 2005, 60.3%, 18.8% and 20.9% of the
      premiums we underwrote were for homeowners’ property and casualty insurance,
      commercial general liability insurance and personal automobile insurance,
      respectively. We internally process claims made by our own and third-party
      insureds through our wholly owned claims adjusting company, Superior Adjusting,
      Inc. (“Superior”). We also offer premium financing to our own and third-party
      insureds through our wholly owned subsidiary, Federated Premium Finance, Inc.
      (Federated Premium”).





We
      market
      and distribute our own and third-party insurers’ products and our other services
      primarily in Central and South Florida, through contractual relationships with
      a
      network of approximately 1,500 independent agents and a select number of general
      agents.





Assurance
      Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary, acts
      as Federated National’s and American Vehicle’s exclusive managing general agent
      in the state of Florida. As American Vehicle continues its expansion into other
      states we expect to contract with other managing general agents to market our
      commercial general liability insurance product beyond the state of Florida.
      Assurance MGA currently provides all underwriting policy administration,
      marketing, accounting and financial services to Federated National and American
      Vehicle, and participates in the negotiation of reinsurance contracts. Assurance
      MGA generates revenue through a 6% commission fee from the insurance companies
      net written premium, policy fee income of $25 per policy and other
      administrative fees from the marketing of companies’ products through the
      Company’s distribution network. The 6% commission fee from Federated National
      and American Vehicle was made effective January 1, 2005. Assurance MGA plans
      to
      establish relationships with additional carriers and add additional insurance
      products in the future.




-7-


**21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


**(2)
      Summary of Significant Accounting Policies and Practices**





**(A)**  **Critical
      Accounting Policies**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires us to make estimates
      and assumptions about future events that affect the amounts reported in the
      financial statements and accompanying notes. Future events and their effects
      cannot be determined with absolute certainty. Therefore, the determination
      of
      estimates requires the exercise of judgment. Actual results inevitably will
      differ from those estimates, and such differences may be material to the
      financial statements.





The
      most
      significant accounting estimates inherent in the preparation of our financial
      statements include estimates associated with management’s evaluation of the
      determination of liability for unpaid loss and loss adjustment expense (“LAE’),
      the amount and recoverability of amortization of deferred policy acquisition
      costs. In addition, significant estimates form the bases for our reserves with
      respect to finance contracts, premiums receivable and deferred income taxes.
      Various assumptions and other factors underlie the determination of these
      significant estimates. The process of determining significant estimates is
      fact
      specific and takes into account factors such as historical experience, current
      and expected economic conditions, and in the case of unpaid loss and LAE, an
      actuarial valuation. Management regularly reevaluates these significant factors
      and makes adjustments where facts and circumstances dictate. In selecting the
      best estimate, we utilize up to 6 different actuarial methodologies. Each of
      these methodologies is designed to forecast the number of claims we will be
      called upon to pay and the amounts we will pay on average to settle those
      claims. In arriving at our best estimate, our actuaries consider the likely
      predictive value of the various loss development methodologies employed in
      light
      of underwriting practices, premium rate changes and claim settlement practices
      that may have occurred, and weight the credibility of each methodology. Our
      actuarial methodologies take into account various factors, including, but not
      limited to, paid losses, liability estimates for reported losses, paid allocated
      loss adjustment expenses, salvage and other recoveries received, reported claim
      counts, open claim counts and counts for claims closed with and without payment
      of loss.





Accounting
      for loss contingencies pursuant to Statements of Financial Accounting Standards
      (“SFAS”), No.5 involves the existence of a condition, situation or set of
      circumstances involving uncertainty as to possible loss that will ultimately
      be
      resolved when one or more future event(s) occur or fail to occur. Additionally,
      accounting for a loss contingency requires management to assess each event
      as
      probable, reasonably possible or remote. Probable is defined as the future
      event
      or events are likely to occur. Reasonably possible is defined as the chance
      of
      the future event or events occurring is more than remote but less than probable,
      while remote is defined as the chance of the future event or events occurring
      is
      slight. An estimated loss in connection with a loss contingency shall be
      recorded by a charge to current operations if both of the following conditions
      are met: First, the amount can be reasonably estimated; and second, the
      information available prior to issuance of the financial statements indicates
      that it is probable that a liability has been incurred at the date of the
      financial statements. It is implicit in this condition that it is probable
      that
      one or more future events will occur confirming the fact of the loss or
      incurrence of a liability.





**(B)
      Impact of New Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS
      No. 123, Share-Based Payments (“SFAS No. 123R”). This statement eliminates the
      option to apply the intrinsic value measurement provisions of the Accounting
      Principles Board (“APB”) No. 25 to stock compensation awards issued to
      employees. Rather, SFAS No. 123R requires companies to measure the cost of
      employee services received in exchange for an award of equity instruments based
      on the grant date fair value of the award. That cost will be recognized over
      the
      period during which an employee is required to provide services in exchange
      for
      the award the requisite service period (usually the vesting period). SFAS No.
      123R will also require companies to measure the cost of employee services
      received in exchange for employee stock purchase plan awards. SFAS No. 123R
      was
      effective for 21 st Century’s fiscal year beginning January 1, 2006 as subsequently extended by the
      SEC pursuant to its April 13, 2005 announcement. We have determined that the
      pretax charge to earnings for the year ending 2006 will total approximately
      $0.6
      million, of which approximately $0.3 million was charged to income from
      continuing operations before provision for income taxes for the six months
      ended
      June 30, 2006. The effect on earnings per share for the six months ended June
      30, 2006 for both undiluted and fully diluted was approximately $0.04 per share.
      The effect on earnings per share for the three months ended June 30, 2006 for
      both undiluted and fully diluted was approximately $0.02 per share. For a more
      detailed discussion, please see Footnote 8, titled Stock Compensation
      Plans.




-8-


**21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


**(C)
      Stock Options**





At
      June
      30, 2006, the Company has three stock-based employee compensation plans, which
      are described later in footnote 8, Stock Compensation Plans. Prior to January
      1,
      2006, we accounted for those plans under the recognition and measurement
      provisions of stock-based compensation using the intrinsic value method
      prescribed by APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Under
      these provisions, no stock-based employee compensation cost was recognized
      in
      the Statement of Operations for the year ended December 31, 2005 as all options
      granted under those plans had an exercise price equal to or less than the market
      value of the underlying common stock on the date of grant. Effective January
      1,
      2006, the Company adopted the fair value recognition provisions of SFAS No.
      123R
      using the modified-prospective-transition method. Under that transition method,
      compensation cost recognized in the first quarter of 2006 includes: (a)
      compensation cost for all share-based payments granted prior to, but not yet
      vested as of January 1, 2006, based on the grant date fair value estimated
      in
      accordance with the original provisions of Statement 123, and (b) compensation
      cost for all share-based payments granted subsequent to January 1, 2006, based
      on the grant-date fair-value estimated in accordance with the provisions of
      SFAS
      No. 123R. Results for prior periods have not been restated. On May 16, 2006,
      41,000 non-qualified and 7,500 qualified stock options were issued with an
      option price of $17.00 per share and a market share price of $16.00 per share.
      Like all other outstanding stock options, these stock options contain service
      conditions and do not contain any performance conditions. For a further
      discussion regarding the provisions of SFAS No. 123R and its effect on our
      operations, please refer to footnote 8, Stock Compensation Plans.





**(D)** **E** **arnings
      Per Share**





Basic
      earnings per share (“Basic EPS”) is computed by dividing net income by the
      weighted average number of common shares outstanding during each period
      presented. Diluted earnings per share (“Diluted EPS”) is computed by dividing
      net income by the weighted average number of shares of common stock and common
      stock equivalents outstanding during the period presented; outstanding warrants
      and stock options are considered common stock equivalents and are included
      in
      the calculation using the treasury stock method. Additionally, when applicable,
      we include in our computation of the weighted average number of common shares
      outstanding all common stock issued in connection with the repayment of our
      Subordinated note.





**(E)
      Reclassifications**





Certain
      amounts in 2005 financial statements have been reclassified to conform to the
      2006 presentation.





**(3)
      Revolving Credit Outstanding**





Federated
      Premium’s operations are funded by a revolving loan agreement (“Revolving
      Agreement”) with FlatIron Funding Company. LLC (“FlatIron”). The Revolving
      Agreement is structured as a sale of contracts receivable under a sale and
      assignment agreement with Westchester Premium Acceptance Corporation (“WPAC”), a
      wholly-owned subsidiary of FlatIron, which gives WPAC the right to sell or
      assign these contracts receivable. Federated Premium, which services these
      contracts, has recorded transactions under the Revolving Agreement as secured
      borrowings.





The
      amounts of WPAC’s advances are subject to availability under a borrowing base
      calculation, with maximum advances outstanding not to exceed the maximum credit
      commitment. The annual interest rate on advances under the Revolving Agreement
      equals the prime rate plus additional interest varying from 1.25% to 3.25%
      based
      on the prior month’s ratio of contracts receivable related to insurance
      companies with an A. M. Best rating of B or lower, to total contracts
      receivable. The effective interest rate on this line of credit, based on our
      average outstanding borrowings under the Revolving Agreement, was 14.4% and
      9.39% for the six months ended June 30, 2006 and 2005, respectively.





There
      were no outstanding borrowings under the Revolving Agreement as of June 30,
      2006. Outstanding borrowings as of December 31, 2005 were approximately
      $197,000. Interest expense on this revolving credit line for the six months
      ended June 30, 2006 and 2005 totaled approximately $3,400 and $28,000,
      respectively.





-9-




**21** **st** **Century Holding Company**
 **Notes
        to Consolidated Financial Statements**




**(4)
      Commitments and Contingencies**




We
      are
      involved in other claims and legal actions arising in the ordinary course of
      business. In the opinion of management, the ultimate disposition of these
      matters will not have a material adverse effect on our consolidated financial
      position, results of operations, or liquidity.





As
      a
      direct premium writer in the State of Florida, we are required to participate
      in
      certain insurer solvency association under Florida Statutes 631.57(3) (a).
      Participation in these pools is based on our written premium by line of business
      to total premiums written statewide by all insurers. Our participation has
      resulted in an assessment due to the insolvency of other property and casualty
      insurance carriers in the State of Florida. The assessment was approximately
      2%
      of our 2005 net written premium in Florida and totaled $1.9 million. The
      assessment was payable in July. There was no charge to operations for this
      assessment. We have been approved by Florida’s Office of Insurance Regulation
      (“OIR”) to recoup the assessment through a 0.9% add-on fee to all Federated
      National and American Vehicle policies issued in Florida with effective dates
      of
      August 15, 2006 for new business and October 15, 2006 for renewal business.





Federated
      National and American Vehicle are also required to participate in an insurance
      apportionment plan under Florida Statutes Section 627.351, which is referred
      to
      as a Joint Underwriting Plan (“JUA Plan”). The JUA Plan provides for the
      equitable apportionment of any profits realized, or losses and expenses
      incurred, among participating motor vehicle insurers. In the event of an
      underwriting deficit incurred by the JUA Plan, which is not recovered through
      the policyholders in the JUA Plan, such deficit shall be recovered from the
      companies participating in the JUA Plan in the proportion that the net direct
      written premiums of each such member during the preceding calendar year bear
      to
      the aggregate net direct premiums written in this state by all members of the
      JUA Plan. During the six months ended June 30, 2006, Federated National and
      American Vehicle were assessed approximately $93,000 and $2,000, respectively
      by
      the JUA Plan based on their respective Cash Activity Reports. These assessments
      are charged to operations as paid. Future assessments by this association are
      undeterminable at this time.





During
      its regularly scheduled meeting on August 17, 2005, the Board of Governors
      of
      Citizens Property Insurance Corporation (“Citizens”) determined a 2004 plan year
      deficit existed in their High Risk Account. Citizen’s Board decided that a $515
      million Regular Assessment is in the best interest of Citizens and consistent
      with Florida Statutes. On this basis, Citizen’s Board certified for a Regular
      Assessment. Federated National’s participation in this assessment totaled $2.0
      million. Provisions contained in our excess of loss reinsurance policies provide
      for their participation totaling $1.5 million. Pursuant to Section 627.3512,
      Florida Statutes, insurers are permitted to recoup the assessment by adding
      a
      surcharge to policies in an amount not to exceed the amount paid by the insurer
      to Citizens. Federated National is currently underwriting the recoupment in
      connection with this assessment which began in March 2006. As noted above,
      Federated National is entitled to recoup this assessment, and will subrogate
      $1.5 million to our reinsurers. Through June 30, 2006 Federated National has
      recouped approximately $1.1 million in connection with this assessment. Future
      assessments by Citizens for a 2005 plan year deficit are assured, however no
      determination as to when or by how much are available at this time.





The
      OIR
      issued OIR-06-008M dated May 4 th 2006 to
      all property and casualty insurers, surplus lines insurers, and surplus lines
      agents in the state of Florida placing them on notice of an anticipated Florida
      Hurricane Catastrophic Fund (“FHCF”) assessment. Sighting the unprecedented
      hurricane seasons of 2004 and 2005, the FHCF has exhausted nearly all of the
      $6
      billion in reserves it had accumulated since its inception in 1993. The Florida
      State Board of Administration, the body that oversees the FHCF, has issued
      its
      directive to levy an emergency assessment upon all property and casualty
      business in the state of Florida. There is no statutory requirement that
      policyholders be notified of the FCHF assessment. The FHCF and OIR are, however,
      recommending that insurers include the FHCF assessment in a line item on the
      declaration page for two reasons: (1) this is a multi-year assessment and (2)
      there may be concurrent assessments and the insureds should know what amount
      is
      for which assessment. The assessment will become effective on all policies
      effective after January 1, 2007 and will be remitted to the administrator of
      the
      assessment as collected.





-10-


**21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  Effective
        on or about March 1, 2006, 21 st Century
        sold its interest in the Lauderdale Lakes property to an unrelated party.
        As
        part of this transaction, 21 st Century
        has agreed to lease the same facilities for a six year term. Our lease for
        this office space expires in December 2011.





The
      expected future lease payouts in connection with this lease are as
      follows:


Fiscal
                  Year
              
              **Lease
                  payments**2006
              
              $
              278,7922007
              
              
              557,5832008
              
              
              557,5832009
              
              
              557,5832010
              
              
              557,583Thereafter
              
              
              557,583Total
              
              $
              3,066,707




**(5)
      Comprehensive Income**





For
      the
      three and six months ended June 30, 2006 and 2005, comprehensive income
      consisted of the following:


**Three
                  months ended June 30,**
              ****
              **Six
                  months ended June 30,**
              ********
              ****
              **2006**
              ****
              **2005**
              ****
              **2006**
              ****
              **2005**Net
                  income
              
              $
              8,904,559
              
              $
              3,023,541
              
              $
              14,917,871
              
              $
              8,843,821Change
                  in net unrealized gains on investments available for sale
              
              
              (535,832
              )
              
              458,828
              
              
              (353,572
              )
              
              (278,738
              )Comprehensive
                  income, before tax
              
              
              8,368,727
              
              
              3,482,369
              
              
              14,564,299
              
              
              8,565,083Income
                      tax (expense) benefit related to items of other comprehensive
                      income
              
              
              201,634
              
              
              (172,835
              )
              
              133,049
              
              
              104,889Comprehensive
                  income
              
              $
              8,570,361
              
              $
              3,309,534
              
              $
              14,697,348
              
              $
              8,669,972


**(6)
      Segment Information**





FASB
      Statement No. 131, Disclosures About Segments of an Enterprise and Related
      Information, requires that the amount reported for each segment item be based
      on
      what is used by the chief operating decision maker in formulating a
      determination as to how many resources to assign to a segment and how to
      appraise the performance of that segment. The term chief operating decision
      maker may apply to the chief executive officer or chief operating officer or
      to
      a group of executives. Note: The term of chief operating decision maker may
      apply to a function and not necessarily to a specific person. This is a
      management approach rather than an industry approach in identifying segments.
      The segments are based on the Company’s organizational structure, revenue
      sources, nature of activities, existence of responsible managers, and
      information presented to the Board of Directors.





If
      any
      one of the following exists, a segment must be reported on:





·
            Revenue,
                including unaffiliated and inter-segment sales or transfers, is 10%
                or
                more of total revenue of all operating
                segments.


·
            Operating
                profit or loss is 10% or more of the greater, in absolute amount,
                of the
                combined operating profit (or loss) of all industry segments with
                operating profits (or losses).


·
            Identifiable
                assets are 10% or more of total assets of all operating
                segments.





Operating
      segments that are not reportable should be combined and disclosed in the ‘‘all
      other’’ category. Disclosure should be made of the sources of revenue for these
      segments.





-11-




**21****st****Century Holding Company**


**Notes
        to Consolidated Financial Statements**




Accordingly,
      we have discontinued our segment disclosures due to the finance segment not
      exceeding the 10% threshold for revenues, earnings or assets.





**(7)
      Reinsurance Agreements**





We
      follow
      industry practice of reinsuring a portion of our risks and paying for that
      protection based primarily upon total insured values of all policies in effect
      and subject to such reinsurance. Reinsurance involves an insurance company
      transferring or "ceding" all or a portion of its exposure on insurance
      underwritten by it to another insurer, known as a "reinsurer.” The ceding of
      insurance does not legally discharge the insurer from its primary liability
      for
      the full amount of the policies. If the reinsurer fails to meet its obligations
      under the reinsurance agreement, the ceding company is still required to pay
      for
      the insured the loss.





For
      the
      2006 - 2007 hurricane season, we have assembled a range of reinsurance products
      designed to insure the Company for an aggregate of approximately $414.5 million
      for a minimum of two catastrophic events. The reinsurance treaties contain
      several complex features and through a series of fluid retentions, attachment
      points and limitations, additional coverage may be afforded Federated National
      for events beyond the first two catastrophic events. Our retention will vary
      depending on the severity and frequency of each catastrophic event. The
      reinsurance companies and their respective participation in this season's
      program are noted in the table as follows:


**First
                  Event Participation**
              ****
              **Reinstated
                  Premium Protection****Current
                    AM**
                  **Best
                    Rating**
              ****
              **Reinsurer**
              ****
              **$20m
                      in**
                    **excess
                      of**
                    **$15m**
              ****
              **$40m
                  in excess of**
                  **$35m**
              ****
              **$72m
                      in excess of**
                    **$75m
                      and FHCF**
                    **participation**
              ****
              **$20m
                      in**
                    **excess
                      of**
                    **$15m**
              ****
              **$40m
                  in excess of**
                  **$35m**A+
              
              Ace
                  Tempest Reinsurance Ltd
              
              
              
              7.5%
              
              7.50%A
              
              Amlin
                  2001 Syndicate
              
              5.0%
              
              5.0%
              
              5.00%
              
              5.0%A-
              
              Amlin
                  Bermuda Ltd
              
              2.5%
              
              4.0%
              
              4.00%
              
              2.5%A
              
              American
                  Reinsurance Company
              
              
              
              
              
              3.53%A
              
              Ascot
                  1414 Syndicate
              
              
              
              
              
              6.50%A++
              
              National
                  Liability and Fire Company
              
              
              
              33.8%
              
              6.57%
              
              
              
              77.6%B++
              
              Converium
                  AG
              
              
              
              5.0%A+
              
              Everest
                  Reinsurance Company
              
              
              
              22.0%
              
              4.25%
              
              
              
              12.0%NR
              
              Wentworth
                  Insurance Company Ltd
              
              5.0%
              
              
              
              .
              
              5.0%A-
              
              Flagstone
                  Reinsurance Ltd
              
              
              
              4.3%
              
              4.00%A
              
              MAP
                  2791 Syndicate
              
              2.5%
              
              2.5%
              
              2.50%
              
              2.5%A-
              
              New
                  Castle Reinsurance Company Ltd
              
              2.0%
              
              2.0%
              
              2.00%
              
              2.0%A
              
              QBE
                  Reinsurance Corporation
              
              
              
              1.5%
              
              1.00%A
              
              Renaissance
                  Reinsurance, Ltd
              
              
              
              12.5%
              
              12.50%A+
              
              XL
                  Re Limited
              
              
              
              
              
              2.50%A
              
              Odyssey
              
              
              
              
              
              3.47%A
              
              Catlin
                  Insurance Company Ltd
              
              25.0%
              
              
              
              
              
              25.0%NR
              
              Allianz
                  Risk Transfer (Bermuda) Ltd
              
              33.0%
              
              
              
              
              
              33.0%A
              
              Liberty
                  Mutual Insurance Company
              
              
              
              
              
              34.72%American
                  Vehicle Insurance CompanyNR4
              
              (Affiliated)
              
              25.0%
              
              
              
              
              
              25.0%


In
      the
      discussion that follows it should be noted that all amounts of reinsurance
      are
      based on management’s current analysis of Federated National’s exposure levels
      to catastrophic risk. Our data will be subjected to exposure level data analysis
      at various dates through December 31, 2006. This analysis of our exposure level
      in relation to the total exposures to the FHCF may produce changes in
      retentions, limits and reinsurance premiums as a result of increases or
      decreases in our exposure level.





Our
      overall reinsurance structure may be divided into four major layers of financial
      impact in connection with any single catastrophic event. The bottom layer is
      considered to be the first $15 million of losses. The next layer is considered
      to be greater than $15 million and less than $35 million. The next layer is
      considered to be greater than $35 million and less than $233.3 million. The
      fourth layer is considered to be losses greater than $233.3 million and less
      than 305.3 million.





-12-




**21****st****Century Holding Company**


**Notes
        to Consolidated Financial Statements**




For
      first
      and second catastrophic events equal to or less than $15 million, the bottom
      layer, Federated National will retain 100% of the first $4.3 million and the
      last $0.7 million of this bottom layer. The FHCF will participate 100% for
      the $10, million in excess of Federated National’s first $4.3 million.





For
      the
      first and second catastrophic events with aggregate losses in excess of the
      first $15.0 million discussed above and less than $35 million, Federated
      National has acquired 100% reinsurance protection with a single automatic
      premium reinstatement protection provision. The $20 million of coverage afforded
      in this layer is by way of 42% traditional, single season, excess of loss
      (“Traditional”) treaties and 58% structured, multi-year, excess of loss
      (“Structured”) treaties. As noted in the chart above, American Vehicle will
      reinsure Federated National via a traditional treaty for 25% of this $20 million
      layer. Relative to the structured excess of loss reinsurance treaties, terms
      contained in these treaties afford capacity in this layer beyond the 2006 -
      2007
      season for two additional hurricane seasons. The structured treaties offer
      respective coverage for a single event in each of the three hurricane seasons
      and one additional respective coverage that may be applied as needed in any
      one
      of the three hurricane seasons. One of the structured treaties, representing
      25%
      of this layer, contains a no coverage provision if any single event results
      in
      damages that exceed $20 billion in the Unites States and its
      territories.





For
      the
      first and second catastrophic events where aggregate losses exceed $35 million,
      but are less than $233.3 million, Federated National has acquired 100%
      reinsurance protection through a combination of private market reinsurers and
      the FHCF program. The private market reinsurers have afforded coverage to insure
      us for $40 million against covered losses in excess of $35 million. The FHCF
      has
      afforded coverage to insure us for 90% of loss greater than $55.6 million and
      less than $231.5 million. The private treaties “wrap around” the FHCF treaty and
      afford coverage, in aggregate, for losses in excess of $35 million and less
      than
      $233.3 million. The FHCF treaty is an aggregate “for the entire season” treaty
      while the private market treaties afford respective per event coverage. As
      to
      reinstatement of coverage for the private market treaties, Federated National
      has purchased a single automatic premium reinstatement protection provision
      that
      would provide for an automatic reinstatement for 89% of the $40 million
      coverage. Federated National would be responsible for the remaining premium
      reinstatement protection and the cost in connection with that reinstatement
      is
      estimated to be approximately $2.1 million. Federated National would also be
      responsible for seasonal losses beyond what is afforded through this part of
      the
      FHCF coverage.





For
      an
      event where aggregate losses exceed $233.3 million, but are less than $305.3
      million, Federated National has acquired traditional reinsurance treaties
      representing 65.3% of this layer without a provision for premium reinstatement
      protection. Premium reinstatement coverage would be prorated as to amount and
      if
      the first event exhausted this coverage Federated National would be responsible
      for approximately $10.4 million for reinstatement protection. Additional
      coverage is afforded to Federated National via Industry Loss Warrants (“ILW”).
      The ILW policies provide for payments to Federated National based solely on
      industry wide losses to private and commercial property only in the State of
      Florida, not-withstanding losses incurred directly by Federated National. A
      payment to Federated National would only be considered, under the terms of
      these
      contracts, if wind damages incurred in the State of Florida exceeded amounts
      varying between $25 billion and $20 billion excluding public property and
      certain other named exclusions.





The
      Company is responsible for single catastrophic events with incurred losses
      in
      excess of approximately $305 million subject to the terms of the ILW’s
      above.





The
      estimated cost to the Company in connection with this reinsurance structure
      is
      approximately $65 million and for the most part payable in quarterly
      installments beginning July 1, 2006 and will be amortized through earned premium
      in accordance with the provisions and terms contained in the respective
      treaties.





For
      the
      2005-2006 hurricane season, the excess of loss treaties insured us for
      approximately $64.0 million, with the Company retaining the first $3.0 million
      of loss and LAE. The treaties had one full reinstatement provision for each
      excess layer with 100% additional premium as to time and pro rata as to amount.
      In addition, we purchased, from the private sector, Reinstatement Premium
      Protection which would reimburse the Company 100% of the cost of reinstatement
      for the second event. Unused coverage from the first two events carried forward
      to events beyond the second, in conjunction with a lowered attachment point
      (as
      explained below) afforded by the FHCF.





-13-


**21****st****Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


In
      addition to the excess of loss reinsurance policies (described above), we
      participated in the FHCF to protect our interest in the insurable risks
      associated with our homeowner and mobile home owner insurance products. For
      the
      first two events, FHCF coverage began after the Company’s retention of $3.0
      million and its excess of loss reinsures retention of approximately $40.3
      million.





Maximum
      coverage afforded from the combined policies of our FHCF and excess of loss
      policies in effect for varying dates from June 1, 2005 to June 30, 2006 total
      approximately $194.8 million. FHCF retained approximately $131.0 million, our
      excess of loss reinsurance policies retained $64.0 million, and the Company
      retained the first $3 million of insurable losses for two events. For events
      beyond the second largest catastrophic event during the policy term, FHCF
      coverage attached after the Company and its excess of loss reinsures collective
      retention of approximately $15.0 million. Additionally, unused coverage from
      our
      excess of loss reinsurance treaties could have been carried forward and totaled
      $20.0 million. However, loss and LAE incurred up to approximately $15.0 million
      for each hurricane subsequent to Hurricane Wilma in October 2005 and through
      June 30, 2006 and deemed to be a catastrophic event would have been the
      responsibility of the Company. There were no such catastrophic events through
      June 30, 2005.





As
      a
      result of the loss and LAE incurred in connection with the hurricane activity
      that occurred in 2004 and 2005, the Company has reflected in its operations
      the
      effects of each storm as follows:


**Claim**
              ****
              **Gross**
              ****
              ****
              ****
              **Reinsurance**
              ****
              **Net**2004
                  Hurricanes
              
              **Count**
              ****
              **Losses**
              ****
              ****
              ****
              **Recoveries**
              ****
              **Losses**(Dollars
                  in millions)Charley
                  (August 13)
              
              
              2,570
              
              $
              60.8
              
              
              
              
              $
              50.8
              
              $
              10.0Frances
                  (September 3)
              
              
              3,808
              
              
              50.7
              
              
              
              
              
              40.7
              
              
              10.0Ivan
                  (September 14)
              
              
              1,061
              
              
              22.0
              
              
              
              
              
              -
              
              
              22.0Jeanne
                  (September 25)
              
              
              1,560
              
              
              13.2
              
              
              
              
              
              -
              
              
              13.2Total
                  Loss Estimate
              
              
              8,999
              
              $
              146.7
              
              
              
              
              $
              91.5
              
              $
              55.2
  **Claim**
              ****
              **Gross**
              ****
              ****
              ****
              ****
              **Reinsurance**
              ****
              **Net**2005
                  Hurricanes
              
              **Count**
              ****
              **Losses**
              ****
              ****
              ****
              ****
              **Recoveries**
              ****
              **Losses**(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              322
              
              $
              2.8
              
              
              
              
              $
              -
              
              $
              2.8Katrina
                  (August 25)
              
              
              2,096
              
              
              12.3
              
              
              
              
              
              9.3
              
              
              3.0Rita
                  (September 20)
              
              
              19
              
              
              0.1
              
              
              
              
              
              -
              
              
              0.1Wilma
                  (October 24)
              
              
              11,290
              
              
              146.1
              
              
              
              
              
              143.1
              
              
              3.0Total
                  Loss Estimate
              
              
              13,727
              
              $
              161.3
              
              
              
              
              $
              152.4
              
              $
              8.9


We
      are
      selective in choosing a reinsurer and consider numerous factors, the most
      important of which are the financial stability of the reinsurer, their history
      of responding to claims and their overall reputation. In an effort to minimize
      our exposure to the insolvency of a reinsurer, we evaluate the acceptability
      and
      review the financial condition of the reinsurer at least annually.





During
      2005 American Vehicle did not reinsure any of its insurance products.





**(8)
      Stock Compensation Plans**





We
      implemented a stock option plan in November 1998 that provides for the granting
      of stock options to officers, directors, employees and consultants. The
      objectives of this plan include attracting and retaining the best personnel,
      providing for additional performance incentives, and promoting our success
      by
      providing employees the opportunity to acquire common stock. Options outstanding
      under this plan have been granted at prices which are either equal to or above
      the market value of the stock on the date of grant, vest over a four-year
      period, and expire ten years after the grant date. Under this plan, we are
      authorized to grant options to purchase up to 900,000 common shares, and, as
      of
      June 30, 2006 and December 31, 2005, we had outstanding exercisable options
      to
      purchase 46,250 and 97,650 shares, respectively.





-14-


**21****st****Century Holding Company**
 **Notes
            to Consolidated Financial Statements**
 In
      2001,
      we implemented a franchise stock option plan that provides for the granting
      of
      stock options to individuals purchasing Company owned agencies which were then
      converted to franchised agencies. The purpose of the plan was to advance our
      interests by providing an additional incentive to encourage managers of Company
      owned agencies to purchase the agencies and convert them to franchises. Options
      outstanding under the plan have been granted at prices which are above the
      market value of the stock on the date of grant and expire ten years after the
      grant date. Under this plan, we are authorized to grant options to purchase
      up
      to 988,500 common shares, though in connection with our sale of our franchise
      operations, we do not anticipate additional options to be granted under this
      plan. As of June 30, 2006 and December 31, 2005, we had outstanding exercisable
      options to purchase -0- and 15,000 shares, respectively.





In
      2002,
      we implemented the 2002 Option Plan. The purpose of this Plan is to advance
      our
      interests by providing an additional incentive to attract, retain and motivate
      highly qualified and competent persons who are key to the Company, including
      employees, consultants, independent contractors, officers and directors, upon
      whose efforts and judgment our success is largely dependent, by authorizing
      the
      grant of options to purchase Common Stock to persons who are eligible to
      participate hereunder, thereby encouraging stock ownership by such persons,
      all
      upon and subject to the terms and conditions of the Plan. Options outstanding
      under the plan have been granted at prices which are above the market value
      of
      the stock on the date of grant, vest over a five-year period, and expire six
      years after the grant date. Under this plan, the Company is authorized to grant
      options to purchase up to 1,800,000 common shares, and, as of June 30, 2006
      and
      December 31, 2005, we had outstanding exercisable options to purchase 736,408
      and 818,608 shares, respectively.





Activity
      in the Company’s stock option plans for the period from January 1, 2005 to June
      30, 2006, is summarized below:


**1998
                    Plan**
                
                **2001
                    Franchisee Plan**
                
                **2002
                    Plan****Number
                      ofShares**
                ****
                **Weighted**
                    **Average**
                      **Option**
                  **Exercise**
                  **Price**
                ****
                **Number
                    of Shares**
                ****
                **Weighted
                    Average
                    Option**
                  **Exercise**
                  **Price**
                ****
                **Number
                    of Shares**
                ****
                **Weighted
Average
                    Option**
                  **Exercise**
                  **Price**Outstanding
                    at January 1, 2005
                
                
                198,275
                
                $
                6.67
                
                
                15,000
                
                $
                9.17
                
                
                906,300
                
                $
                10.80Granted
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                451,500
                
                $
                14.39Exercised
                
                
                (96,875
                )
                $
                6.67
                
                
                -
                
                $
                -
                
                
                (271,542
                )
                $
                8.96Cancelled
                
                
                (3,750
                )
                $
                6.67
                
                
                -
                
                
                
                
                
                (262,650
                )
                $
                14.00Outstanding
                    at January 1, 2006
                
                
                97,650
                
                $
                6.67
                
                
                15,000
                
                $
                9.17
                
                
                823,608
                
                $
                12.35Granted
                
                
                -
                
                $
                -
                
                
                -
                
                $
                -
                
                
                48,500
                
                $
                17.00Exercised
                
                
                (51,400
                )
                $
                6.67
                
                
                (15,000
                )
                $
                9.17
                
                
                (115,200
                )
                $
                9.22Cancelled
                
                
                -
                
                $
                6.67
                
                
                -
                
                
                
                
                
                (20,500
                )
                $
                13.50Outstanding
                    at June 30, 2006
                
                
                46,250
                
                $
                6.67
                
                
                -
                
                $
                -
                
                
                736,408
                
                $
                13.13





Options
      outstanding as of June 30, 2006 are exercisable as follows :





-15-


**21****st****Century Holding Company**
 **Notes
            to Consolidated Financial Statements**
 **1998
                        Plan**
                    
                    **2001
                        Franchisee Plan**
                    
                    **2002
                        Plan**Options
                        Exercisable at:
                    
                    **Number
                        of Shares**
                    ****
                    **Weighted
                        Average Option Exercise Price**
                    ****
                    **Number
                        of Shares**
                    ****
                    **Weighted
                        Average Option Exercise Price**
                    ****
                    **Number
                        of Shares**
                    ****
                    **Weighted
                        Average Option Exercise Price**June
                        30, 2006
                    
                    
                    46,250
                    
                    $
                    6.67
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    306,958
                    
                    $
                    9.21December
                        31, 2006
                    
                    
                    -
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    55,350
                    
                    $
                    9.21December
                        31, 2007
                    
                    
                    -
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    129,200
                    
                    $
                    9.21December
                        31, 2008
                    
                    
                    -
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    95,900
                    
                    $
                    9.21December
                        31, 2009
                    
                    
                    -
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    83,900
                    
                    $
                    9.21December
                        31, 2010
                    
                    
                    -
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    57,400
                    
                    $
                    9.21Thereafter
                    
                    
                    -
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    7,700Total
                        options exercisible
                    
                    
                    46,250
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    736,408


At
      June
      30, 2006, the Company has three stock-based employee compensation plans, which
      are described above. Prior to January 1, 2006, we accounted for those plans
      under the recognition and measurement provisions of stock-based compensation
      using the intrinsic value method prescribed by APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Under
      these provisions, no stock-based employee compensation cost was recognized
      in
      the Statement of Operations for the years ended December 31, 2005 or 2004 as
      all
      options granted under those plans had an exercise price equal to or less than
      the market value of the underlying common stock on the date of grant. Effective
      January 1, 2006, the Company adopted the fair value recognitions provisions
      of
      FASB Statement No. 123 (R) using the modified-prospective-transition method.
      Under that transition method, compensation cost recognized in the first quarter
      of 2006 includes: (a) compensation cost for all share-based payments granted
      prior to, but not yet vested as of January 1, 2006, based on the grant date
      fair
      value estimated in accordance with the original provisions of Statement 123,
      and
      (b) compensation cost for all share-based payments granted subsequent to January
      1, 2006, based on the grant-date fair-value estimated in accordance with the
      provisions of SFAS No. 123R. Results for prior periods have not been
      restated.





As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
      continuing operations before provision for income taxes and net income for
      the
      six months ended June 30, 2006, are lower by approximately $280,000 and
      $175,000, respectively, than if it had continued to account for share-base
      compensation under ABP Opinion No. 25. For the three months ended June 30,
      2006,
      income from continuing operations before provision for income taxes and net
      income are lower by approximately $123,000 and $75,000, respectively, than
      if it
      had continued to account for share-base compensation under ABP Opinion No.
      25.





Basic
      and
      diluted earnings per share for the six month period ended June 30, 2006 for
      both
      basic and diluted would have been $2.00 and $1.87, respectively, if the Company
      had not adopted SFAS No. 123R, compared to reported basic and diluted earnings
      per share of $2.02 and $1.89, respectively.





Basic
      and
      diluted earnings per share for the three month period ended June 30, 2006 for
      basic and diluted would have been $1.19 and $1.18, respectively, if the Company
      had not adopted SFAS No. 123R, compared to reported basic and diluted earnings
      per share of $1.20 and $1.19, respectively.





Because
      the change in income taxes payable includes the effect of excess tax benefits,
      those excess tax benefits also must be shown as a separate operating cash
      outflow so that operating cash flows exclude the effect of excess tax benefits.
      SFAS No. 123R requires the cash flows resulting from the tax benefits resulting
      from tax deductions in excess of the compensation cost recognized for those
      options (excess tax benefits) to be classified as financing cash
      flows.





The
      following table illustrates the effect on net income and earnings per share
      if
      the Company had applied the fair value recognition provisions of Statement
      123
      to options granted under our stock option plans in the period presented. For
      purposes of this provision disclosure and comparability, the value of the
      options were estimated using the Black-Scholes option-pricing model and
      amortized to expense over the options vesting periods.





-16-


**21****st****Century Holding Company**
 **Notes
            to Consolidated Financial Statements**
 **Three
                      months**
                    **ended
                      June 30,**
                  ****
                  ****
                  ****
                  **Six
                      months**
                    **ended****June
                      30,****2005**
                  ****
                  ****
                  ****
                  **2005**Net
                      Income as reported
                  
                  
                  
                  
                  $
                  3,023,541
                  
                  
                  
                  $
                  8,843,821Compensation,
                      net of tax effect
                  
                  
                  
                  
                  
                  145,768
                  
                  
                  
                  
                  799,699Pro
                      forma net income
                  
                  
                  
                  
                  $
                  2,877,773
                  
                  
                  
                  $
                  8,044,122Net
                      income per shareAs
                      reported - Basic
                  
                  
                  
                  
                  $
                  0.48
                  
                  
                  
                  $
                  1.43As
                      reported - Diluted
                  
                  
                  
                  
                  $
                  0.46
                  
                  
                  
                  $
                  1.35Pro
                      forma - Basic
                  
                  
                  
                  
                  $
                  0.45
                  
                  
                  
                  $
                  1.30Pro
                      forma - Diluted
                  
                  
                  
                  
                  $
                  0.43
                  
                  
                  
                  $
                  1.23





The
      weighted average fair value for the 48,500 new options granted during the three
      months ended June 30, 2006, estimated on the date of grant using the
      Black-Scholes option-pricing model was $4.67. There were no new options granted
      during the quarter ending March 31, 2006.





The
      weighted average fair value for new options granted during the six months ended
      June 30, 2005, estimated on the date of grant using the Black-Scholes
      option-pricing model was $20.00. In connection with the sale of Express Tax
      Service, Inc. and EXPRESSTAX Franchise Corporation on January 1, 2005, 105,000
      Incentive Stock Options under the 2002 Stock Option plan were cancelled and
      reissued as Non-Qualified Stock Options.





The
      weighted average fair value of options granted during 2005 as estimated on
      the
      date of grant using the Black-Scholes option-pricing model was $2.81 to $10.75
      in 2005. The fair value of options granted is estimated on the date of grant
      using the following assumptions:




**June
                  30, 2006**
              
              **June
                  30, 2005**Dividend
                  yield
              
              2.80%
                  to 3.70%
              
              2.33%
                  to 2.43%Expected
                  volatility
              
              43.97%
                  to 44.30%
              
              61.76%
                  to 96.76%Risk-free
                  interest rate
              
              5.18%
              
              3.34%
                  to 3.86%Expected
                  life (in years)
              
              2.04
                  to 2.86
              
              2.59
                  to 2.63





Volatility
      of a share price is the standard deviation of the continuously compounded rates
      of return on the share over a specified period of time. The higher the
      volatility, the more returns on the shares can be expected to vary - up or
      down.
      The expected volatility is a measure of the amount by which a financial variable
      such as a share price has fluctuated (historical volatility) or is expected
      to
      fluctuate (expected volatility) during a period. Our volatility as reflected
      above contemplates only historical volatility.





Summary
      information about the Company’s stock options outstanding at June 30,
      2006:




**Range
                  of**
                **Exercise
                  Price**
              ****
              **Outstanding
                  at**
                **June
                  30, 2006**
              ****
              **Weighted
                  Average**
                **Contractual**
                **Periods
                  in Years**
              ****
              **Weighted**
                **Average**
                **Exercise
                  Price**
              ****
              **Exercisable
                  at**
                **June
                  30, 2006**1998
                  Plan
              
              $
              6.67
              
              
              46,250
              
              
              2.53
              
              $
              6.67
              
              
              46,2502001
                  Franchise Plan
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -2002
                  Plan
              
              $
              8.33
                  - $17.00
              
              
              736,408
              
              
              2.86
              
              $
              13.13
              
              
              306,958




**(9)
      Subordinated Debt**





On
      July
      31, 2003, we completed a private placement of our 6% Senior Subordinated Notes
      (the “July 2003 Notes”), which were offered and sold to accredited investors as
      units consisting of one July 2003 Note with a principal amount of $1,000 and
      warrants (the “2003 Warrants”) to purchase shares of our Common Stock. We sold
      an aggregate of $7.5 million of July 2003 Notes in this placement, which
      resulted in proceeds to us (net of placement agent fees of $450,724 and offering
      expenses of $110,778) of $6,938,498.





-17-


**21****st****Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


The
      July
      2003 Notes pay interest at the annual rate of 6%, are subordinated to senior
      debt of the Company, and mature on July 31, 2006. Quarterly payments of
      principal and interest due on the July 2003 Notes may be made in cash or, at
      our
      option, in shares of our Common Stock. If paid in shares of Common Stock, the
      number of shares to be issued shall be determined by dividing the payment due
      by
      95% of the weighted-average volume price for the Common Stock on Nasdaq as
      reported by Bloomberg for the 20 consecutive trading days preceding the payment
      date.




The
      2003
      Warrants issued in this placement to the purchasers of the July 2003 Notes
      and
      to the placement agent in the offering, J. Giordano Securities Group (“J.
      Giordano”), each entitle the holder to purchase 3⁄4 of one share of our Common
      Stock at an exercise price of $12.744 per whole share (as adjusted for the
      Company’s three-for-two stock split) until July 31, 2006. The total number of
      shares issuable upon exercise of 2003 Warrants issued to the purchasers of
      the
      July 2003 Notes and to J. Giordano totaled 612,074. GAAP requires that
      detachable warrants be valued separately from debt and included in paid-in
      capital.  Based on the terms of the purchase agreement with the investors
      in the private placement, management determined that the July 2003 Warrants
      had
      zero value at the date of issuance.





On
      or
      about July 31, 2006, the July 2003 notes and the warrants were retired. Of
      the
      612,074 shares that could have been issued in connection with the July 2003
      notes, 301,430 were exercised and issued, 225,000 were reacquired in the open
      market by us and 85,644 were unexercised.





On
      September 30, 2004, we completed a private placement of 6% Senior Subordinated
      Notes due September 30, 2007 (the “September 2004 Notes”). These notes were
      offered and sold to accredited investors as units consisting of one September
      2004 Note with a principal amount of $1,000 and
      warrants to purchase shares of our Common Stock (the “2004 Warrants”), the terms
      of which are similar to our July 2003 Notes and 2003 Warrants, except as
      described below .
      We sold
      an aggregate of $12.5 million of units in this placement, which resulted in
      proceeds (net of placement agent fees of $700,000 and offering expenses of
      $32,500) to us of $11,767,500.





The
      September 2004 Notes pay interest at the annual rate of 6%, mature on September
      30, 2007, and rank pari passu in terms of payment and priority to the July
      2003
      Notes. Quarterly payments of principal and interest due on the September 2004
      Notes, like the July 2003 Notes, may be made in cash or, at our option, in
      shares of our Common Stock. If paid in shares of Common Stock, the number of
      shares to be issued shall be determined by dividing the payment due by 95%
      of
      the weighted-average volume price for the Common Stock on Nasdaq as reported
      by
      Bloomberg for the 20 consecutive trading days preceding the payment
      date.





The
      2004
      Warrants issued to the purchasers of the September 2004 Notes and to the
      placement agent in the offering, J. Giordano, each entitle the holder to
      purchase one share of our Common Stock at an exercise price of $12.75 per share
      and will be
      exercisable until September 30, 2007. The
      number of shares issuable upon exercise of the 2004 Warrants issued to
      purchasers equaled $12.5 million divided by the exercise price of the warrants,
      and totaled 980,392. The number of shares issuable upon exercise of the 2004
      Warrants issued to J. Giordano equaled $500,000 divided by the exercise price
      of
      the warrants, and totaled 39,216. GAAP requires that detachable warrants be
      valued separately from debt and included in paid-in capital. Based on the terms
      of the purchase agreement with the investors in the private placement,
      management determined that the September 2004 Warrants had zero value at the
      date of issuance. Of the 1,019,000 warrants issued in connection with the
      September 2004 notes, 539,868 have been exercised to date.





The
      terms
      of the 2004 and 2003 Warrants provide for adjustment of the exercise price
      and
      the number of shares issuable thereunder upon the occurrence of certain events
      typical for private offerings of this type.





As
      indicated on the table below, we paid, pursuant to the terms of the July 2003
      Notes and in accordance with the contractual computations, the quarterly
      payments of principal and interest due in shares of our Common
      Stock.





-18-


**21****st****Century Holding Company**
 **Notes
            to Consolidated Financial Statements**


Quarterly
                  payment due date
              
              **2006**
              ****
              **2005**January
                  31,
              
              
              -
              
              
              55,537April
                  30,
              
              
              38,420
              
              
              -July
                  31,
              
              
              -
              
              
              -October
                  31,
              
              
              -
              
              
              -Total
                  common stock issued
              
              
              38,420
              
              
              55,537





As
      indicated on the table below, we paid, pursuant to the terms of the September
      2004 Notes and in accordance with the contractual computations, the quarterly
      payments of principal and interest due in shares of our Common
      Stock.




Quarterly
                  payment due date
              
              **2006**
              ****
              **2005**January
                  31,
              
              
              -
              
              
              103,870April
                  30,
              
              
              68,696
              
              
              -July
                  31,
              
              
              -
              
              
              -October
                  31,
              
              
              -
              
              
              -Total
                  common stock issued
              
              
              68,696
              
              
              103,870





The
      Company retains the privilege of repaying these notes in cash or by the issuance
      of common stock. Through the quarter ended March 31, 2005, we made our quarterly
      installment payments by issuing common stock. Our regularly scheduled payment
      of
      principal and interest in connection with the July 2003 and September 2004
      Notes
      were due on April 30, 2006 and were paid by issuance of 38,420 shares and 68,696
      shares of our Common Stock, respectively.





For
      the
      July 2003 Notes, the quarterly principal and interest payments totaling
      approximately $0.6 million per payment are due quarterly with the last
      installment paid in cash on July 31, 2006.





For
      the
      September 2004 Notes, the quarterly principal and interest payments, totaling
      approximately $1.2 million per payment, are due quarterly for two more years
      with the last installment due on September 30, 2007. The scheduled loan payments
      for the next two years are as follows:





For
                  the periodYear
                  ending December 31, 2006
              
              $
              2,083,334Year
                  ending December 31, 2007
              
              
              4,166,666Total
              
              $
              6,250,000





**(10)
      Discontinued Operations**





In
      2005
      the Company has separately disclosed the operating, investing and financing
      portions of the cash flows attributable to its discontinued operations, which
      in
      prior periods were reported on a combined basis with its continuing
      operations.





The
      Company completed the transaction contemplated by the Stock Purchase and
      Redemption Agreement dated January 3, 2005 with Express Tax Service, Inc.
      (“Express Tax”), Robert J. Kluba and Robert H. Taylor. The Company was the
      beneficial and record owner of 80% of the issued and outstanding stock of
      Express Tax, which in turn owned 100% of the issued and outstanding stock of
      EXPRESSTAX Franchise Corporation (“EXPRESSTAX”). Mr. Kluba was the President and
      a director of Express Tax and EXPRESSTAX, and the owner of the remaining 20%
      of
      the issued and outstanding stock of Express Tax. The sale of the assets closed
      on January 13, 2005 with an effective date of January 1, 2005.





The
      Company received at closing a cash payment of $311,351, which reflected the
      purchase price of $660,000 for all of the Company’s common stock in Express Tax,
      less $348,649 representing intercompany receivables owed to Express Tax by
      the
      Company. The Company also received a payment of $1,200,000 in exchange for
      the
      Company’s agreement not to compete with the current business of Express Tax and
      EXPRESSTAX for five years following the closing. The Company’s investment in its
      subsidiary totaled $230,000.





-19-


**21****st****Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


In
      connection with the transaction, the Company has extended the expiration dates
      for the 75,000 outstanding stock options previously granted to Mr. Kluba and
      the
      30,000 outstanding stock options previously granted to Mr. Kluba’s wife, such
      that 80% of such stock options shall expire, if not exercised, on the first
      anniversary date of the closing and the remaining 20% of such stock options
      shall expire on the second anniversary date of the closing; none of these
      options were exercisable for the six-month period following the
      closing.




-20-




**21****st****Century Holding Company**
  *General
          information about 21* *st* *Century Holding Company can be found at* *www.21stcenturyholding.com* *however, the information that can be accessed through our web site is not
          part
          of our report. We make our annual report on Form 10-K, quarterly reports
          on Form
          10-Q, current reports on Form 8-K and amendments to these reports filed
          or
          furnished pursuant to Section 13 or 15(d) of the Securities and Exchange
          Act of
          1934 available free of charge on our web site, as soon as reasonably practicable
          after they are electronically filed with the SEC.*





**Item
      2**





**Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**





**Forward-Looking
      Statements**





Statements
      in this report or in documents that are incorporated by reference that are
      not
      historical fact are forward-looking statements that are subject to certain
      risks
      and uncertainties that could cause actual events and results to differ
      materially from those discussed herein. Without limiting the generality of
      the
      foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”
“intend,” “could,” “would,” “estimate,” or “continue” or the negative other
      variations thereof or comparable terminology are intended to identify
      forward-looking statements. The risks and uncertainties include, without
      limitation, uncertainties related to estimates, assumptions and projections
      relating to losses from the nine hurricanes that occurred in fiscal years 2005
      and 2004 and other estimates, assumptions and projections contained in this
      10-Q; inflation and other changes in economic conditions (including changes
      in
      interest rates and financial markets); pricing competition and other initiatives
      by competitors; ability to obtain regulatory approval for requested rate changes
      and the timing thereof; legislative and regulatory developments; the outcome
      of
      litigation pending against us, including the terms of any settlements; risks
      related to the nature of our business; dependence on investment income and
      the
      composition of our investment portfolio; the adequacy of our liability for
      loss
      and loss adjustment expense; insurance agents; claims experience; ratings by
      industry services; catastrophe losses; reliance on key personnel; weather
      conditions (including the severity and frequency of storms, hurricanes,
      tornadoes and hail); changes in driving patterns and loss trends; acts of war
      and terrorist activities; court decisions and trends in litigation and health
      care and auto repair costs; and other matters described from time to time by
      us
      in this report, and our other filings with the SEC.




You
      are
      cautioned not to place reliance on these forward-looking statements, which
      are
      valid only as of the date they were made. The Company undertakes no obligation
      to update or revise any forward-looking statements to reflect new information
      or
      the occurrence of unanticipated events or otherwise. In addition, readers should
      be aware that GAAP prescribes when a company may reserve for particular risks,
      including litigation exposures. Accordingly, results for a given reporting
      period could be significantly affected if and when a reserve is established
      for
      a major contingency. Reported results may therefore appear to be volatile in
      certain accounting periods.





**Overview**





The
      insurance industry uses terminology that is unfamiliar to many people. The
      Company has denoted certain terms in the footnotes to its consolidated financial
      statements beginning on page seven. It may be helpful for you to refer to these
      definitions as you read this Quarterly Report on Form 10-Q.





We
      are an
      insurance holding company, which, through our subsidiaries and our contractual
      relationships with our independent agents and general agents, control
      substantially all aspects of the insurance underwriting, distribution and claims
      process. We are authorized to underwrite homeowners’ property and casualty
      insurance, commercial general liability insurance, and personal automobile
      insurance, in various states with various lines of authority through our wholly
      owned subsidiaries, Federated National and American Vehicle. We internally
      process claims made by our own and third party insureds through our wholly
      owned
      claims adjusting company, Superior.





Federated
      National is authorized to underwrite personal automobile insurance, homeowners’
property and casualty insurance and mobile home property and casualty insurance
      in Florida as an admitted carrier. American Vehicle is authorized to underwrite
      personal and commercial automobile insurance and commercial general liability
      insurance in Florida as an admitted carrier. In addition, American Vehicle
      is
      authorized to underwrite commercial general liability insurance in Georgia,
      Kentucky, South Carolina and Virginia as a surplus lines carrier and in Texas,
      Louisiana and Alabama as an admitted carrier. American Vehicle operations in
      Florida, Georgia, Louisiana, Texas, South Carolina and Virginia are on-going.
      American Vehicle operations in Alabama and Kentucky are expected to begin this
      year. American Vehicle has pending  applications,
      in various stages of approval, to be authorized as a surplus lines carrier
      in
      the states of Missouri, California and Arkansas.





-21-


**21****st****Century Holding Company**


During
      the six months ended June 30, 2006, 75.2%, 19.1% and 5.7% of the premiums we
      underwrote were for homeowners’ property and casualty insurance, commercial
      general liability insurance and personal automobile insurance, respectively.
      During the six months ended June 30, 2005, 60.3%, 18.8% and 20.9% of the
      premiums we underwrote were for homeowners’ property and casualty insurance,
      commercial general liability insurance and personal automobile insurance,
      respectively. We internally process claims made by our own and third-party
      insureds through our wholly owned claims adjusting company, Superior. We also
      offer premium financing to our own and third-party insureds through our wholly
      owned subsidiary, Federated Premium.




We
      market
      and distribute our own and third-party insurers’ products and our other services
      primarily in Central and South Florida, through contractual relationships with
      a
      network of approximately 1,500 independent agents and a select number of general
      agents.





Assurance
      MGA, a wholly owned subsidiary, acts as Federated National’s and American
      Vehicle’s exclusive managing general agent. Assurance MGA currently provides all
      underwriting policy administration, marketing, accounting and financial services
      to Federated National and American Vehicle, and participates in the negotiation
      of reinsurance contracts. Assurance MGA generates revenue through a 6%
      commission fee from the insurance companies' net written premium, policy fee
      income of $25 per policy and other administrative fees from the marketing of
      companies’ products through the Company’s distribution network. The 6%
      commission fee from Federated National and American Vehicle was made effective
      January 1, 2005. Assurance MGA plans to establish relationships with additional
      carriers and add additional insurance products in the future.





Our
      business, results of operations and financial condition are subject to
      fluctuations due to a variety of factors. Abnormally high severity or frequency
      of claims in any period could have a material adverse effect on our business,
      results of operations and financial condition. Also, if our estimated
      liabilities for unpaid losses and LAE are less than actual losses and LAE,
      we
      will be required to increase reserves with a corresponding reduction in our
      net
      income in the period in which the deficiency is identified.





We
      operate in highly competitive markets and face competition from both national
      and regional insurance companies, many of whom are larger and have greater
      financial and other resources, have better A.M. Best ratings and offer more
      diversified insurance coverage. Our competitors include companies which market
      their products through agents, as well as companies which sell insurance
      directly to their customers. Large national writers may  have
      certain competitive advantages over agency writers, including increased name
      recognition, increased loyalty of their customer base and reduced policy
      acquisition costs. We may also face competition from new or temporary entrants
      in our niche markets. In some cases, such entrants may, because of inexperience,
      desire for new business or other reasons, price their insurance below ours.
      Although our pricing is inevitably influenced to some degree by that of our
      competitors, we believe that it is generally not in our best interest to compete
      solely on price. We compete on the basis of underwriting criteria, our
      distribution network and superior service to our agents and insureds.





In
      Florida, more than 200 companies are authorized to underwrite homeowners’
insurance. Comparable companies which compete with us in the homeowners’ market
      include Allstate Insurance Company, State Farm Insurance Company, First
      Floridian Insurance Company, and Vanguard Insurance Company. During the quarter
      ended June 30, 2006 the Florida OIR announced the take over of three of our
      major competitors due to the poor financial condition stemming from the effects
      of last year’s catastrophic hurricanes. We are currently experiencing an
      increase in policy volume relative to our homeowners’ insurance products due to
      the narrowed competition.





Comparable
      companies which compete with us in the general liability insurance market
      include Century Surety Insurance Company, Atlantic Casualty Insurance Company,
      Colony Insurance Company and Burlington/First Financial Insurance
      Companies.





With
      respect to automobile insurance in Florida, we compete with more than 100
      companies, which underwrite personal automobile insurance. Comparable companies
      which compete with us in the personal automobile insurance market include
      Affirmative Insurance Holdings, Inc., which acquired our non-standard automobile
      agency business in Florida in December 2004, U.S. Security Insurance Company,
      United Automobile Insurance Company, Direct General Insurance Company and
      Security National Insurance Company, as well as major insurers such as
      Progressive Casualty Insurance Company.





Competition
      could have a material adverse effect on our business, results of operations
      and
      financial condition.





-22-


**21****st****Century Holding Company**
  Our
              executive offices are located at 3661 West Oakland Park Boulevard,
              Suite 300,
              Lauderdale Lakes, Florida and our telephone number is (954)
              581-9993.




**Critical
      Accounting Policies**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires us to make estimates
      and assumptions about future events that affect the amounts reported in the
      financial statements and accompanying notes. Future events and their effects
      cannot be determined with absolute certainty. Therefore, the determination
      of
      estimates requires the exercise of judgment. Actual results inevitably will
      differ from those estimates, and such differences may be material to the
      financial statements.




The
      most
      significant accounting estimates inherent in the preparation of our financial
      statements include estimates associated with our evaluation of the determination
      of liability for unpaid losses and LAE. In addition, significant estimates
      form
      the basis for our reserves with respect to finance contracts, premiums
      receivable, deferred income taxes, deferred acquisition costs and loss
      contingencies. Various assumptions and other factors underlie the determination
      of these significant estimates. The process of determining significant estimates
      is fact specific and takes into account factors such as historical experience,
      as well as current and expected economic conditions. We periodically re-evaluate
      these significant factors and make adjustments where facts and circumstances
      dictate.




Using
      the
      various complex actuarial methods and different underlying assumptions, our
      actuaries produce a number of point estimates for each class of business. After
      reviewing the appropriateness of the underlying assumptions, management selects
      the carried reserve for each class of business. We do not calculate a range
      of
      loss reserve estimates. Ranges are not a true reflection of the potential
      volatility between carried loss reserves and the ultimate settlement amount
      of
      losses incurred prior to the balance sheet date. This is due to the fact that
      ranges are developed based on known events as of the valuation date whereas
      the
      ultimate disposition of losses is subject to the outcome of events and
      circumstances that were unknown as of the valuation date.




Among
      the
      numerous factors that contribute to the inherent uncertainty in the process
      of
      establishing loss reserves are the following:




·
            Changes
                in the market and inflation rate for goods and services related to
                covered
                damages such as medical care and home repair
                costs,




·
            Changes
                in the judicial environment regarding the interpretation of policy
                provisions relating to the determination of
                coverage,




·
            Changes
                in the general attitude of juries in the determination of liability
                and
                damages,




·
            Legislative
                actions,




·
            Changes
                in our estimates of the number and/or severity of claims that have
                been
                incurred but not reported as of the date of the financial
                statements,




·
            Changes
                in our underwriting standards, and




·
            Any
                changes in our claim handling
                procedures.




We
      establish and evaluate unpaid loss reserves using recognized standard
      statistical loss development methods and techniques. Each component of loss
      reserves is affected by the expected frequency and average severity of claims.
      Such amounts are analyzed using statistical techniques on historical claims
      data
      and adjusted when appropriate to reflect perceived changes in loss patterns.
      Data is analyzed by policy coverage, jurisdiction of loss, reporting date and
      occurrence date, among other factors.




Average
      reserve amounts are established for automobile claims prior to the development
      of an individual case reserve. Average reserve amounts are driven by the
      estimated average severity per claim and the number of new claims
      opened.




For
      other
      than automobile lines, claims adjusters generally establish individual claim
      case loss and LAE reserve estimates as soon as the specific facts and merits
      of
      each claim can be evaluated. Case reserves represent the amounts, that in the
      judgment of the adjusters, are reasonably expected to be paid in the future
      to
      completely settle the claim, including expenses. Individual case reserves are
      revised as more information becomes known.




-23-


**21****st****Century Holding Company**


For
      unreported claims, incurred but not reported (“IBNR”) reserve estimates are
      calculated by first projecting the ultimate number of claims expected (reported
      and unreported) for each significant coverage by using historical quarterly
      and
      monthly claim counts, to develop age-to-age projections of the ultimate counts
      by accident quarter. Reported claims are subtracted from the ultimate claim
      projections to produce an estimate of the number of unreported claims. The
      number of unreported claims is multiplied by an estimate of the average cost
      per
      unreported claim to produce the IBNR reserve amount. Actuarial techniques are
      difficult to apply reliably in certain situations, such as to new legal
      precedents, class action suits, long-term claimants from personal injury
      protection coverage or recent catastrophes. Consequently, supplemental IBNR
      reserves for these types of events may be established.




**New
      Accounting Pronouncements**




The
      material set forth in Item 1, Part I, “Financial Statements - Note 2 - Summary
      of Significant Accounting Policies and Practices” of this Form 10-Q is
      incorporated herein by reference.





At
      June
      30, 2006, the Company has three stock-based employee compensation plans, which
      are described in Item 1, Part I, “Financial Statements - Note 8 - Stock
      Compensation Plans” of this Form 10-Q. Prior to January 1, 2006, we accounted
      for those plans under the recognition and measurement provisions of stock-based
      compensation using the intrinsic value method prescribed by APB Opinion No.
      25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Under
      these provisions, no stock-based employee compensation cost was recognized
      in
      the Statement of Operations for the years ended December 31, 2005 or 2004 as
      all
      options granted under those plans had an exercise price equal to or greater
      than
      the market value of the underlying common stock on the date of grant. Effective
      January 1, 2006, the Company adopted the fair value recognitions provisions
      of
      FASB Statement No. 123 (R) using the modified-prospective-transition method.
      Under that transition method, compensation cost recognized for the six months
      and three months ending June 30, 2006 include: (a) compensation cost for all
      share-based payments granted prior to, but not yet vested as of January 1,
      2006,
      based on the grant date fair value estimated in accordance with the original
      provisions of Statement 123, totaling approximately $117,000 and $157,000,
      respectively and (b) compensation cost for all share-based payments granted
      subsequent to January 1, 2006, based on the grant-date fair-value estimated
      in
      accordance with the provisions of SFAS No. 123R; and totaling approximately
      nothing and $6,000, respectively. Results for prior periods have not been
      restated and there were no cumulative adjustments recorded in the March 31,
      2006
      Statement of Operations as a result of the adoption of FASB Statement 123
      (R).





As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
      continuing operations before provision for income taxes and net income for
      the
      six months ended June 30, 2006, are lower by approximately $280,000 and
      $175,000, respectively, than if it had continued to account for share-base
      compensation under ABP Opinion No. 25. For the three months ended June 30,
      2006,
      income from continuing operations before provision for income taxes and net
      income are lower by approximately $123,000 and $75,000, respectively, than
      if it
      had continued to account for share-base compensation under ABP Opinion No.
      25.





Basic
      and
      diluted earnings per share for the six month period ended June 30, 2006 for
      basic and diluted would have been $2.00 and $1.87, respectively, if the Company
      had not adopted SFAS No. 123R, compared to reported basic and diluted earnings
      per share of $2.02 and $1.89, respectively.





Basic
      and
      diluted earnings per share for the three month period ended June 30, 2006 for
      basic and diluted would have been $1.19 and $1.18, respectively, if the Company
      had not adopted SFAS No. 123R, compared to reported basic and diluted earnings
      per share of $1.20 and $1.19, respectively.





Our
      estimate for compensation cost related to non-vested awards not yet recognized
      as of January 1, 2006 total approximately $1.7 million and the weighted average
      period over which it is expected to be recognized ranges between 2.6 and 2.82
      years.





The
      weighted average fair value for the 48,500 new options granted during the three
      months ended June 30, 2006, estimated on the date of grant using the
      Black-Scholes option-pricing model was $4.67. There were no new options granted
      during the quarter ended March 31, 2006. The weighted average fair value for
      new
      options granted during the six months ended June 30, 2005, estimated on the
      date
      of grant using the Black-Scholes option-pricing model was $20.00. The fair
      value
      of options granted is estimated on the date of grant using the following
      assumptions:





-24-


**21****st****Century Holding Company**
 **June
                        30, 2006**
                    ****
                    **June
                        30, 2005**Dividend
                        yield
                    
                    2.80%
                        to 3.70%
                    
                    2.33%
                        to 2.43%Expected
                        volatility
                    
                    43.97%
                        to 44.30%
                    
                    61.76%
                        to 96.76%Risk-free
                        interest rate
                    
                    5.18%
                    
                    3.34%
                        to 3.86%Expected
                        life (in years)
                    
                    2.04
                        to 2.86
                    
                    2.59
                        to 2.63





Volatility
      of a share price is the standard deviation of the continuously compounded rates
      of return on the share over a specified period of time. The higher the
      volatility, the more the returns on the shares can be expected to vary - up or
      down. The expected volatility is a measure of the amount by which a financial
      variable such as a share price has fluctuated (historical volatility) or is
      expected to fluctuate (expected volatility) during a period. Our volatility
      as
      reflected above contemplates only historical volatility.





There
      were no changes in the quantity or type of instruments used in the share-based
      payment programs, such as a shift from share options to restricted shares.
      Additionally, there were no changes in the terms of the share-based payment
      arrangements, such as the addition of performance conditions.





On
      December 5, 2005, our Board of Directors granted a modification to the
      outstanding share-based stock options prior to the adoption of SAFS 123 (R).
      The
      modification provided that the grant price for 92,000 outstanding share-based
      stock options under the 2002 Stock Option Plan (both vested and unvested) be
      repriced from $20.00 per share as originally issued to a new grant price of
      $16.00 per share. All other features of the stock options were unchanged. At
      the
      close of business on the date of the modification the company’s common stock
      traded at $14.35 per share. The effect of the modification to these stock
      options was reflected in the pro forma disclosure for the period ended December
      31, 2005. The reason for the reprice was to reinstate the desired motivational
      effect and provide a refreshed incentive to the holders of those stock
      options.





**Analysis
      of Financial Condition**


**As
      of June 30, 2006 as Compared to December 31, 2005**





**Total
      Investments**





SFAS
      No.
      115 addresses accounting and reporting for (a) investments in equity securities
      that have readily determinable fair values and (b) all investments in debt
      securities. SFAS 115 requires that these securities be classified into one
      of
      three categories, Held-to-maturity, Trading securities or Available-for-sale.





Investments
      classified as held-to-maturity include debt securities wherein the Company’s
      intent and ability are to hold the investment until maturity. The accounting
      treatment for held-to-maturity investments is to carry them at amortized cost
      without consideration to unrealized gains or losses. Investments classified
      as
      trading securities include debt and equity securities bought and held primarily
      for the sale in the near term. The accounting treatment for trading securities
      is to carry them at fair value with unrealized holding gains and losses included
      in current period operations. Investments classified as available-for-sale
      include debt and equity securities that are not classified as held-to-maturity
      or as trading security investments. The accounting treatment for
      available-for-sale securities is to carry them at fair value with unrealized
      holding gains and losses excluded from earnings and reported as a separate
      component of shareholders’ equity, namely “Other Comprehensive
      Income”.





Total
      Investments increased $33.7 million, or 33.6%, to $133.8 million as of June
      30,
      2006, as compared to $100.1 million as of December 31, 2005. The increase is
      primarily a result of our investment of the proceeds from an increase in written
      insurance premiums.





The
      fixed
      maturities and the equity securities that are available for sale and carried
      at
      fair value represent 85.3% of total investments as of June 30, 2006, as compared
      to 80.3% as of December 31, 2005.





We
      did
      not hold any non-traded investment securities during 2006 or 2005.





Below
      is
      a summary of net unrealized gains and (losses) at June 30, 2006 and December
      31,
      2005 by category.





-25-


**21****st****Century Holding Company**
 **Unrealized
                        Gains and (Losses)**
                    ********
                    ****
                    **June
                        30, 2006**
                    ****
                    **December
                        31, 2005**Fixed
                        maturities:U.S.
                        government obligations and agency obligations
                    
                    $
                    (1,310,967
                    )
                    $
                    (618,703
                    )Obligations
                        of states and political subdivisions
                    
                    
                    (328,185
                    )
                    
                    (135,305
                    )(1,639,152
                    )
                    
                    (754,008
                    )Corporate
                        securities:Communications
                    
                    
                    3,401
                    
                    
                    14,735Financial
                    
                    
                    (81,665
                    )
                    
                    (225,768
                    )Other
                    
                    
                    (20,893
                    )
                    
                    (19,681
                    )(99,157
                    )
                    
                    (230,714
                    )Equity
                        securities:Common
                        stocks
                    
                    
                    (1,079,979
                    )
                    
                    (1,479,994
                    )Total
                        unrealized gains and (losses), net
                    
                    $
                    (2,818,288
                    )
                    $
                    (2,464,716
                    )





During
      December 2005, we classified $19.7 million of our bond portfolio as
      held-to-maturity. The decision to classify this layer of our bond portfolio
      as
      held-to-maturity was predicated on our intention to establish an irrevocable
      letter of credit in order to facilitate business opportunities in connection
      with our commercial general liability program. During April 2006, American
      Vehicle finalized the irrevocable letter of credit in conjunction with the
      100%
      Quota Share Reinsurance Agreement with Republic Underwriters Insurance Company.





Pursuant
      to FASB 115, the Company records the unrealized losses, net of estimated income
      taxes that are associated with that part of our portfolio classified as
      available for sale through the Shareholders' equity account titled Other
      Comprehensive Income. Management periodically reviews the individual investments
      that comprise our portfolio in order to determine whether a decline in fair
      value below our cost is either other than temporary or permanently impaired.
      Factors used in such consideration include, but are not limited to, the extent
      and length of time over which the market value has been less than cost, the
      financial condition and near-term prospects of the issuer and our ability and
      intent to keep the investment for a period sufficient to allow for an
      anticipated recovery in market value.





In
      reaching a conclusion that a security is either other than temporary or
      permanently impaired we consider such factors as the timeliness and completeness
      of expected dividends, principle and interest payments, ratings from nationally
      recognized statistical rating organizations such as Standard and Poor’s and
      Moody’s as well as information released via the general media
      channels.





The
      investments held at June 30, 2006 and December 31, 2005 were comprised mainly
      of
      United States government and agency bonds as well as municipal bonds which
      are
      viewed by the Company as conservative and less risky holdings however, sensitive
      to interest rate changes. There is a smaller concentration of corporate bonds
      predominantly held in the financial and conglomerate industries. Approximately
      two-thirds of the equity holdings are in income funds while the other third
      is
      invested in equities related to the mortgage investment industry and business
      service industry.





All
      of
      our securities are in good standing and are not impaired as defined by FASB
      115.
      We have determined that none of our securities qualify for other than temporary
      impairment or permanent impairment status. Our rational for this determination
      includes, but is not limited to Standard and Poor’s rating of no less than BB++,
      no delinquent interest and dividend payments, near term maturity dates and
      our
      ability and intent to hold these securities for a period sufficient to allow
      for
      an anticipated recovery in market value.




-26-


**21****st****Century Holding Company**
 **Cash
              and Cash Equivalents**


Cash
      and
      cash equivalents, which include cash, certificates of deposits, and money market
      accounts increased $3.9 million, or 64.0%, to $10.0 million as of June 30,
      2006,
      as compared to $6.1 million as of December 31, 2005. These balances are held
      primarily in money market accounts and are available for the settlement of
      hurricanes related claims.





**Receivable
      for Investments Sold**





Receivable
      for investments sold increased to $17.0 million as of June 30, 2006, as compared
      to nothing as of December 31, 2005. The increase is a result of investment
      trading activity that occurred in late June 2006 and did not settle until early
      July 2006.





**Finance
      Contracts Receivable, Net of Allowance for Credit Losses**





Finance
      contracts receivable, net of allowance for credit losses, decreased $3.6
      million, or 49.1%, to $3.7 million as of June 30, 2006, as compared to $7.3
      million as of December 31, 2005. The decrease is primarily due to our sale
      in
      December 2004 of our assets related to our non-standard automobile insurance
      agency business in Florida and the associated financed contracts. We anticipate
      a continued decline in the financed contracts receivable, net over the future
      short term and its related conversion to cash, cash equivalents and
      investments.





**Prepaid
      Reinsurance Premiums**





Prepaid
      reinsurance premiums decreased $9.3 million, or 76.4%, to $2.9 million as of
      June 30, 2006, as compared to $12.1 million as of December 31, 2005. The
      decrease is due to the amortization of prepaid reinsurance premiums associated
      with our homeowners’ book of business.





**Premiums
      Receivable, Net of Allowance for Credit Losses**





Premiums
      receivable, net of allowance for credit losses, increased $2.7 million, or
      36.3%, to $10.2 million as of June 30, 2006, as compared to $7.5 million as
      of
      December 31, 2005.





The
      largest component of the increase relates to our expanding homeowners’ insurance
      business for which premiums receivable increased $2.9 million, or 152.6%, to
      $4.9 million as of June 30, 2006, as compared to $1.9 million as of December
      31,
      2005. The increase in the homeowner’s receivable is due to the Company’s success
      in expanding homeowner’s written premium to new customers and the implementation
      of overall rate increases.





Additional
      components of the premium receivable include amounts in connection with our
      commercial general liability insurance business which increased $0.9 million,
      or
      38.7%, to $3.1 million as of June 30, 2006, as compared to $2.3 million as
      of
      December 31, 2005.





Premiums
      receivable in connection with our automobile line of business decreased $1.1
      million, or 25.2%, to $3.1 million as of June 30, 2006, as compared to $4.2
      million as of December 31, 2005. The decrease in automobile related premiums
      receivable is associated with the sale of our distribution channels in
      connection with the sale of our agencies, effective December 31, 2004.





**Reinsurance
      Recoverable**





Reinsurance
      recoverable decreased $120.5 million, or 88.2%, to $16.2 million as of June
      30,
      2006, as compared to $136.7 million as of December 31, 2005. The decrease is
      due
      to the timing of settlements with our reinsurers in connection with the
      adjustment of loss and LAE claims as they relate to costs recoverable under
      our
      reinsurance agreements. All amounts are considered current; the private
      reinsurance recoverable is collateralized by irrevocable letters of credit
      in
      favor of Federated National.





**Deferred
      Policy Acquisition Costs**





Deferred
      policy acquisition costs increased $2.8 million, or 30.1%, to $11.9 million
      as
      of June 30, 2006, as compared to $9.2 million as of December 31, 2005. The
      increased production volume for both the homeowners’ and commercial general
      liability product lines is the reason for the modest increase to this
      asset.





-27-


**21****st****Century Holding Company**
 **Deferred
              Income Taxes, net**


Deferred
      income taxes, net, increased $2.3 million, or 84.8%, to $5.0 million as of
      June
      30, 2006, as compared to $2.7 million as of December 31, 2005. The increase
      is
      comprised primarily of $2.4 million related to discounted unearned premiums
      and
      $0.9 million in connection with the sale of our property in Lauderdale Lakes,
      offset by $1.0 million associated with deferred policy acquisition
      costs.





**Property,
      Plant and Equipment, net**





Property,
      plant and equipment, net, decreased $2.5 million, or 63.6%, to $1.4 million
      as
      of June 30, 2006, as compared to $3.9 million as of December 31, 2005. Effective
      on or about March 1, 2006, 21 st Century
      sold its interest in the Lauderdale Lakes property to an unrelated party for
      approximately $5.0 million cash and a $0.9 million six year 5% note, generating
      a gain on sale totaling approximately $2.9 million. As part of the transaction,
      21 st Century
      has agreed to lease the same facilities for a six year term. Our lease for
      this
      office space expires in February 2011. The Company recognized a deferred gain
      in
      connection with the sale totaling approximately $2.8 million.





**Other
      Assets**





Other
      assets increased $0.8 million, or 17.3%, to $5.4 million as of June 30, 2006,
      as
      compared to $4.6 million as of December 31, 2005. Major components of other
      assets are as follows:


**June
                  30, 2006**
              ****
              **December
                  31, 2005**Accrued
                  interest income
              
              $
              1,006,385
              
              $
              734,059Notes
                  receivable
              
              
              889,583
              
              
              -Unamortized
                  loan costs
              
              
              155,552
              
              
              310,832Compensating
                  cash balances
              
              
              9,359
              
              
              363,021Due
                  from sale of discontinued operations, net
              
              
              -
              
              
              410,000Prepaid
                  expenses
              
              
              364,445
              
              
              349,138Recoupment
                  of assessments
              
              
              2,910,324
              
              
              2,025,210Other
              
              
              35,502
              
              
              387,803Total
              
              $
              5,371,150
              
              $
              4,580,063




**Unpaid
      Losses and LAE**





Unpaid
      losses and LAE decreased $122.7 million, or 79.7%, to $31.3 million as of June
      30, 2006, as compared to $154.0 million as of December 31, 2005. The decrease
      in
      unpaid losses and LAE relates to our payment patterns primarily relative to
      the
      settling of hurricane related claims. The composition of unpaid loss and LAE
      by
      product line is as follows:


**June
                  30, 2006**
              ****
              **December
                  31, 2005**Homeowners'
              
              $
              15,937,780
              
              $
              135,173,026Commercial
                  general liability
              
              
              4,474,457
              
              
              3,661,256Automobile
              
              
              10,931,890
              
              
              15,204,261$
              31,344,127
              
              $
              154,038,543




Factors
      that affect unpaid losses and LAE include the estimates made on a claim-by-claim
      basis known as “case reserves” coupled with bulk estimates known as IBNR.
      Periodic estimates by management of the ultimate costs required to settle all
      claim files are based on the Company’s analysis of historical data and
      estimations of the impact of numerous factors such as (i) per claim information;
      (ii) company and industry historical loss experience; (iii) legislative
      enactments, judicial decisions, legal developments in the awarding of damages,
      and changes in political attitudes; and (iv) trends in general economic
      conditions, including the effects of inflation. Management revises its estimates
      based on the results of its analysis. This process assumes that past experience,
      adjusted for the effects of current developments and anticipated trends, is
      an
      appropriate basis for estimating the ultimate settlement of all claims. There
      is
      no precise method for subsequently evaluating the impact of any specific factor
      on the adequacy of the reserves, because the eventual redundancy or deficiency
      is affected by multiple factors.





-28-


**** **21****st****Century Holding Company**
 **Unearned
              Premium**


Unearned
      premiums increased $23.2 million, or 37.5%, to $85.0 million as of June 30,
      2006, as compared to $61.8 million as of December 31, 2005. The increase was
      due
      to a $22.6 million increase in unearned homeowners’ insurance premiums, a $4.1
      million increase in unearned commercial general liability premiums, and a $3.5
      million decrease in unearned automobile premiums. These changes reflect our
      continued emphasis in 2006 on property and commercial general liability
      insurance products.




**Premium
      Deposits**





Premium
      deposits increased $1.3 million, or 58.7%, to $3.4 million as of June 30, 2006,
      as compared to $2.1 million as of December 31, 2005. Premium deposits are monies
      received on policies not yet in force as of June 30, 2006. The change is due
      to
      our policyholders purchasing patterns, the Company’s marketing efforts and our
      policies renewal patterns.





**Revolving
      Credit Outstanding**





Revolving
      credit outstanding decreased to nothing as of June 30, 2006, as compared to
      $0.2
      million as of December 31, 2005. The decrease is due to our cash management
      efforts, requested credit reduction from the lender, and sale in December 2004
      of our assets related to our non-standard automobile insurance agency business
      in Florida and the derived finance contracts receivable.





**Bank
      Overdraft**





Bank
      overdraft decreased $1.9 million, or 15.9%, to $10.3 million as of June 30,
      2006, as compared to $12.2 million as of December 31, 2005. The bank overdraft
      relates to hurricane-related loss and LAE disbursements paid but not yet
      presented for payment by the policyholder or vendor. The decrease relates to
      our
      payment patterns in relationship to the rate at which those cash disbursements
      are presented to the bank for payment.





**Funds
      Held Under Reinsurance Treaties**





Funds
      held under reinsurance treaties remained relatively unchanged at $1.6 million
      as
      of June 30, 2006, as compared to $1.5 million as of December 31, 2005. During
      its regularly scheduled meeting on August 17, 2005, the Board of Governors
      of
      Citizens determined a 2004 plan year deficit existed in their High Risk Account.
      Citizen’s Board decided that a $515 million Regular Assessment was in the best
      interest of Citizens and consistent with Florida Statutes. On this basis,
      Citizen’s Board certified for a Regular Assessment. Federated National’s
      participation in this assessment totaled $2.0 million. Provisions contained
      in
      our excess of loss reinsurance policies provide for their participation totaling
      $1.5 million of our $2.0 million assessment. Pursuant to Section 627.3512,
      Florida Statutes, insurers are permitted to recoup the assessment by adding
      a
      surcharge to policies in an amount not to exceed the amount paid by the insurer
      to Citizens. Federated National is currently underwriting the recoupment in
      connection with this assessment which began during the later part of the first
      quarter of 2006. As noted above, Federated National is entitled to recoup this
      assessment, and will subrogate $1.5 million to our reinsurers.





**Income
      Taxes Payable**





Income
      taxes payable increased $4.7 million, or 155.6%, to $7.7 million as of June
      30,
      2006, as compared to $3.0 million as of December 31, 2005. The increase is
      due
      to the one time gain in connection with the sale of our property in Lauderdale
      Lakes and our continued profitable operations.





**Subordinated
      Debt**





Subordinated
      debt decreased $3.3 million, or 32.7%, to $6.9 million as of June 30, 2006,
      as
      compared to $10.2 million as of December 31, 2005. The decrease is in connection
      with the scheduled quarterly principle payments.





**Deferred
      Gain from Sale of Property**





-29-


**** **21stCentury
            Holding Company**
 Deferred
              gain from sale of property increased to $2.8 million as of June 30,
              2006 as
              compared to nothing as of December 31, 2005. In accordance with the
              provisions
              of FASB No. 13, we will amortize the deferred gain over the term of
              the
              lease-back which is scheduled to end in December 2011.


**Accounts
      Payable and Accrued Expenses**





Accounts
      payable and accrued expenses increased $1.5 million, or 35.8%, to $5.6 million
      as of June 30, 2006, as compared to $4.2 million as of December 31, 2005. The
      increase is due to our cash management efforts and timing of payments with
      our
      trade vendors.





**Results
      of Operations**


**Three
      Months Ended June 30, 2006 as Compared to Three Months Ended June 30,
      2005**





**Gross
      Premiums Written**





Gross
      premiums written increased $19.4 million, or 61.8%, to $50.8 million for the
      three months ended June 30, 2006, as compared to $31.4 million for the three
      months ended June 30, 2005. The following table denotes gross premiums written
      by major product line.


**Three
                  months ended June 30,****2006**
              ****
              **2005****Amount**
              
              **Percentage**
              
              **Amount**
              
              **Percentage**Automobile
              
              $
              660,317
              
              
              1.30
              %
              $
              3,829,250
              
              
              12.21
              %Homeowners'
              
              
              41,855,449
              
              
              82.47
              %
              
              21,163,250
              
              
              67.48
              %Commercial
                  liability
              
              
              8,236,906
              
              
              16.23
              %
              
              6,370,408
              
              
              20.31
              %Gross
                  written premiums
              
              $
              50,752,672
              
              
              100.00
              %
              $
              31,362,908
              
              
              100.00
              %




As
      noted
      above, the Company’s efforts to expand commercial general liability lines of
      insurance products are coming to fruition, as reflected by increased premiums
      written of $1.9 million, or 29.3 % to $8.2 million for the three months ended
      June 30, 2006, as compared to $6.4 million for the same three month period
      last
      year.





The
      following table sets forth the amounts and percentages of our gross premiums
      written in connection with our commercial general liability program by state:


**Three
                  months ended June 30,**
              ********
              ****
              **2006**
              ****
              **2005**
              ********
              ****
              **Amount**
              ****
              **Percentage**
              ****
              **Amount**
              ****
              **Percentage**StateFlorida
              
              $
              6,174,391
              
              
              75.1
              %
              $
              5,475,418
              
              
              85.9
              %Georgia
              
              
              234,864
              
              
              2.8
              %
              
              332,163
              
              
              5.3
              %Lousiania
              
              
              1,536,053
              
              
              18.6
              %
              
              562,827
              
              
              8.8
              %Texas
              
              
              291,598
              
              
              3.5
              %
              
              -
              
              
              0.0
              %Total
              
              $
              8,236,906
              
              
              100.0
              %
              $
              6,370,408
              
              
              100.0
              %





The
      Company’s sale of homeowners’ policies increased $20.7 million, or 98.1% to
      $41.8 million for the three months ended June 30, 2006, as compared to $21.1
      million in the same three months ended June 30, 2005. The increase in
      homeowners’ gross premiums written is primarily due to the Company’s rate
      increase and the addition of new customers.





The
      Company’s sale of auto insurance policies decreased by $3.2 million, or 82.8% to
      $0.7 million for the three months ended June 30, 2006, as compared to $3.8
      million in the same three months ended June 30, 2005.





**Gross
      Premiums Ceded**





Gross
      premiums ceded increased to a debit balance of ($3.4) million for the three
      months ended June 30, 2006, as compared to a debit balance of ($2.1) million
      for
      the three months ended June 30, 2005. The increase is associated with the change
      in our prepaid reinsurance premiums.





-30-




**21** **st** **Century Holding Company**





**Decrease
      in Prepaid Reinsurance Premiums**





The
      decrease in prepaid reinsurance premiums was $0.6 million for the three months
      ended June 30, 2006, as compared to $2.8 million for the three months ended
      June
      30, 2005. The decreased charge against written premium is primarily associated
      with the timing of our reinsurance payments measured against the term of the
      underling reinsurance policies.




**(Increase)
      in Unearned Premiums**





The
      (increase) in unearned premiums was ($18.0) million for the three months ended
      June 30, 2006, as compared to ($4.6) million for the three months ended June
      30,
      2005. The change was due to a $19.5 million increase in unearned homeowners’
insurance premiums, a $1.7 million increase in unearned commercial general
      liability premiums, a $3.2 million decrease in unearned automobile premiums,
      and
      a $0.1 million decrease in unearned mobile home insurance premiums. These
      changes reflect our continued growth along our homeowners’ and commercial
      general liability lines of business. For further discussion, see “Unearned
      Premiums” above.





**Finance
      Revenue**





Finance
      revenue decreased $0.4 million, or 47.1%, to $0.5 million for the three months
      ended June 30, 2006, as compared to $0.9 million for the three months ended
      June
      30, 2005. The decrease is primarily due to the sale in December 2004 of our
      assets related to our non-standard automobile insurance agency business in
      Florida and the finance revenue derived there-from.





**Managing
      General Agent Fees**





Managing
      general agent fees increased $0.1 million, or 16.6%, to $0.7 million for the
      three months ended June 30, 2006, as compared to $0.6 million for the three
      months ended June 30, 2005. The increase is associated with the number of
      policies issued during the respective periods.





**Net
      Investment Income**





Net
      investment income increased $0.7 million, or 77.0%, to $1.6 million for the
      three months ended June 30, 2006, as compared to $0.9 million for the three
      months ended June 30, 2005. The increase in investment income is primarily
      a
      result of the additional amounts of invested assets. Also affecting our net
      investment income was an increase in overall yield to 5.34% for the three months
      ended June 30, 2006 as compared to a yield of 4.44% for the three months ended
      June 30, 2005.





**Net
      Realized Investment Gains**





Net
      realized investment gains increased $0.2 million, or 125.8% to $0.3 million
      for
      the three months ended June 30, 2006, as compared to $0.1 million for the three
      months ended June 30, 2005. The table below depicts the gains by investment
      category.




**Net
                Realized Gains (Losses)**
            ********
            ****
            **Three
                Months Ended June 30,****2006**
            ****
            **2005**Fixed
                maturities:U.S.
                government obligations and agencies
            
            $
            (32,516
            )
            $
            -Corporate
                securities:Other
            
            
            -
            
            
            21,525Equity
                securities:Common
                stocks
            
            
            315,857
            
            
            103,985Total
                net realized gains
            
            $
            283,341
            
            $
            125,510


-31-


**21** **st** **Century Holding Company**


**Other
      Income**





Other
      income increased $0.3 million, or 200.8%, to $0.5 million for the three months
      ended June 30, 2006, as compared to $0.2 million for the three months ended
      June
      30, 2005. Major components of other income for the three months ended June
      30,
      2006 included approximately $153,000 in connection with our business
      interruption insurance proceeds stemming from Hurricane Wilma, $132,000 of
      commissions in connection with the national flood insurance program, $123,000
      of
      commissions in connection with the acquisition of our current reinsurance
      program and $115,000 in connection with the recognition of our gain on the
      sale
      of our Lauderdale Lakes property





**Loss
      and LAE**





Loss
      and
      LAE, our most significant expense, represent actual payments made and changes
      in
      estimated future payments to be made to or on behalf of our policyholders,
      including expenses required to settle claims and losses. We revise our estimates
      based on the results of analysis of estimated future payments to be made. This
      process assumes that past experience, adjusted for the effects of current
      developments and anticipated trends, is an appropriate basis for predicting
      future events





Loss
      and
      LAE decreased by $3.0 million, or 24.1%, to $9.3 million for the three months
      ended June 30, 2006, as compared to $12.3 million for the three months ended
      June 30, 2005. The decrease is attributable to the increase in loss and LAE
      incurred during the three months ended June 30, 2005 which was in connection
      with the adverse development associated with the 2004 hurricanes.





We
      continue to revise our estimates of the ultimate financial impact of past
      storms. The revisions to our estimates are based on our analysis of subsequent
      information that we receive regarding various factors, including: (i) per claim
      information; (ii) company and industry historical loss experience; (iii)
      legislative enactments, judicial decisions, legal developments in the awarding
      of damages, and (iv) trends in general economic conditions, including the
      effects of inflation. Management revises its estimates based on the results
      of
      its analysis. This process assumes that past experience, adjusted for the
      effects of current developments and anticipated trends, is an appropriate basis
      for estimating the ultimate settlement of all claims. There is no precise method
      for subsequently evaluating the impact of any specific factor on the adequacy
      of
      the reserves, because the eventual redundancy or deficiency is affected by
      multiple factors.





The
      table
      below reflects no effect to operations during the three months ended June 30,
      2006 from the four hurricanes that occurred in July, August, September and
      October of 2005. As to Hurricane Wilma, despite the increase in claim count
      during the three months ended June 30, 2006, gross losses and reinsurance
      recoveries have increased by $8.3 million due primarily to an increase in
      average severity per claim.


**2005
                  Hurricanes**
              
              **Claim
                  Count**
              ****
              **Gross
                  Losses**
              ****
              **Reinsurance
                  Recoveries**
              ****
              **Net
                  Losses**(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              2
              
              $
              -
              
              $
              -
              
              $
              -Katrina
                  (August 25)
              
              
              2
              
              
              -
              
              
              -
              
              
              -Rita
                  (September 20)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Wilma
                  (October 24)
              
              
              252
              
              
              8.3
              
              
              8.3
              
              
              -Total
                  Loss Estimate
              
              
              256
              
              $
              8.3
              
              $
              8.3
              
              $
              -





The
      following table reflects the changes during the three months ended June 30,
      2006
      in connection with the four hurricanes that occurred in August and September
      of
      2004. A charge of $1.1 million occurred during the three months ended June
      30,
      2006 in connection with these storms.


-32-


**21** **st** **Century Holding Company**


**2004
                  Hurricanes**
              
              **Claim**
                **Count**
              
              **Gross**
                **Losses**
              
              **Reinsurance**
                **Recoveries**
              
              **Net**
                **Losses**(Dollars
                  in millions)Charley
                  (August 13)
              
              
              3
              
              $
              1.3
              
              $
              1.3
              
              $
              -Frances
                  (September 3)
              
              
              3
              
              
              0.5
              
              
              0.5
              
              
              -Ivan
                  (September 14)
              
              
              -
              
              
              1.0
              
              
              -
              
              
              1.0Jeanne
                  (September 25)
              
              
              3
              
              
              0.1
              
              
              -
              
              
              0.1Total
                  Loss Estimate
              
              
              9
              
              $
              2.9
              
              $
              1.8
              
              $
              1.1





Our
      loss
      ratio, as determined in accordance with GAAP, for the three month period ended
      June 30, 2006 was 32.51% compared with 56.23% for the same period in 2005.
      The
      table below reflects the loss ratios by product line.




**Three
                  months ended June 30,****2006**
              ****
              **2005**Automobile
              
              
              97.21
              %
              
              71.91
              %Homeowners'
              
              
              25.91
              %
              
              62.14
              %Commercial
                  liability
              
              
              13.11
              %
              
              20.79
              %All
                  lines
              
              
              32.51
              %
              
              56.23
              %





For
      further discussion, see the Note 7 to the Consolidated Financial Statements
      included under Part I, Item 1, of this Report.





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased a modest $0.1 million, or 4.6%, to $2.3
      million for the three months ended June 30, 2006, as compared to $2.2 million
      for the three months ended June 30, 2005.





**Salaries
      and Wages**





Salaries
      and wages increased $0.2 million, or 12.2%, to $1.8 million for the three months
      ended June 30, 2006, as compared to $1.6 million for the three months ended
      June
      30, 2005. As a result of adopting SFAS No. 123R on January 1, 2006, salaries
      and
      wages for the three months ended June 30, 2006 increased $123,000, representing
      approximately 64.0% of the 2006 second quarter’s overall increase. The remaining
      increase in salaries and wages was due in part to the increased labor costs
      in
      connection with additional claims loss adjusters added to our staff. We believe
      that salaries and wages are consistent with retaining quality management and
      increased premium production.





**Interest
      Expense**





Interest
      expense decreased $0.2 million, or 52.2%, to $0.2 million for the three months
      ended June 30, 2006, as compared to $0.4 million for the three months ended
      June
      30, 2005. The change is primarily attributed to our decreased reliance upon
      outside sources for financing our contracts receivable.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $0.9 million, or 28.1%, to
      $4.1 million for the three months ended June 30, 2006, as compared to $3.2
      million for the three months ended June 30, 2005. Policy acquisition costs,
      net
      of amortization, consists of the actual policy acquisition costs, including
      commissions, payroll and premium taxes, less commissions earned on reinsurance
      ceded and policy fees earned.





**Provision
      for Income Tax Expense**





The
      provision for income tax expense for continuing and discontinued operations
      increased $3.8 million, or 196.4%, to $5.7 million for the three months ended
      June 30, 2006, as compared to $1.9 million for the three months ended June
      30,
      2005. The effective rate for income tax expense is 39.1% for the three months
      ended June 30, 2006, as compared to 38.9% for the same three month period in
      2005.


-33-


**21** **st** **Century Holding Company**


As
      a
      result of the foregoing, the Company’s net income for the three months ended
      June 30, 2006 was $8.9 million compared to net income of $3.0 million for the
      three months ended June 30, 2005.





**Results
      of Operations**


**Six
      Months Ended June 30, 2006 as Compared to Six Months Ended June 30,
      2005**





**Gross
      Premiums Written**





Gross
      premiums written increased $24.9 million, or 40.5%, to $86.4 million for the
      six
      months ended June 30, 2006, as compared to $61.5 million for the six months
      ended June 30, 2005. The following table denotes gross premiums written by
      major
      product line.


**Six
                  months ended June 30,**
              ********
              ****
              **2006**
              ****
              **2005****Amount**
              
              **Percentage**
              
              **Amount**
              
              **Percentage**Automobile
              
              $
              4,946,651
              
              
              5.73
              %
              $
              12,847,495
              
              
              20.90
              %Homeowners'
              
              
              64,957,975
              
              
              75.21
              %
              
              37,086,287
              
              
              60.35
              %Commercial
                  liability
              
              
              16,457,119
              
              
              19.06
              %
              
              11,526,170
              
              
              18.75
              %Gross
                  written premiums
              
              $
              86,361,745
              
              
              100.00
              %
              $
              61,459,952
              
              
              100.00
              %




As
      noted
      above, the Company’s efforts to expand commercial general liability lines of
      insurance products are coming to fruition, as reflected by increased premiums
      written of $4.9 million, or 42.8 % to $16.5 million for the six months ended
      June 30, 2006, as compared to $11.5 million for the same six month period last
      year.





The
      following table sets forth the amounts and percentages of our gross premiums
      written in connection with our commercial general liability program by state:




**Six
                  months ended June 30,**
              ********
              ****
              **2006**
              ****
              **2005**
              ********
              ****
              **Amount**
              ****
              **Percentage**
              ****
              **Amount**
              ****
              **Percentage**(Dollars
                  in Thousands)**State**Florida
              
              $
              12,741
              
              
              77.5
              %
              $
              9,994
              
              
              86.6
              %Georgia
              
              
              570
              
              
              3.4
              %
              
              537
              
              
              4.8
              %Lousiania
              
              
              2,854
              
              
              17.3
              %
              
              995
              
              
              8.6
              %Texas
              
              
              292
              
              
              1.8
              %
              
              -
              
              
              0.0
              %Total
              
              $
              16,457
              
              
              100.0
              %
              $
              11,526
              
              
              100.0
              %





The
      Company’s sale of homeowners’ policies increased $27.9 million, or 43.1%, to
      $64.7 million for the six months ended June 30, 2006, as compared to $36.8
      million in the same six months ended June 30, 2005. The increase in homeowners’
gross premiums written is primarily due to the Company’s rate increase and the
      addition of new customers.





The
      Company’s sale of auto insurance policies decreased by $7.9 million, or 61.5%,
      to $4.9 million for the six months ended June 30, 2006, as compared to $12.8
      million in the same six months ended June 30, 2005.





**Gross
      Premiums Ceded**





Gross
      premiums ceded decreased to a debit balance of ($3.4) million for the six months
      ended June 30, 2006, as compared to a debit balance of ($5.0) million for the
      six months ended June 30, 2005. The decrease is associated with the change
      in
      our prepaid reinsurance premiums.




-34-


**21** **st** **Century Holding Company**


Decrease
        in Prepaid Reinsurance Premiums
 
 The
        decrease in prepaid reinsurance premiums was $9.3 million for the six months
        ended June 30, 2006, as compared to $5.5 million for the six months ended
        June
        30, 2005. The increased charge against written premium is primarily associated
        with the timing of our reinsurance payments measured against the term of
        the
        underling reinsurance policies.


**(Increase)
      in Unearned Premiums**





The
      (increase) in unearned premiums was ($23.2) million for the six months ended
      June 30, 2006, as compared to ($10.3) million for the six months ended June
      30,
      2005. The change was due to a $22.6 million increase in unearned homeowners’
insurance premiums, a $4.1 million increase in unearned commercial general
      liability premiums, a $3.5 million decrease in unearned automobile premiums,
      and
      a $0.1 million decrease in unearned mobile home insurance premiums. These
      changes reflect our continued growth along our homeowners’ and commercial
      general liability lines of business. For further discussion, see “Unearned
      Premiums” above.





**Finance
      Revenue**





Finance
      revenue decreased $0.9 million, or 44.6%, to $1.1 million for the six months
      ended June 30, 2006, as compared to $2.0 million for the six months ended June
      30, 2005. The decrease is primarily due to the sale in December 2004 of our
      assets related to our non-standard automobile insurance agency business in
      Florida and the finance revenue derived there from.





**Managing
      General Agent Fees**





Managing
      general agent fees increased $0.1 million, or 10.2%, to $1.4 million for the
      six
      months ended June 30, 2006, as compared to $1.3 million for the six months
      ended
      June 30, 2005. The increase is associated with the number of policies issued
      during the respective periods.





**Net
      Investment Income**





Net
      investment income increased $1.0 million, or 55.7%, to $2.8 million for the
      six
      months ended June 30, 2006, as compared to $1.8 million for the six months
      ended
      June 30, 2005. The increase in investment income is primarily a result of the
      additional amounts of invested assets. Also affecting our net investment income
      was an increase in overall yield to 4.8% for the six months ended June 30,
      2006
      as compared to a yield of 4.28% for the six months ending June 30, 2005.





**Net
      Realized Investment Gains**





Net
      realized investment gains increased $0.2 million, or 68.2% to $0.5 million
      for
      the six months ended June 30, 2006, as compared to $0.3 million for the six
      months ended June 30, 2005. The table below depicts the gains by investment
      category.




**Net
                  Realized Gains (Losses)**
                  **Six
                    Months Ended June 30,**
              ********
              ****
              **2006**
              ****
              **2005**Fixed
                  maturities:U.S.
                  government obligations and agencies
              
              $
              (32,516
              )
              $
              (131,066
              )Obligations
                  of states and political subdivisions
              
              
              75
              
              
              (43
              )(32,441
              )
              
              (131,109
              )Corporate
                  securities:Other
              
              
              (33,816
              )
              
              31,521Equity
                  securities:Common
                  stocks
              
              
              545,809
              
              
              384,621Total
                  net realized gains
              
              $
              479,552
              
              $
              285,033


-35-




**21** **st** **Century Holding Company**





**Other
      Income**





Other
      income increased $0.7 million, or 173.9%, to $1.1 million for the six months
      ended June 30, 2006, as compared to $0.4 million for the six months ended June
      30, 2005. Major components of other income for the six months ended June 30,
      2006 included approximately $270,000 in connection with the recognition of
      our
      gain on the sale of our Lauderdale Lakes property, $247,000 of commissions
      in
      connection with the acquisition of our current reinsurance program, $159,000
      of
      commissions in connection with the national flood insurance program, $153,000
      in
      connection with our business interruption insurance proceeds stemming from
      Hurricane Wilma and $119,000 of policy fees in connection with our commercial
      general liability program.





**Loss
      and LAE**





Loss
      and
      LAE, our most significant expense, represent actual payments made and changes
      in
      estimated future payments to be made to or on behalf of our policyholders,
      including expenses required to settle claims and losses. We revise our estimates
      based on the results of analysis of estimated future payments to be made. This
      process assumes that past experience, adjusted for the effects of current
      developments and anticipated trends, is an appropriate basis for predicting
      future events





Loss
      and
      LAE decreased by $2.3 million, or 12.0%, to $16.9 million for the six months
      ended June 30, 2006, as compared to $19.2 million for the six months ended
      June
      30, 2005. The decrease is attributable to the increase in loss and LAE incurred
      during the six months ended June 30, 2005 which was in connection with the
      adverse development associated with the 2004 hurricanes.





We
      continue to revise our estimates of the ultimate financial impact of past
      storms. The revisions to our estimates are based on our analysis of subsequent
      information that we receive regarding various factors, including: (i) per claim
      information; (ii) company and industry historical loss experience; (iii)
      legislative enactments, judicial decisions, legal developments in the awarding
      of damages, and (iv) trends in general economic conditions, including the
      effects of inflation. Management revises its estimates based on the results
      of
      its analysis. This process assumes that past experience, adjusted for the
      effects of current developments and anticipated trends, is an appropriate basis
      for estimating the ultimate settlement of all claims. There is no precise method
      for subsequently evaluating the impact of any specific factor on the adequacy
      of
      the reserves, because the eventual redundancy or deficiency is affected by
      multiple factors.





The
      table
      below reflects no effect to operations during the six months ended June 30,
      2006
      from the four hurricanes that occurred in July, August, September and October
      of
      2005. As to Hurricane Wilma, despite the increase in claim count during the
      six
      months ended June 30, 2006, gross losses and reinsurance recoveries have
      increased by $8.1 million due primarily to an increase in average severity
      per
      claim.




**2005
                  Hurricanes**
              
              **Claim**
                **Count**
              ****
              **Gross**
                **Losses**
              ****
              **Reinsurance**
                **Recoveries**
              ****
              **Net**
                **Losses**(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -Katrina
                  (August 25)
              
              
              20
              
              
              -
              
              
              -
              
              
              -Rita
                  (September 20)
              
              
              (5
              )
              
              -
              
              
              -
              
              
              -Wilma
                  (October 24)
              
              
              1,251
              
              
              8.1
              
              
              8.1
              
              
              -Total
                  Loss Estimate
              
              
              1,266
              
              $
              8.1
              
              $
              8.1
              
              $
              -





The
      following table reflects the changes during the six months ended June 30, 2006
      in connection with the four hurricanes that occurred in August and September
      of
      2004. A charge of $1.2 million occurred during the six months ended June 30,
      2006 in connection with these storms.


-36-


**21** **st** **Century Holding Company**


**2004
                  Hurricanes**
              
              **Claim**
                **Count**
              ****
              **Gross**
                **Losses**
              ****
              **Reinsurance**
                **Recoveries**
              ****
              **Net**
                **Losses**(Dollars
                  in millions)Charley
                  (August 13)
              
              
              5
              
              $
              1.3
              
              $
              1.3
              
              $
              -Frances
                  (September 3)
              
              
              3
              
              
              0.5
              
              
              0.5
              
              
              -Ivan
                  (September 14)
              
              
              (4
              )
              
              1.0
              
              
              -
              
              
              1.0Jeanne
                  (September 25)
              
              
              12
              
              
              0.2
              
              
              -
              
              
              0.2Total
                  Loss Estimate
              
              
              16
              
              $
              3.0
              
              $
              1.8
              
              $
              1.2




Our
      loss
      ratio, as determined in accordance with GAAP, for the six month period ended
      June 30, 2006 was 33.46% compared with 47.19% for the same period in 2005.
      The
      table below reflects the loss ratios by product line.




**Six
                  months ended June 30,**
              ********
              ****
              **2006**
              ****
              **2005**Automobile
              
              
              82.56
              %
              
              61.92
              %Homeowners'
              
              
              26.04
              %
              
              47.93
              %Commercial
                  liability
              
              
              17.60
              %
              
              23.04
              %All
                  lines
              
              
              33.46
              %
              
              47.19
              %





For
      further discussion, see the Note 7 to the Consolidated Financial Statements
      included under Part I, Item 1, of this Report.





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased $0.8 million, or 21.7%, to $4.6 million
      for
      the six months ended June 30, 2006, as compared to $3.8 million for the six
      months ended June 30, 2005. The change is primarily due to premium tax expense
      which increased $0.7 million, or 91.3%, to $1.5 million for the six months
      ended
      June 30, 2006, as compared to $0.8 million for the six months ended June 30,
      2005. Premium tax expense is directly correlated to written premium, which
      experienced an increase in 2006.





**Salaries
      and Wages**





Salaries
      and wages increased $0.5 million, or 14.3%, to $3.6 million for the six months
      ended June 30, 2006, as compared to $3.2 million for the six months ended June
      30, 2005. As a result of adopting SFAS No. 123R on January 1, 2006, salaries
      and
      wages for the six months ended June 30, 2006 increased $280,000, representing
      approximately 62.0% of the 2006 overall increase. The remaining increase in
      salaries and wages was due in part to the increased labor costs in connection
      with additional claims loss adjusters added to our staff. We believe that
      salaries and wages are consistent with retaining quality management and
      increased premium production.





**Interest
      Expense**





Interest
      expense decreased $0.4 million, or 49.3%, to $0.4 million for the six months
      ended June 30, 2006, as compared to $0.8 million for the six months ended June
      30, 2005. The change is primarily attributed to our decreased reliance upon
      outside sources for financing our contracts receivable.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $1.0 million, or 14.2%, to
      $8.0 million for the six months ended June 30, 2006, as compared to $7.0 million
      for the six months ended June 30, 2005. Policy acquisition costs, net of
      amortization, consists of the actual policy acquisition costs, including
      commissions, payroll and premium taxes, less commissions earned on reinsurance
      ceded and policy fees earned.





**Provision
      for Income Tax Expense**





The
      provision for income tax expense for continuing and discontinued operations
      increased $3.7 million, or 69.7%, to $8.9 million for the six months ended
      June
      30, 2006, as compared to $5.3 million for the six months ended June 30, 2005.
      The effective rate for income tax expense is 37.5% for the six months ended
      June
      30, 2006, as compared to 37.4% for the same six month period in
      2005.


-37-


**21** **st** **Century Holding Company**





As
      a
      result of the foregoing, the Company’s net income for the six months ended June
      30, 2006 was $14.9 million compared to net income of $8.8 million for the six
      months ended June 30, 2005.





**Liquidity
      and Capital Resources**





For
      the
      six months ended June 30, 2006, our primary sources
      of capital were
      revenues generated from operations, including decreased amounts due from
      reinsurers, net, increased unearned premiums, decreased prepaid reinsurance
      premiums and increased income taxes payable. Additionally, operational sources
      of capital came from decreased finance contracts receivable, decreased other
      assets, increased accounts payable and accrued expenses, increased premium
      deposits, net realized investment gains, non-cash compensation, depreciation
      and
      amortization, common stock issued for interest on notes, an increase in the
      provision for credit losses and increased funds held under reinsurance treaties.
      Also contributing to our liquidity were proceeds from exercised warrants, the
      sale of assets, exercised employee stock options, and a tax benefit related
      to
      non-cash compensation. Because we are a holding company, we are largely
      dependent upon fees and commissions from our subsidiaries for cash flow.





For
      the
      six months ended June 30, 2006, operations provided net operating cash flow
      of
      $49.3 million, as compared to $13.9 million for the six months ended June 30,
      2005.





For
      the
      six months ended June 30, 2006, operations generated $181.9 million of gross
      cash flow, due to a $120.5 million decrease in amounts due from reinsurers,
      net,
      a $23.2 million increase in unearned premiums, a $9.3 million decrease in
      prepaid reinsurance premiums, a $4.7 million increase in income taxes payable,
      a
      $3.5 million decrease in finance contracts receivable, a $1.9 million decrease
      in other assets, a $1.5 million increase in accounts payable and accrued
      expenses and a $1.3 million increase in premium deposits. To a much less
      significant extent, operations generated additional sources of cash via $0.5
      million of net realized investment gains, $0.3 million of non-cash compensation,
      $0.2 million in depreciation and amortization, $0.1 million of common stock
      issued for interest on notes and a $0.1 million increase in the provision for
      credit losses; all in conjunction with net income of $14.9 million.





For
      the
      six months ended June 30, 2006, operations used $132.6 million of gross cash
      flow primarily due to a $122.7 million decrease in unpaid losses and LAE, a
      $2.8
      million increase in policy acquisition costs, net of amortization, and a $2.7
      million increase in premiums receivable, a $2.3 million increase in deferred
      income tax expense, a $1.9 million decrease in bank overdrafts, $0.1 million
      in
      amortization of investment discount, net, and a $0.1 million decrease in the
      provision for uncollectible premiums receivable.





Subject
      to catastrophic occurrences, net operating cash flow is currently expected
      to be
      positive in both the short-term and the reasonably foreseeable future.





For
      the
      six months ended June 30, 2006, net investing activities used $48.9 million,
      as
      compared to providing $1.7 million for the six months ended June 30, 2005.
      Our
      available for sale investment portfolio is highly liquid as it consists entirely
      of readily marketable securities.





For
      the
      six months ended June 30, 2006, investing activities generated $192.2 million
      and used $226.5 million from the maturity several times over of our very short
      municipal portfolio. An additional use of cash flow from investing activities
      was a $17.0 million receivable for investments sold. Sources of cash flow from
      investing activities included the sale of property with net book value of $2.7
      million, for which we received $5.6 million in proceeds and recorded a $2.9
      million deferred gain. The Company also used $0.4 million for the purchase
      of
      equipment.





For
      the
      six months ended June 30, 2006, net financing activities provided $3.5 million,
      as compared to using $3.1 million for the six months ended June 30, 2005. For
      the six months ended June 30, 2006, the sources of cash in connection with
      financing activities included $6.1 million from the exercise of warrants, a
      $1.7
      million tax benefit related to non-cash compensation and $1.4 million from
      the
      exercise of stock options. The uses of cash in connection with financing
      activities included $2.0 million for the acquisition of common stock, $1.9
      million in dividends paid, $1.7 million for the regularly scheduled principal
      and interest payments on our Notes and $0.2 million in connection with the
      reduction of our outstanding revolving credit.


-38-


**21** **st** **Century Holding Company**


Federated
      Premium’s operations are partially funded by the revolving loan agreement with
      FlatIron. The effective interest rate on this line of credit, based on our
      average outstanding borrowings under the Revolving Agreement, was 14.40% and
      9.39% for the six months ended June 30, 2006 and 2005, respectively. Interest
      expense on this revolving credit line totaled approximately $7,100 and $64,200
      for the six months ended June 30, 2006 and 2005, respectively.





Outstanding
      borrowings under the Revolving Agreement were nothing and approximately $200,000
      as of June 30, 2006 and December 31, 2005, respectively.





As
      an
      alternative to premium finance, we offer direct billing in connection with
      our
      automobile program, where the insurance company accepts from the insured, as
      a
      receivable, a promise to pay the premium, as opposed to requiring the full
      amount of the policy, either directly from the insured or from a premium finance
      company. The advantage of direct billing a policyholder by the insurance company
      is that we are not reliant on our credit facility, but remain able to charge
      and
      collect interest from the policyholder.





We
      believe that our current capital resources, together with cash flow from
      operations, will be sufficient to meet currently anticipated working capital
      requirements. There can be no assurances, however, that such will be the case.





Federated
      National’s and American Vehicle’s statutory capital surplus levels as of June
      30, 2006 were approximately $22.3 million and $23.0 million, respectively,
      and
      their statutory net income for the six months ended June 30, 2006 were $9.9
      million and $3.1 million, respectively.





As
      of
      June 30, 2006, we did not have any relationships with unconsolidated entities
      or
      financial partnerships, such as entities often referred to as “structured
      finance” or “special purpose” entities, which were established for the purpose
      of facilitating off-balance-sheet arrangements or other contractually narrow
      or
      limited purposes. As such, management believes that we currently are not exposed
      to any financing, liquidity, market or credit risks that could arise if we
      had
      engaged in transactions of that type requiring disclosure herein.





**Impact
      of Inflation and Changing Prices**





The
      consolidated financial statements and related data presented herein have been
      prepared in accordance with GAAP, which requires the measurement of financial
      position and operating results in terms of historical dollars without
      considering changes in the relative purchasing power of money over time due
      to
      inflation. The primary assets and liabilities of the Company are monetary in
      nature. As a result, interest rates have a more significant impact on the
      Company's performance than the effects of general levels of inflation. Interest
      rates do not necessarily move in the same direction or with the same magnitude
      as the inflationary effect on the cost of paying losses and LAE.





Insurance
      premiums are established before the Company knows the amount of loss and LAE
      and
      the extent to which inflation may affect such expenses. Consequently, we attempt
      to anticipate the future impact of inflation when establishing rate levels.
      While we attempt to charge adequate premiums, we may be limited in raising
      our
      premium levels for competitive and regulatory reasons. Inflation also affects
      the market value of our investment portfolio and the investment rate of return.
      Any future economic changes which result in prolonged and increased levels
      of
      inflation could cause increases in the dollar amount of incurred loss and LAE
      and thereby materially adversely affect future liability
      requirements.





**Item
      3**





**Quantitative
      and Qualitative Disclosures about Market Risk**





Information
      related to quantitative and qualitative disclosures about market risk was
      included under Item 7a, “Quantitative and Qualitative Disclosures about Market
      Risk”, in our Annual Report on Form 10-K for the year ended December 31, 2005.
      No material changes have occurred in market risk since this information was
      disclosed except as discussed below.





Our
      investment portfolio is available for sale and is carried at fair value, except
      for that portion deemed as held to maturity. Gains that represent securities
      with a fair value in excess of amortized cost, and losses (amortized cost is
      in
      excess of fair value) that are deemed temporary by management are recorded
      in
      shareholders’ equity in accumulated other comprehensive income. Losses that are
      deemed other than temporary by management are recorded as net realized losses
      in
      the consolidated statement of operations. A summary of the investment portfolio
      as of June 30, 2006 follows:


-39-


**21** **st** **Century Holding Company**


**Unrealized****Amortized
                  Cost**
              ****
              **Fair
                  Value**
              ****
              **Gain
                  (Loss)**Fixed
                  maturities:U.S.
                  government obligations and agencies
              
              $
              69,361,984
              
              
              59.34
              %
              $
              68,051,017
              
              
              59.66
              %
              $
              (1,310,967
              )Obligations
                  of states and political subdivisions
              
              
              17,589,373
              
              
              15.04
              %
              
              17,261,187
              
              
              15.12
              %
              
              (328,186
              )86,951,357
              
              
              74.38
              %
              
              85,312,204
              
              
              74.78
              %
              
              (1,639,153
              )Corporate
                  securities:Communications
              
              
              256,924
              
              
              0.22
              %
              
              260,325
              
              
              0.22
              %
              
              3,401Financial
              
              
              2,000,000
              
              
              1.71
              %
              
              1,918,335
              
              
              1.69
              %
              
              (81,665
              )Other
              
              
              11,907,451
              
              
              10.19
              %
              
              11,886,559
              
              
              10.42
              %
              
              (20,892
              )14,164,375
              
              
              12.12
              %
              
              14,065,219
              
              
              12.33
              %
              
              (99,156
              )Equity
                  securities:Common
                  stocks
              
              
              15,779,144
              
              
              13.50
              %
              
              14,699,165
              
              
              12.89
              %
              
              (1,079,979
              )15,779,144
              
              
              13.50
              %
              
              14,699,165
              
              
              12.89
              %
              
              (1,079,979
              )Total
                  fixed, corporate and equity securities
              
              $
              116,894,876
              
              
              100.00
              %
              $
              114,076,588
              
              
              100.00
              %
              $
              (2,818,288
              )





As
      of
      June 30, 2006, there were no concentrations greater than 5% of total investments
      in any single investment other than United States government
      obligations.





**Item
      4**





**Controls
      and Procedures**





**Evaluation
      of Disclosure Controls and Procedures** An
      evaluation of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures was carried out as of June 30, 2006 by the
      Company under the supervision and with the participation of the Company’s
      management, including the Chief Executive Officer and Chief Financial Officer.
      Based on that evaluation, the Chief Executive Officer and Chief Financial
      Officer concluded that the Company’s disclosure controls and procedures have
      been designed and are being operated in a manner that provides reasonable
      assurance that the information required to be disclosed by the Company in
      reports filed under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms. Nevertheless, the controls system, no matter how well designed and
      operated, cannot provide absolute assurance that the objectives of the controls
      system are met, and no evaluation of controls can provide absolute assurance
      that all control issues and instances of fraud, if any, within a company have
      been detected.





**Changes
      in Internal Controls** Subsequent
      to the date of the most recent evaluation of the Company’s internal controls,
      there were no significant changes in the Company’s internal controls or in other
      factors that could significantly affect the internal controls, including any
      corrective actions with regard to significant deficiencies and material
      weaknesses.


-40-


**21** **st** **Century Holding Company**


**Part
      II: OTHER INFORMATION**





**Item
      1**





**Legal
      Proceedings**





We
      are
      involved in various claims and legal actions arising in the ordinary course
      of
      business. Specifically, we are a
      party to approximately fifteen lawsuits in connection with coverage disputes
      associated with claims resulting from Hurricanes Ivan and Jeanne. Hurricane
      Ivan
      occurred on September 14, 2004. Hurricane Jeanne occurred on September 25,
      2004.





The
      outcome of the pending litigation in connection with these cases remains unclear
      but could have a significant negative impact on current operations once
      additional uncertainties become a matter of fact. These uncertainties involve
      the outcome of other cases involving similarly styled coverage issues involving
      other property insurers in various stages of discovery. Due to these
      uncertainties management recognizes the potentially negative outcome of this
      pending litigation is reasonably possible, but the ultimate financial impact
      is
      currently undeterminable.




In
      2000
      and 2001 respectively, two class action lawsuits were filed against an
      unaffiliated insurance company for which our subsidiary, Assurance MGA, was
      the
      managing general agent. These lawsuits were seeking compensatory damages in
      an
      undisclosed amount based on allegations of unfair practices involving the
      computation of interest due the policyholder in connection with automobile
      premium refunds. The unaffiliated company has contested these lawsuits over
      the
      last several years. Negotiations relative to this matter have been ongoing
      and
      in July 2005 the parties reached an agreement wherein we have paid $240,000
      to
      resolve the underlying actions in these suits subject to our contractual duties
      with respect to the unaffiliated company. We believe that we will be successful
      in our efforts to enjoin others to participate in this settlement; however
      we
      are unable to quantify the participation of others at this time. Accordingly,
      we
      charged against second quarter 2005 earnings $240,000 for this
      action.





In
      the
      opinion of management, the ultimate disposition of these matters will not have
      a
      material adverse effect on our consolidated financial position, results of
      operations, or liquidity.





**Item
      1A**





**Risk
      Factors**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31, 2005, which could materially
      affect our business, financial condition or future results. The risks described
      in our Annual Report on Form 10-K are not the only risks facing our Company.
      Additional risks and uncertainties not currently known to us or that we
      currently deem to be immaterial also may materially adversely affect our
      business, financial condition and/or operating results. The most significant
      of
      these risks include weather related conditions.





**Item
      2**





**(a)
      Unregistered Sales of Equity Securities and Use of
      Proceeds**





During
      the six months ended June 30, 2006, nine warrant holders exercised their
      warrants to acquire an aggregate of 475,330 shares of our common stock. The
      exercise price of the Warrants was approximately $18.70 per share. The names
      of
      the warrant holders, dates of exercise, number of shares purchased, exercise
      price and proceeds received by us are listed below.


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**21** **st** **Century Holding Company**


**Date
                      of**
                  
                  **Date
                      of**
                  
                  **Number
                      of**
                  
                  **Exercise**
                  
                  **Proceeds****Name**
                  
                  **Grant**
                  
                  **Exercise**
                  
                  **Shares**
                  
                  **Price**
                  
                  **Received**WhiteBox
                      Convertible Arbitrage Partners, LP
                  
                  
                  September
                      30, 2004
                  
                  
                  January
                      27, 2006
                  
                  
                  224,619
                  
                  
                  12.750
                  
                  
                  2,863,892Omega
                      Overseas Partners Ltd.
                  
                  
                  July
                      31, 2003
                  
                  
                  January
                      20, 2006
                  
                  
                  82,500
                  
                  
                  12.744
                  
                  
                  1,051,380Hillson
                      Partners LP
                  
                  
                  September
                      30, 2004
                  
                  
                  January
                      25, 2006
                  
                  
                  78,431
                  
                  
                  12.750
                  
                  
                  999,995Pandora
                      Select Partners, LP
                  
                  
                  September
                      30, 2004
                  
                  
                  January
                      27, 2006
                  
                  
                  45,131
                  
                  
                  12.750
                  
                  
                  575,420Whitebox
                      Intermarket Partners LP
                  
                  
                  September
                      30, 2004
                  
                  
                  January
                      27, 2006
                  
                  
                  33,824
                  
                  
                  12.750
                  
                  
                  431,256Chris
                      Pellegrini
                  
                  
                  July
                      31, 2003
                  
                  
                  January
                      20, 2006
                  
                  
                  2,250
                  
                  
                  12.744
                  
                  
                  28,674WhiteBox
                      Convertible Arbitrage Partners, LP
                  
                  
                  September
                      30, 2004
                  
                  
                  January
                      18, 2006
                  
                  
                  1,000
                  
                  
                  12.750
                  
                  
                  12,750Cedric
                      Fricke
                  
                  
                  July
                      31, 2003
                  
                  
                  May
                      17, 2006
                  
                  
                  1,500
                  
                  
                  12.744
                  
                  
                  19,116Cedric
                      Fricke
                  
                  
                  July
                      31, 2003
                  
                  
                  June
                      12, 2006
                  
                  
                  6,000
                  
                  
                  12.744
                  
                  
                  76,464Youg
                      & Usha Ganju
                  
                  
                  July
                      31, 2003
                  
                  
                  June
                      16, 2006
                  
                  
                  75
                  
                  
                  12.744
                  
                  
                  956





Each
      of
      the warrant holders paid for their shares with cash. Each of these warrant
      holders exercised their warrants in reliance upon Section 4(2) of the Securities
      Act of 1933, because each of these holders was knowledgeable, sophisticated
      and
      had access to comprehensive information about us. We placed legends on the
      certificates stating that the securities were not registered under the
      Securities Act and set forth the restrictions on their transferability and
      sale.





During
      the six months ended June 30, 2006, thirty-seven persons exercised options
      to
      acquire an aggregate of 181,600 shares of the Company's common stock with
      proceeds to the Company aggregating to approximately $3.2 million. The
      individuals exercising options consists of thirty-two employees, the Chief
      Executive Officer and his wife, the former Chief Operating Officer of the
      Company and two franchise owners. All of the option holders paid cash for these
      shares. The shares underlying the options were registered on registration
      statements on Form S-8 and the shares issued to these persons do not contain
      any
      restrictive legends.





**(b)
      None**





**(c)
      Market for the Company’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities**





On
      May
      16, 2006, the Company’s Board of Directors authorized, pursuant to Section 12 of
      the Securities Exchange Act, the repurchase of up to $2.0 million of its common
      stock. Acting upon the Board’s authorization, the Company repurchased, for
      approximately $2.0 million, 130,461 shares for an average price of $15.34
      between May 16, 2006 and May 24, 2006. The table below provides, in tabular
      format, information about our purchase of equity securities that are registered
      by the Company.




**Period**
              ****
              **Total
                  Number of SharesPurchased**
              ****
              **Average
                  Price Paidper
                  Share**
              ****
              **Total
                  Number of Shares Purchased as Part of Publicly AnnouncedPlans
                  or Programs**
              ****
              **Maximum
                  Number of Shares that May Yet BePurchased
                  Under the Plan**April-06
              
              
              None
              
              
              None
              
              
              None
              
              
              NoneMay-06
              
              $
              130,461
              
              $
              15.34
              
              $
              130,461
              
              
              NoneJune-06
              
              
              None
              
              
              None
              
              
              None
              
              
              None




**Item
      3**





**Defaults
      upon Senior Securities**





None


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**21** **st** **Century Holding Company**





**Item
      4**





**Submission
      of Matters to a Vote of Security Holders**





Our
      annual meeting of shareholders was held on June 6, 2006. Proxies for the meeting
      were solicited pursuant to Regulation 14A of the Securities Exchange Act of
      1934
      and there was no solicitation in opposition to that of management.





All
      of
      management’s nominees for directors as listed in the proxy statement were
      elected. Bruce Simberg, Richard W. Wilcox, Jr. and Peter J. Prygelski were
      elected as Class II directors to serve until the Annual Shareholder’s Meeting to
      be held in 2009 or until their successors are elected and qualified. The number
      of votes cast for each nominee is as follows:





**Shares
                Voted“FOR”**
            ****
            **Votes**
              **Withheld**Bruce
                Simberg
            
            
            5,543,937
            
            
            84,127Richard
                W. Wilcox, Jr.
            
            
            5,540,744
            
            
            87,310Peter
                J. Prygelski
            
            
            5,544,319
            
            
            83,735







The
      proposal to approve the appointment of DeMeo Young McGrath as the Company’s
      independent auditors for the fiscal year ended December 31, 2006, was ratified
      by the following votes:





**Shares
                Voted**
              **“FOR”**
            ****
            **Shares
                Voted**
              **“AGAINST”**
            ****
            **Shares**
              **“ABSTAINING”**
            ****
            **Broker**
              **“NON-VOTE”**5,594,858
            
            
            27,160
            
            
            6,036
            
            
            0




**Item
      5**





**Other
      Information**





None





**Item
      6**





**Exhibits**





10.1
            American
                Vehicle Insurance Company 100% Quota Share Reinsurance Agreement
                with
                Republic Underwriters Insurance Company for a portion of its business
                and
                a portion of the business assumed by it from its affiliated member
                companies executed on April 15, 2006 and became effective April 15,
                2006
                (incorporated by reference to Exhibit 10.37 in the Company’s current
                report Form 8-K held with the Securities and Exchange Commission
                (“SEC”)
                on April 19, 2006).





10.2
            Reimbursement
                Contract between Federated National Insurance Company and The State
                Board
                of Administration of Florida (SBA) which administers the Florida
                Hurricane
                Catastrophe Fund (FHCF), effective June 1, 2006 (incorporated by
                reference
                to Exhibit 10.38 in the Company’s current report on Form 8-K held with the
                SEC on June 2, 2006).





10.39
            Addendum
                No. 1 to the Reimbursement Contract between Federated National Insurance
                Company and The State Board of Administration of Florida (SBA) which
                administers the Florida Hurricane Catastrophe Fund (FHCF), effective
                June
                1, 2006 (incorporated by reference to Exhibit 10.39 in the Company’s
                current report on Form 8-K held with the SEC on June 2,
                2006).





10.4
            Addendum
                No. 2 to the Reimbursement Contract between Federated National Insurance
                Company and The State Board of Administration of Florida (SBA) which
                administers the Florida Hurricane Catastrophe Fund (FHCF), effective
                June
                1, 2006 (incorporated by reference to Exhibit 10.40 in the Company’s
                current report on Form 8-K held with the SEC on June 2,
                2006).


-43-


**21** **st** **Century Holding Company**


31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act. *****




31.2
            Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act.*****




32.1
            Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act.*****




32.2
            Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act.*****





* **** filed
      herewith


-44-




**21** **st** **Century Holding Company**


**Signatures**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned hereunto
      duly authorized.


**21**st****CENTURY HOLDING COMPANY****By:
            */s/
              Edward J. Lawson*Edward
              J. Lawson, President, Chief Executive Officer and
              Chairman of the Board  */s/
              James G. Jennings, III*James
              G. Jennings III, Chief Financial
              Officer




Date:
      August 11, 2006




-45-