**UNITED
      STATES**


**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, 2007**


**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 of
              (IRS
                  EmployerIncorporation
                  or Organization)
              Identification
                  Number)




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
      No o





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
      - 8,023,944 outstanding as of August 08, 2007




1




**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
              
              23**ITEM
                  3**
              
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              42**ITEM
                  4**
              
              Controls
                  and Procedures
              
              42**PART
                  II: OTHER INFORMATION****ITEM
                  1**
              
              Legal
                  Proceedings
              
              44**ITEM
                  1A**
              
              Risk
                  Factors
              
              44**ITEM
                  2**
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              45**ITEM
                  3**
              
              Defaults
                  upon Senior Securities
              
              45**ITEM
                  4**
              
              Submission
                  of Matters to a Vote of Security Holders
              
              45**ITEM
                  5**
              
              Other
                  Information
              
              46**ITEM
                  6**
              
              Exhibits
              
              46**SIGNATURES**
              
              
              
              47


2


**PART
      I: FINANCIAL INFORMATION**


**Item
      1**





21 st CENTURY
      HOLDING COMPANY


CONSOLIDATED
      BALANCE SHEETS


Period
                    EndingJune
                    30, 2007
                
                December
                    31, 2006ASSETS
                
                (Dollars
                    in Thousands)InvestmentsFixed
                    maturities, available for sale, at fair value
                
                $
                131,441
                
                $
                98,525Fixed
                    maturities, held to maturity, at amoritized cost
                
                
                20,373
                
                
                19,667Equity
                    securities, available for sale, at fair value
                
                
                4,250
                
                
                6,641Total
                    investments
                
                
                156,064
                
                
                124,834Cash
                    and short term investments
                
                
                7,680
                
                
                17,917Receivable
                    for investments sold
                
                
                5,000
                
                
                -Finance
                    contracts, net of allowance for credit losses of $97 in 2007
                    and $116
                    in2006,
                    and net of unearned finance charges of $76 in 2007 and $90 in
                    2006
                
                
                1,484
                
                
                1,831Prepaid
                    reinsurance premiums
                
                
                21,366
                
                
                38,927Premiums
                    receivable, net of allowance for credit losses of $464 and $66,
                    respectively
                
                
                7,047
                
                
                7,222Reinsurance
                    recoverable, net
                
                
                3,047
                
                
                -Deferred
                    policy acquisition costs
                
                
                12,470
                
                
                11,153Deferred
                    income taxes, net
                
                
                6,128
                
                
                3,610Income
                    taxes receivable
                
                
                1,104
                
                
                787Property,
                    plant and equipment, net
                
                
                1,171
                
                
                1,296Other
                    assets
                
                
                10,710
                
                
                4,556Total
                    assets
                
                $
                233,271
                
                $
                212,134LIABILITIES
                    AND SHAREHOLDERS' EQUITYUnpaid
                    losses and LAE
                
                $
                45,206
                
                $
                39,615Unearned
                    premiums
                
                
                90,668
                
                
                77,829Due
                    to reinsurers, net
                
                
                -
                
                
                4,237Premiums
                    deposits and customer credit balances
                
                
                4,169
                
                
                3,793Revolving
                    credit outstanding
                
                
                10
                
                
                10Bank
                    overdraft
                
                
                10,573
                
                
                8,107Subordinated
                    debt
                
                
                2,083
                
                
                4,167Deferred
                    gain from sale of property
                
                
                2,233
                
                
                2,467Accounts
                    payable and accrued expenses
                
                
                3,397
                
                
                5,715Total
                    liabilities
                
                
                158,340
                
                
                145,940Commitments
                    and ContingenciesShareholders'
                    equity:Common
                    stock, $0.01 par value. Authorized 37,500,000 shares; issued
                    and
                    outstanding7,885,383
                    and 7,896,919, respectively
                
                
                79
                
                
                79Additional
                    paid-in capital
                
                
                48,036
                
                
                47,070Accumulated
                    other comprehensive income (deficit)
                
                
                (1,640
                )
                
                (967
                )Retained
                    earnings
                
                
                28,456
                
                
                20,011Total
                    shareholders' equity
                
                
                74,931
                
                
                66,193Total
                    liabilities and shareholders' equity
                
                $
                233,271
                
                $
                212,134






**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





3








21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(UNAUDITED)


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2007
              
              2006
              
              2007
              
              2006(Dollars
                  in Thousands except EPS and dividend data)
              
              (Dollars
                  in Thousands except EPS and dividend data)Revenue:Gross
                  premiums written
              
              $
              44,462
              
              $
              50,753
              
              $
              93,652
              
              $
              86,362Gross
                  premiums ceded
              
              
              (15,803
              )
              
              (3,372
              )
              
              (15,809
              )
              
              (3,372
              )Net
                  premiums written
              
              
              28,658
              
              
              47,381
              
              
              77,843
              
              
              82,990(Decrease)
                  in prepaid reinsurance premiums
              
              
              (846
              )
              
              (593
              )
              
              (17,818
              )
              
              (9,265
              )(Increase)
                  in unearned premiums
              
              
              (2,999
              )
              
              (18,047
              )
              
              (12,839
              )
              
              (23,177
              )Net
                  change in prepaid reinsurance premiums and unearned
                  premiums
              
              
              (3,845
              )
              
              (18,640
              )
              
              (30,657
              )
              
              (32,442
              )Net
                  premiums earned
              
              
              24,814
              
              
              28,741
              
              
              47,187
              
              
              50,548Commission
                  income
              
              
              6,491
              
              
              132
              
              
              6,491
              
              
              159Finance
                  revenue
              
              
              160
              
              
              496
              
              
              347
              
              
              1,132Managing
                  general agent fees
              
              
              804
              
              
              723
              
              
              1,422
              
              
              1,381Net
                  investment income
              
              
              2,131
              
              
              1,612
              
              
              3,700
              
              
              2,808Net
                  realized investment gains (losses)
              
              
              80
              
              
              283
              
              
              (48
              )
              
              480Other
                  income
              
              
              13
              
              
              355
              
              
              979
              
              
              949Total
                  revenue
              
              
              34,493
              
              
              32,342
              
              
              60,078
              
              
              57,457Expenses:Loss
                  and LAE
              
              
              9,658
              
              
              9,343
              
              
              23,760
              
              
              16,912Operating
                  and underwriting expenses
              
              
              3,100
              
              
              2,308
              
              
              7,065
              
              
              4,613Salaries
                  and wages
              
              
              1,734
              
              
              1,773
              
              
              3,290
              
              
              3,610Interest
                  expense
              
              
              60
              
              
              181
              
              
              145
              
              
              410Policy
                  acquisition costs, net of amortization
              
              
              4,909
              
              
              4,127
              
              
              9,517
              
              
              8,045Total
                  expenses
              
              
              19,460
              
              
              17,732
              
              
              43,777
              
              
              33,590Income
                  before provision for income tax expense
              
              
              15,033
              
              
              14,610
              
              
              16,300
              
              
              23,866Provision
                  for income tax expense
              
              
              4,555
              
              
              5,705
              
              
              4,979
              
              
              8,949Net
                  income
              
              $
              10,478
              
              $
              8,905
              
              $
              11,321
              
              $
              14,918Basic
                  net income per share
              
              $
              1.32
              
              $
              1.20
              
              $
              1.42
              
              $
              2.02Fully
                  diluted net income per share
              
              $
              1.31
              
              $
              1.19
              
              $
              1.40
              
              $
              1.89Weighted
                  average number of common shares outstanding
              
              
              7,930,964
              
              
              7,427,765
              
              
              7,944,933
              
              
              7,370,592Weighted
                  average number of common shares outstanding (assuming
                  dilution)
              
              
              8,014,947
              
              
              7,465,896
              
              
              8,099,187
              
              
              7,880,251Dividends
                  paid per share
              
              $
              0.18
              
              $
              0.12
              
              $
              0.36
              
              $
              0.24





**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




4




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six
                Months Ended June 30,2007
            
            2006(Dollars
                in Thousands)Cash
                flow from operating activities:Net
                income
            
            $
            11,321
            
            $
            14,918Adjustments
                to reconcile net income to net cash provided by operating
                activities:Amortization
                of investment discount, net
            
            
            (180
            )
            
            (143
            )Depreciation
                and amortization of property plant and equipment, net
            
            
            155
            
            
            170Net
                realized investment (losses) gains
            
            
            (48
            )
            
            480Common
                Stock issued for interest on Notes
            
            
            109
            
            
            128(Recovery)
                provision for credit losses, net
            
            
            (6
            )
            
            95Provision
                (recovery)for uncollectible premiums receivable
            
            
            397
            
            
            (0
            )Non-cash
                compensation
            
            
            143
            
            
            280Changes
                in operating assets and liabilities:Premiums
                receivable
            
            
            (222
            )
            
            (2,726
            )Prepaid
                reinsurance premiums
            
            
            17,561
            
            
            9,265Reinsurance
                recoverable, net
            
            
            (7,284
            )
            
            120,508Income
                taxes recoverable
            
            
            (316
            )
            
            -Deferred
                income tax expense
            
            
            (2,518
            )
            
            (2,292
            )Policy
                acquisition costs, net of amortization
            
            
            (1,317
            )
            
            (2,761
            )Premium
                finance contracts receivable
            
            
            354
            
            
            3,494Other
                assets
            
            
            (6,392
            )
            
            1,890Unpaid
                losses and LAE
            
            
            5,591
            
            
            (122,694
            )Unearned
                premiums
            
            
            12,839
            
            
            23,177Premium
                deposits and customer credit balances
            
            
            376
            
            
            1,258Funds
                held under reinsurance treaties
            
            
            -
            
            
            24Income
                taxes payable
            
            
            -
            
            
            4,698Bank
                overdraft
            
            
            2,466
            
            
            (1,946
            )Accounts
                payable and accrued expenses
            
            
            (2,318
            )
            
            1,487Net
                cash provided by operating activities
            
            
            30,711
            
            
            49,312Cash
                flow used in investing activities:Proceeds
                from sale of investment securities available for
                sale
            
            
            72,033
            
            
            175,207Purchases
                of investment securities available for sale
            
            
            (108,708
            )
            
            (226,456
            )Purchases
                of property and equipment
            
            
            (30
            )
            
            (353
            )Proceeds
                from sale of assets
            
            
            -
            
            
            2,663Net
                cash used in investing activities
            
            
            (36,705
            )
            
            (48,939
            )Cash
                flow (used in) provided by financing activities:Subordinated
                debt
            
            
            -
            
            
            (1,667
            )Exercised
                stock options
            
            
            89
            
            
            1,417Dividends
                paid
            
            
            (2,876
            )
            
            (1,856
            )Exercised
                warrants, net
            
            
            -
            
            
            6,061Purchase
                of treasury stock
            
            
            (1,518
            )
            
            (2,001
            )Tax
                benefit related to non-cash compensation
            
            
            63
            
            
            1,758Revolving
                credit outstanding
            
            
            0
            
            
            (197
            )Net
                cash (used in) provided by financing activities
            
            
            (4,242
            )
            
            3,515Net
                (decrease) increase in cash and short term investments
            
            
            (10,236
            )
            
            3,888Cash
                and short term investments at beginning of period
            
            
            17,917
            
            
            6,071Cash
                and short term investments at end of period
            
            $
            7,680
            
            $
            9,959




SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS




5




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)




(continued)
            
            
            2007
            
            
            2006Supplemental
                disclosure of cash flow information:Cash
                paid during the period for:Interest
            
            $
            2
            
            $
            160Income
                taxes
            
            $
            7,300
            
            $
            4,650Non-cash
                investing and finance activities:Accrued
                dividends payable
            
            $
            1,444
            
            $
            972Retirement
                of subordinated debt by common stock issuance
            
            $
            2,083
            
            $
            1,667Stock
                issued to pay interest on subordinated debt
            
            $
            109
            
            $
            128





**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, 2006.
      The
      December 31, 2006 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,
      F ederated
      National Insurance Company (“Federated National”) and American Vehicle Insurance
      Company (“American Vehicle”).





Federated
      National is authorized to underwrite homeowners’ property and casualty insurance
      and personal automobile insurance in Florida as an admitted carrier. American
      Vehicle is authorized to underwrite personal automobile insurance and commercial
      general liability coverage in Florida as an admitted carrier. In addition,
      American Vehicle is authorized to underwrite commercial general liability
      insurance in Georgia, Kentucky, South Carolina, Virginia, Missouri and Arkansas
      as a surplus lines carrier and in Texas, Louisiana and Alabama as an admitted
      carrier. American Vehicle operations in Florida, Georgia, Kentucky, Louisiana,
      Texas, South Carolina and Virginia are on-going. American Vehicle operations
      in
      Alabama, Arkansas and Missouri are expected to begin this year. American Vehicle
      has applications pending authorization as a surplus lines carrier in the states
      of California, Mississippi, Nevada and Maryland and an application pending
      submission as a surplus lines carrier to the state of Oklahoma.





During
      the six months ended June 30, 2007, 79.0%, 19.5% and 1.5% 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, 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.
      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 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 intend on retaining other general agents to market our commercial
      general liability insurance product beyond the state of Florida. Assurance
      MGA
      currently provides 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’ gross written premium,
      policy fee income of $25 per policy and other administrative fees from the
      marketing of company 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 GAAP requires management
      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 expenses (“LAE”)
      and the amount and recoverability of amortization of deferred policy acquisition
      costs. In addition, significant estimates form the basis 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 which are described in greater detail in Footnote 2 of
      the
      Company's audited financial statements for the fiscal year ended December 31,
      2006 filed with the Securities and Exchange Commission ("SEC") on March 16,
      2007.





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 various 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 LAE, 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.





We
      are
      required to review the contractual terms of all our reinsurance purchases to
      ensure compliance with SFAS No. 113, *Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
      Contracts* .
      The
      statement establishes the conditions required for a contract with a reinsurer
      to
      be accounted for as reinsurance and prescribes accounting and reporting
      standards for those contracts. Contracts that do not result in the reasonable
      possibility that the reinsurer may realize a significant loss from the insurance
      risk assumed generally do not meet the conditions for reinsurance accounting
      and
      must be accounted for as deposits. SFAS No. 113 also requires us to disclose
      the
      nature, purpose and effect of reinsurance transactions, including the premium
      amounts associated with reinsurance assumed and ceded. It also requires
      disclosure of concentrations of credit risk associated with reinsurance
      receivables and prepaid reinsurance premiums.





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




8


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


In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      SFAS No. 159 *“The
      Fair Value Option for Financial Assets and Financial Liabilities —
Including an Amendment of SFAS No. 115”* (“SFAS No. 159”), which permits an entity to measure many financial
      assets and financial liabilities at fair value that are not currently required
      to be measured at fair value. Entities that elect the fair value option will
      report unrealized gains and losses in earnings at each subsequent reporting
      date. The fair value option may be elected on an instrument-by-instrument basis,
      with a few exceptions. SFAS No. 159 amends previous guidance to extend
      the use of the fair value option to available-for-sale and held-to-maturity
      securities. SFAS No. 159 also establishes presentation and disclosure
      requirements to help financial statement users understand the effect of the
      election. We will adopt SFAS No. 159 on its effective date, January 1,
      2008.  We do not expect the adoption of SFAS No. 159 to have
      a material impact, if any, on our financial position or results of
      operations.





In
      June
      2006, FASB issued FIN 48, *Accounting
      for Uncertainty in Income Taxes* which
      clarifies the accounting for income tax reserves and contingencies recognized
      in
      an enterprise’s financial statements in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      This
      Interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure and transition. This
      Interpretation is effective for fiscal years beginning after December 15, 2006.
      The Company has evaluated and concluded that the impact of FIN 48 will be
      minimal and includes a policy of classifying interest and penalties related
      to
      income tax as elements of income tax expense in the consolidated financial
      statements. As required by FIN 48, this change was done prospectively.
      Previously, penalties and interest were classified as operating and underwriting
      expenses.





In
      December 2004, 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 requisite service period (usually the
      vesting period) during which an employee is required to provide services in
      exchange for the award. SFAS No. 123R also requires 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 2007 will
      total approximately $0.6 million, of which approximately $0.2 million was
      charged to income from continuing operations before provision for income taxes
      for the six months ended June 30, 2007. The effect on earnings per share for
      the
      six months ended June 30, 2007 for both undiluted and fully diluted was less
      than $0.02 per share. For a more detailed discussion, please see Footnote 8,
      titled Stock Compensation Plans.





**(C)
      Stock Options**





At
      June
      30, 2007, the Company had two stock-based employee compensation plans and one
      stock-based franchise compensation plan, which are described later in footnote
      8, Stock Compensation Plans.





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 during the six months ended
      June
      30, 2007 includes compensation cost for all share-based payments granted
      subsequent to January 1, 2007, based on the grant date fair-value estimated
      in
      accordance with the provisions of SFAS No. 123R.





During
      the six months ended June 30, 2007, we granted 30,000 qualified stock options
      to
      employees and 10,000 non-qualified stock options to a
      director with an average option price of $12.42 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.




9


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


**(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 the 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 2006 financial statements have been reclassified to conform to the
      2007 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. Outstanding borrowings under the Revolving Agreement as of June
      30,
      2007 and December 31, 2006 were unchanged at approximately $10,000.





The
      effective interest rate on this line of credit, based on our average outstanding
      borrowings under the Revolving Agreement, was 20.22% and 14.4% for the three
      months ended June 30, 2007 and 2006, respectively. Interest expense on this
      revolving credit line for the three months ended June 30, 2007 and 2006 totaled
      approximately $500 and $3,400, respectively. Interest expense on this revolving
      credit line for the six months ended June 30, 2007 and 2006 totaled
      approximately $1,000 and $7,000, respectively.





**(4)
      Commitments and Contingencies**





Management
      has a responsibility to continually measure and monitor its commitments and
      its
      contingencies. The nature of the Company’s commitments and contingencies can be
      grouped into three major categories, insured claim activity, assessment related
      activities and operational matters.





We
      are
      involved in claims and legal actions arising in the ordinary course of business.
      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. 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.





We
      operate in a regulatory environment where certain entities and organizations
      have the authority to require us to participate in assessments. Currently these
      entities and organizations include, but are not limited to, the Florida Joint
      Underwriters Association (“Florida JUA”), the Florida Insurance Guarantee
      Association (“FIGA”), Citizens Property Insurance Corporation (“Citizens”) and
      the Florida Hurricane Catastrophic Fund (“FHCF”).





As
      a
      direct premium writer in the State of Florida, we are required to participate
      in
      certain insurer solvency associations under Florida Statutes 631.57(3) (a).
      Participation in these pools is based on our written premiums by line of
      business compared to total premiums written statewide by all insurers.
      Participation may result in assessments against us as it did in 2006. During
      2006 we were assessed $3.9 million in connection with the FIGA. For statutory
      accounting purposes these assessments are not charged to operations, in contrast
      GAAP treatment is to charge current operations for the assessments. Through
      policyholder surcharges, as approved by the Florida Office of Insurance
      Regulation (“OIR”), during the six months ended June 30, 2007 we collected
      approximately $681,000. These surcharges are reflected in other income in our
      statement of operations.




10


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


During
      its regularly scheduled meeting on August 17, 2005, the Board of Governors
      of
      Citizens determined a 2004 plan year deficit existed in the High Risk Account.
      Citizens decided that a $515 million Regular Assessment was in the best interest
      of Citizens and consistent with Florida Statutes. On this basis, Citizens
      certified for a Regular Assessment. Federated National’s participation in this
      assessment totaled $2.0 million. During a subsequent regularly scheduled meeting
      on or about December 18, 2006, Citizens Board determined an additional 2004
      plan
      year deficit existed in the High Risk Account. Citizens decided that an
      additional $515 million Regular Assessment was in the best interest of Citizens
      and consistent with Florida Statutes. On this basis, Citizens certified for
      a
      Regular Assessment. Federated National’s participation in this assessment
      totaled $0.3 million. Provisions contained in our excess of loss reinsurance
      policies provide for reinsurance 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 these assessments and has
      recouped approximately $0.2 million during the six months ended June 30, 2007.
      As noted above, Federated National continues to subrogate this assessment to
      our
      reinsurers.





The
      OIR
      issued Information Memorandum OIR-06-008M, titled *Notice
      of Anticipated Florida Hurricane Catastrophe Fund Assessment,* dated
      May
      4, 2006, to all property and casualty, surplus lines insurers, and surplus
      lines
      agents in the state of Florida placing them on notice of an anticipated 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 became
      effective on all policies effective after January 1, 2007 and will be remitted
      to the administrator of the assessment as collected and therefore accounted
      for
      in a manner such that amounts collected or receivable are not recorded as
      revenues and amounts due or paid are not expensed.





In
      addition to the assessments noted above, the OIR has also issued Information
      Memorandum OIR -07-02M, titled *Information
      Regarding Emergency Assessment by Citizens Property Insurance
      Corporation,* dated
      January 11, 2007, to all property and casualty insurers in the state of Florida
      placing them on notice that an order has been approved for an emergency
      assessment by Citizens for its High Risk Account. This order requires insurers
      to begin collecting the emergency assessment for policies issued or renewed
      on
      or after July 1, 2007. Similar to the FHCF assessment discussed above, the
      Citizens emergency assessment will be remitted to the administrator of the
      assessment as collected and therefore accounted for in a manner such that
      amounts collected or receivable are not recorded as revenues and amounts due
      or
      paid are not expensed.





Both
      Federated National and American Vehicle participate in an insurance
      apportionment plan under Section 627.351, Florida Statutes, 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, 2007, Federated National and
      American Vehicle were not assessed by the JUA Plan based on their respective
      Cash Activity Reports. These assessments would be charged to operations as
      paid.
      Future assessments by this association are undeterminable at this
      time.





The
      2004,
      2003 and 2002 consolidated Federal Income Tax Returns filed by the Company
      have
      been examined by the Internal Revenue Service (“IRS”) during 2006 and 2005. We
      have concurred with certain IRS conclusions and have appealed other conclusions.
      Irrespective of the ongoing appellate process, we do not believe that a material
      adjustment will occur. Income taxes receivable are net of $160,000 reserve
      established in conjunction with this process.




11


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


Relative
      to the Company’s commitments stemming from operational matters, 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 five-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
                payments2007
            
            $
            301,4432008
            
            
            612,9342009
            
            
            625,1932010
            
            
            637,6972011
            
            
            650,451Total
            
            $
            2,827,718





On
      July
      27, 2007 and August 7, 2007, two securities class action lawsuits were filed
      against the Company and certain of its executive officers in the United States
      District Court for the Southern District of Florida on behalf of all persons
      and
      entities who purchased the Company's securities between October 3, 2007 through
      May 3, 2007. While the specific factual allegations vary slightly in each case,
      the complaints allege that the defendants made false and misleading statements
      and failed to accurately project the Company's business and financial
      performance during the putative class period. The complaints seeks an
      unspecified amount of damages and claim violations of Sections 10(b) and 20(a)
      of the Securities Exchange Act of 1934 and Rule 10b-5. The Company expects
      that
      these two actions will be consolidated into one case in the United States
      District Court for the Southern District of Florida.





While
      the
      Company believes that the allegations in the complaint are without merit, an
      unfavorable resolution of pending litigation could have a material adverse
      effect on our financial condition. Litigation may result in substantial costs
      and expenses and significantly divert the attention of the Company's management
      regardless of the outcome. There can be no assurance that the Company will
      be
      able to achieve a favorable settlement of pending litigation or obtain a
      favorable resolution of this litigation if it is not settled. In addition,
      current litigation could lead to increased costs or interruptions of normal
      business operations of the Company.





**(5)
      Comprehensive Income**





For
      the
      three and six months ended June 30, 2007 and 2006, comprehensive income
      consisted of the following :


For
                  the three months ended June 30,
              
              For
                  the six months ended June 30,2007
              
              2006
              
              2007
              
              2006Net
                  income
              
              $
              10,478,429
              
              $
              8,904,559
              
              $
              11,321,234
              
              $
              14,917,871Change
                  in net unrealized gains on investments available for sale
              
              
              (939,137
              )
              
              (535,832
              )
              
              (1,203,126
              )
              
              (353,572
              )Comprehensive
                  income, before tax
              
              
              9,539,292
              
              
              8,368,727
              
              
              10,118,108
              
              
              14,564,299Income
                  tax benefit related to items of other comprehensive income
              
              
              430,812
              
              
              201,634
              
              
              530,151
              
              
              133,049Comprehensive
                  income
              
              $
              9,970,104
              
              $
              8,570,361
              
              $
              10,648,259
              
              $
              14,697,348





**(6)
      Segment Information**




12




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


**Notes
      to Consolidated Financial Statements**





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.





A
      segment
      must be reported on if any one of the following exists:





·
            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.





Accordingly,
      we have discontinued our segment disclosures for the finance segment, as it
      did
      not exceed 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
      the
      insured for the loss. Our reinsurance agreements are designed to coincide with
      the seasonality of Florida’s hurricane season.





For
      the
      2007-2008 hurricane season, the excess of loss and FHCF treaties will insure
      us
      for approximately $403.0 million of aggregate loss and LAE with a maximum single
      event coverage totaling approximately $320.0 million, with the Company retaining
      the first $5.0 million of loss and LAE. Additionally, we purchased,
      Reinstatement Premium Protection from the private sector, which would reimburse
      the Company 100% of the cost of reinstatement for a second event. The FHCF
      affords coverage for the entire season, subject to maximum payouts, without
      regard to any particular insurable event. The cost to the Company for these
      reinsurance products for the 2007-2008 hurricane season, including the prepaid
      automatic premium reinstatement protection will be approximately $40 million.
      The reinsurance companies and their respective A. M. Best Rating are noted
      in
      the table as follows:




13




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


**Notes
      to Consolidated Financial Statements**


**Reinsurer**
              
              **A.M.
                  Best Rating****UNITED
                  STATES**Everest
                  Reinsurance Company
              
              
              A+Folksamerica
                  Reinsurance Company
              
              
              A-GMAC
                  Re/Motors Insurance Corporation
              
              
              A-Munich
                  Reinsurance America, Inc.
              
              
              AOdyssey
                  America Reinsurance Corporation
              
              
              AQBE
                  Reinsurance Corporation
              
              
              A**BERMUDA**ACE
                  Tempest Reinsurance Limited, Bermuda
              
              
              A+Amlin
                  Bermuda Limited
              
              
              A-Ariel
                  Reinsurance Company Limited, Bermuda
              
              
              A-DaVinci
                  Reinsurance Ltd, Bermuda
              
              
              AFlagstone
                  Reinsurance Limited
              
              
              A-Max
                  Bermuda Limited
              
              
              A-New
                  Castle Reinsurance Company Limited
              
              
              A-Renaissance
                  Reinsurance Ltd, Bermuda
              
              
              A**UNITED
                  KINGDOM**Amlin
                  Syndicate No. 2001 (AML)
              
              
              AAscot
                  Underwriting Syndicate No. 1414 (RTH)
              
              
              AG.S.
                  Christensen and Others Syndicate No. 958 (GSC)
              
              
              AMAP
                  Underwriting Syndicate No. 2791 (MAP)
              
              
              ATalbot
                  Underwriting Syndicate No. 1183 (TAL)
              
              
              A**EUROPE**Converium
                  Limited, Switzerland
              
              
              B++





For
      the
      2006-2007 hurricane season, we 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 contained
      several complex features and through a series of fluid retentions, attachment
      points and limitations, additional coverage may have been afforded Federated
      National for events beyond the first two catastrophic events. Our retention
      would have varied depending on the severity and frequency of each catastrophic
      event. The reinsurance companies and their respective participation in the
      season's program are noted in the table as follows:




14




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


**Notes
      to Consolidated Financial Statements**


First
                  Event Participation
              
              Reinstated
                  Premium Protection$20m
                  in
              
              
              
              $72m
                  in excess of
              
              $20m
                  inAM
              
              
              
              excess
                  of
              
              $40m
                  in excess of
              
              $75m
                  and FHCF
              
              excess
                  of
              
              $40m
                  in excess ofBest
                  Rating
              
              Reinsurer
              
              $15m
              
              $35m
              
              participation
              
              $15m
              
              $35mA+
              
              Ace
                  Tempest Reinsurance Ltd
              
              
              
              7.5%
              
              7.5%A
              
              Amlin
                  2001 Syndicate
              
              5.0%
              
              5.0%
              
              5.0%
              
              5.0%A-
              
              Amlin
                  Bermuda Ltd
              
              2.5%
              
              4.0%
              
              4.0%
              
              2.5%A
              
              American
                  Reinsurance Company
              
              
              
              
              
              3.5%A
              
              Ascot
                  1414 Syndicate
              
              
              
              
              
              6.5%A++
              
              National
                  Liability and Fire Company
              
              
              
              33.8%
              
              6.6%
              
              
              
              77.6%B++
              
              Converium
                  AG
              
              
              
              5.0%A+
              
              Everest
                  Reinsurance Company
              
              
              
              22.0%
              
              4.3%
              
              
              
              12.0%NR
              
              Wentworth
                  Insurance Company Ltd
              
              5.0%
              
              
              
              .
              
              5.0%A-
              
              Flagstone
                  Reinsurance Ltd
              
              
              
              4.3%
              
              4.0%A
              
              MAP
                  2791 Syndicate
              
              2.5%
              
              2.5%
              
              2.5%
              
              2.5%A-
              
              New
                  Castle Reinsurance Company Ltd
              
              2.0%
              
              2.0%
              
              2.0%
              
              2.0%A
              
              QBE
                  Reinsurance Corporation
              
              
              
              1.5%
              
              1.0%A
              
              Renaissance
                  Reinsurance, Ltd
              
              
              
              12.5%
              
              12.5%A+
              
              XL
                  Re Limited
              
              
              
              
              
              2.5%A
              
              Odyssey
              
              
              
              
              
              3.5%A
              
              Catlin
                  Insurance Company Ltd
              
              25.0%
              
              
              
              
              
              25.0%NR
              
              Allianz
                  Risk Transfer (Bermuda) Ltd
              
              33.0%
              
              
              
              
              
              33.0%A
              
              Liberty
                  Mutual Insurance Company
              
              
              
              
              
              34.7%American
                  Vehicle InsuranceNR4
              
              Company
                  (Affiliated)
              
              25.0%
              
              
              
              
              
              25.0%





In
      the
      discussion that follows it should be noted that all amounts of reinsurance
      were
      based on management’s analysis of Federated National’s exposure levels to
      catastrophic risk. Our data was subjected to exposure level data analysis at
      various dates through December 31, 2006.





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





For
      the
      first and second catastrophic events equal to or less than $15 million, the
      bottom layer, Federated National would have retained 100% of the first $4.3
      million and the last $0.7 million of this bottom layer. The FHCF would have
      participated 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 acquired 100% reinsurance protection with a single automatic premium
      reinstatement protection provision. The $20 million of coverage afforded in
      this
      layer was by way of a 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 reinsured
      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 offered respective
      coverage for a single event in each of the three hurricane seasons and one
      additional respective coverage that could be applied as needed in any one of
      the
      three hurricane seasons. One of the structured treaties, representing 25% of
      this layer, contained a provision which prevented the Company from recovery
      if
      any single event resulted in damages that exceed $20 billion in the Unites
      States and its territories.





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




15




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


**Notes
      to Consolidated Financial Statements**





If
      an
      event had occurred where aggregate losses exceed $233.3 million, but were less
      than $305.3 million, Federated National had acquired traditional reinsurance
      treaties representing 65.3% of this layer without a provision for premium
      reinstatement protection. Premium reinstatement coverage would have been
      prorated as to amount and if the first event exhausted this coverage then
      Federated National would have been responsible for approximately $10.4 million
      for reinstatement protection. Additional coverage was afforded to Federated
      National via Industry Loss Warrants (“ILW”). The ILW policies provided 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 have been considered under the terms of these contracts, if insured wind
      damages incurred in the State of Florida had exceeded amounts varying between
      $25 billion and $20 billion excluding public property and certain other named
      exclusions.





The
      Company would have been 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
      was
      approximately $65 million, which for the most part was payable in quarterly
      installments that began July 1, 2006 and were amortized through earned premium
      in accordance with the provisions and terms contained in the respective
      treaties.





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:




16




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


**Notes
      to Consolidated Financial Statements**


Claim
              
              Gross
              
              Reinsurance
              
              Net2004
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Charley
                  (August 13)
              
              
              2,572
              
              $
              64.3
              
              $
              54.3
              
              $
              10.0Frances
                  (September 3)
              
              
              3,809
              
              
              53.4
              
              
              43.3
              
              
              10.1Ivan
                  (September 14)
              
              
              1,062
              
              
              26.5
              
              
              -
              
              
              26.5Jeanne
                  (September 25)
              
              
              1,562
              
              
              13.9
              
              
              -
              
              
              13.9Total
                  Loss Estimate
              
              
              9,005
              
              $
              158.1
              
              $
              97.6
              
              $
              60.5Claim
              
              
              Gross
              
              
              Reinsurance
              
              
              Net2005
                  Hurricanes
              
              
              Count
              
              
              Losses
              
              
              Recoveries
              
              
              Losses(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              322
              
              $
              2.8
              
              $
              -
              
              $
              2.8Katrina
                  (August 25)
              
              
              2,112
              
              
              14.6
              
              
              11.6
              
              
              3.0Rita
                  (September 20)
              
              
              19
              
              
              0.1
              
              
              -
              
              
              0.1Wilma
                  (October 24)
              
              
              11,696
              
              
              174.5
              
              
              171.5
              
              
              3.0Total
                  Loss Estimate
              
              
              14,149
              
              $
              192.0
              
              $
              183.1
              
              $
              8.9


Effective
      March 28, 2006, American Vehicle entered into a 100% quota-share reinsurance
      treaty with Republic Underwriters Insurance Company (“Republic”). Republic is
      domiciled in the State of Texas and licensed both directly and on a surplus
      lines basis in approximately 32 states. Republic has a financial rating of
“A-”
Excellent with A.M. Best. This arrangement would have facilitated the
      policyholder who requires their commercial general liability insurance policy
      to
      come from an insurance company with an A.M. Best rating. Our arrangement with
      Republic allowed for a 4.75% commission on net written premium and reimbursement
      for all other costs in connection with the treaty such as premium taxes and
      assessments. We also remit a 1% commission to the intermediary broker on the
      same net written premium. Under this agreement the Company assumed approximately
      $348,000 in premiums in connection with its operations in the State of Texas.
      Our operations in Texas began in December 2006. During the three months ended
      March 31, 2007, this 100% quota-sharing reinsurance treaty with Republic was
      cancelled at their request, effective June 30, 2007.





We
      are
      selective in choosing reinsurers 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.





Our
      automobile quota-share reinsurance treaties for 2003 include loss corridors
      with
      varying layers of coverage based on ultimate incurred loss ratio results whereby
      the two insurance companies will retain 100% of the losses between incurred
      loss
      ratios of 66% and 86% for policies with an effective date of 2003. Despite
      the
      loss corridor, the reinsurer assumes significant insurance risk under the
      reinsured portions of the underlying insurance contracts and it is reasonably
      possible that the reinsurer may realize a significant loss from the transaction.
      Our ultimate incurred loss ratios for these treaties as of December 31, 2006
      are
      estimated to be 66.6% and 77.4% for Federated National and American Vehicle,
      respectively.





**(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 that are either equal to or above
      the market value of the stock on the date of grant, typically vest over a four
      or five-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, 2007 and December 31, 2006, we had outstanding exercisable
      options to purchase 82,750 and 44,750 shares, respectively.




17




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


**Notes
      to Consolidated Financial Statements**





In
      2001,
      we implemented a franchisee stock option plan that provided 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 were granted at prices which were above the market
      value of the stock on the date of grant, vest over a ten-year period, 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, and, as of June 30, 2007,
      we
      had no outstanding exercisable options to purchase shares.





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, and 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, 2007
      and
      December 31, 2006, we had outstanding exercisable options to purchase 619,658
      and 637,358 shares, respectively.





Activity
      in the Company’s stock option plans for the period from January 1, 2005 to June
      30, 2007, is summarized below:


**1998
                  Plan**
              
              
              **2001
                  Franchisee Plan**
              
              
              **2002
                  Plan**Weighted
              
              
              
              
              
              Weighted
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              Average
              
              
              
              
              
              AverageNumber
                  of
                Shares
              
              
              Option
              
              
              Number
                  of
                Shares
              
              
              Option
              
              
              Number
                  of
                Shares
              
              
              OptionExercise
                  Price
              
              
              
              
              Exercise
                  Price
              
              
              
              
              Exercise
                  PriceOutstanding
                  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
              
              
              25,000
              
              $
              27.79
              
              
              -
              
              $
              -
              
              
              86,000
              
              $
              16.44Exercised
              
              
              (77,900
              )
              $
              6.67
              
              
              (15,000
              )
              $
              9.17
              
              
              (212,350
              )
              $
              8.98Cancelled
              
              
              -
              
              
              
              
              
              -
              
              $
              -
              
              
              (59,900
              )
              $
              14.98Outstanding
                  at January 1, 2007
              
              
              44,750
              
              $
              18.47
              
              
              -
              
              $
              -
              
              
              637,358
              
              $
              13.80Granted
              
              
              40,000
              
              $
              12.42
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -Exercised
              
              
              (2,000
              )
              $
              6.67
              
              
              -
              
              $
              -
              
              
              (7,300
              )
              $
              10.38Cancelled
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              (10,400
              )
              $
              16.52Outstanding
                  at June 30, 2007
              
              
              82,750
              
              $
              15.83
              
              
              -
              
              $
              -
              
              
              619,658
              
              $
              13.79





Options
      outstanding as of June 30, 2007 are exercisable as follows :




18


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


**1998
                  Plan**
              
              
              **2001
                  Franchisee Plan**
              
              
              **2002
                  Plan**Weighted
              
              
              
              
              
              Weighted
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              Average
              
              
              
              
              
              AverageNumber
                  of
                Shares
              
              
              Option
              
              
              Number
                  of
                Shares
              
              
              Option
              
              
              Number
                  of
                Shares
              
              
              OptionOptions
                  Exercisable at:
              
              
              
              
              Exercise
                  Price
              
              
              
              
              Exercise
                  Price
              
              
              
              
              Exercise
                  PriceJune
                  30, 2007
              
              
              17,750
              
              $
              15.83
              
              
              -
              
              $
              -
              
              
              316,506
              
              $
              13.79December
                  31, 2007
              
              
              25,000
              
              $
              15.83
              
              
              -
              
              $
              -
              
              
              56,200
              
              $
              13.79December
                  31, 2008
              
              
              8,000
              
              $
              15.83
              
              
              -
              
              $
              -
              
              
              91,951
              
              $
              13.79December
                  31, 2009
              
              
              8,000
              
              $
              15.83
              
              
              -
              
              $
              -
              
              
              81,299
              
              $
              13.79December
                  31, 2010
              
              
              8,000
              
              $
              15.83
              
              
              -
              
              $
              -
              
              
              59,001
              
              $
              13.79December
                  31, 2011
              
              
              8,000
              
              $
              15.83
              
              
              -
              
              $
              -
              
              
              14,701
              
              $
              13.79Thereafter
              
              
              8,000
              
              $
              15.83
              
              
              -
              
              $
              -
              
              
              -
              
              $
              13.79Total
                  options exercisible
              
              
              82,750
              
              
              
              
              
              -
              
              
              
              
              
              619,658





At
      June
      30, 2007, the Company has two stock-based employee compensation plans and one
      stock-based franchise compensation plan, 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. 123R using the modified-prospective-transition method. Under
      that transition method, compensation cost recognized during the six months
      ended
      June 30, 2007 includes compensation cost for all share-based payments granted
      subsequent to January 1, 2007, 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 before
      provision for income taxes and net income for the six months ended June 30,
      2007, are lower by approximately $205,000 and $143,000, 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, 2007 would
      have been $1.44 and $1.42, respectively, if the Company had not adopted SFAS
      No.
      123R, as compared to reported basic and diluted earnings per share of $1.42
      and
      $1.40, respectively.





Basic
      and
      diluted earnings per share for the three-month period ended June 30, 2007 would
      have been $1.34 and $1.33, respectively, if the Company had not adopted SFAS
      No.
      123R, as compared to reported basic and diluted earnings per share of $1.32
      and
      $1.31, 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
      weighted average fair value for the 40,000 new options granted during the three
      months ended June 30, 2007, estimated on the date of grant using the
      Black-Scholes option-pricing model was $2.92 per option. There were no new
      options granted during the quarter ending June 30, 2006.





The
      fair
      value of options granted is estimated on the date of grant using the following
      assumptions:




19


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


June
                  30, 2007
              
              June
                  30, 2006Dividend
                  yield
              3.20%
                  - 6.70%
              
              2.80%
                  - 3.70%Expected
                  volatility
              42.87%
                  - 54.77%
              
              43.97%
                  - 44.30%Risk-free
                  interest rate
              4.79%
                  to 4.86%
              
              5.18%Expected
                  life (in years)
              2.58
              
              2.04
                  to 2.86





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,
      2007:


Weighted
                  Average
              
              WeightedRange
                  of
              
              Outstanding
                  at
              
              Contractual
              
              Average
              
              Exercisable
                  atExercise
                  Price
              
              June
                  30, 2007
              
              Periods
                  in Years
              
              Exercise
                  Price
              
              June
                  30, 20071998
                  Plan
              
              $6.67
                  - $27.79
              
              82,750
              
              4.78
              
              $15.83
              
              17,7502001
                  Franchise Plan
              
              -
              
              -
              
              -
              
              -
              
              -2002
                  Plan
              
              $8.33
                  - $18.21
              
              619,658
              
              3.11
              
              $13.79
              
              316,506





**(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.





The
      July
      2003 Notes paid interest at the annual rate of 6%, were subordinated to senior
      debt of the  Company,
      and matured on July 31, 2006. Quarterly payments of principal and interest
      due
      on the July 2003 Notes were made in cash or, at our option, in shares of our
      Common Stock. When paid in shares of Common Stock, the number of shares issued
      was 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 entitled 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 required 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
      July
      31, 2006, we made the final principal payment of $625,000 on the July 2003
      notes
      and the July 2003 warrants expired. Of the 612,074 shares that could have been
      issued in connection with the July 2003 warrants, 301,430 were exercised,
      225,000 were reacquired in the open market by us and 85,644 were unexercised.
      The unexercised warrants were cancelled as of July 31, 2006.





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.




20







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


**Notes
      to Consolidated Financial Statements**


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, 751,699 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.





For
      the
      quarterly payment due April 30, 2006 we paid, pursuant to the terms of the
      July
      2003 Notes and in accordance with the contractual computations 38,420 shares
      of
      our Common Stock for principal and interest.





As
      indicated on the table below, as of June 30, 2007, we paid, pursuant to the
      terms of the September 2004 Notes and in accordance with the contractual
      computations, selected quarterly payments of principal and interest due in
      shares of our Common Stock.





Quarterly
                  payment due date
              
              2007
              
              2006January
                  31,
              
              
              54,211
              
              
              -April
                  30,
              
              
              63,114
              
              
              68,696July
                  31,
              
              
              -
              
              
              -October
                  31,
              
              
              -
              
              
              -Total
                  common stock issued
              
              
              117,325
              
              
              68,696





The
      Company retains the privilege of repaying these notes in cash or by the issuance
      of common stock.





For
      the
      September 2004 Notes, the remaining quarterly principal and interest payments,
      totaling approximately $1.0 million per payment, are due quarterly with the
      last
      installment due on September 30, 2007.





**(10)
      Subsequent Event**





On
      July
      27, 2007 and August 7, 2007, two securities class action lawsuits were filed
      against the Company and certain of its executive officers in the United States
      District Court for the Southern District of Florida on behalf of all persons
      and
      entities who purchased the Company's securities between October 3, 2007 through
      May 3, 2007. While the specific factual allegations vary slightly in each case,
      the complaints allege that the defendants made false and misleading statements
      and failed to accurately project the Company's business and financial
      performance during the putative class period. The complaints seeks an
      unspecified amount of damages and claim violations of Sections 10(b) and 20(a)
      of the Securities Exchange Act of 1934 and Rule 10b-5. The Company expects
      that
      these two actions will be consolidated into one case in the United States
      District Court for the Southern District of Florida.





-
          21
          -


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




While
      the
      Company believes that the allegations in the complaint are without merit, an
      unfavorable resolution of pending litigation could have a material adverse
      effect on our financial condition. Litigation may result in substantial costs
      and expenses and significantly divert the attention of the Company's management
      regardless of the outcome. There can be no assurance that the Company will
      be
      able to achieve a favorable settlement of pending litigation or obtain a
      favorable resolution of this litigation if it is not settled. In addition,
      current litigation could lead to increased costs or interruptions of normal
      business operations of the Company.




-
          22
          -


**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 Quarterly Report on Form 10-Q for the six months ended June 30, 2007
      (“Form 10-Q”) 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
      Form
      10-Q; inflation and other changes in economic conditions (including changes
      in
      interest rates and financial markets); the impact of new regulations adopted
      in
      Florida which affect the property and casualty insurance market; 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**





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. We also offer premium financing to our
      own
      and third-party insureds through our wholly owned subsidiary, Federated
      Premium.





Federated
      National is authorized to underwrite homeowners’ property and casualty insurance
      and personal automobile insurance in Florida as an admitted carrier. American
      Vehicle is authorized to underwrite personal automobile insurance and commercial
      general liability coverage in Florida as an admitted carrier. In addition,
      American Vehicle is authorized to underwrite commercial general liability
      insurance in Georgia, Kentucky, South Carolina, Virginia, Missouri and Arkansas
      as a surplus lines carrier and in Texas, Louisiana and Alabama as an admitted
      carrier. American Vehicle operations in Florida, Georgia, Kentucky, Louisiana,
      Texas, South Carolina and Virginia are on-going. American Vehicle operations
      in
      Alabama, Arkansas and Missouri are expected to begin this year. American Vehicle
      has applications pending authorization as a surplus lines carrier in the states
      of California, Mississippi, Nevada and Maryland and an application pending
      submission as a surplus lines carrier to the state of Oklahoma.





-
          23
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




During
      the six months ended June 30, 2007, 79.0%, 19.5% and 1.5% 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, 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.





We
      market
      and distribute our own and third-party insurers’ products and our other services
      primarily in 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 in the state of Florida. Assurance
      MGA is not licensed to do business elsewhere. As American Vehicle continues
      its
      expansion into other states we intend on retaining other general agents to
      market our commercial general liability insurance product beyond the state
      of
      Florida. Assurance MGA currently provides 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’
gross written premium, policy fee income of $25 per policy and other
      administrative fees from the marketing of company 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 national,
      regional and residual market insurance companies, many of whom are larger and
      have greater financial and other resources, have better 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.
      Additionally, during an emergency session in January 2007, the Florida
      legislature passed and the Governor signed into law a bill known as “CS/HB-1A.”
This new law makes fundamental changes to the property and casualty insurance
      business in Florida and undertakes a multi-pronged approach to address the
      cost
      of residential property insurance in Florida. First, the new law requires
      insurance companies to lower their Florida premium rates for residential
      property insurance. The new law also authorizes the state-owned insurance
      company, Citizens, which is free of many of the restraints on private carriers
      such as surplus, ratios, income taxes and reinsurance expense, to reduce its
      premium rates and begin competing against private insurers in the residential
      property insurance market and expands the authority of Citizens to write
      commercial insurance. 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
      products 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. National and regional companies which compete with us in the
      homeowners’ market include Allstate Insurance Company, State Farm Insurance
      Company, First Floridian Insurance Company, and Royal Palm Insurance Company.
      We
      also compete with several Florida domestic property and casualty companies
      such
      as Universal Insurance Company and Coral Insurance Company. During calendar
      year
      2006, the Florida OIR announced the take over of several of our major
      competitors due to the poor financial condition stemming from the effects of
      the
      2005 catastrophic hurricanes.




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




-
          24
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




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.





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 GAAP requires management
      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 LAE and the amount and
      recoverability of amortization of deferred policy acquisition costs. In
      addition, significant estimates form the basis 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 which are described in greater detail in Footnote 2 of the Company’s
      audited financial statements for the fiscal year ended December 31, 2006 filed
      with the SEC on March 16, 2007.





Except
      as
      described below, we believe that during the first six months of fiscal 2007
      there were no significant changes in those critical accounting policies and
      estimates. Senior management has reviewed the development and selection of
      our
      critical accounting policies and estimates and their disclosure in this Form
      10-Q with the Audit committee of our Board of Directors.





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 various 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 LAE, 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 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.




-
          25
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




We
      are
      required to review the contractual terms of all our reinsurance purchases to
      ensure compliance with SFAS No. 113, *Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
      Contracts* .
      The
      statement establishes the conditions required for a contract with a reinsurer
      to
      be accounted for as reinsurance and prescribes accounting and reporting
      standards for those contracts. Contracts that do not result in the reasonable
      possibility that the reinsurer may realize a significant loss from the insurance
      risk assumed generally do not meet the conditions for reinsurance accounting
      and
      must be accounted for as deposits. SFAS No. 113 also requires us to disclose
      the
      nature, purpose and effect of reinsurance transactions, including the premium
      amounts associated with reinsurance assumed and ceded. It also requires
      disclosure of concentrations of credit risk associated with reinsurance
      receivables and prepaid reinsurance premiums.




**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.




In
      February 2007, the FASB issued SFAS No. 159 *“The
      Fair Value Option for Financial Assets and Financial Liabilities —
Including an Amendment of SFAS No. 115”* (“SFAS No. 159”), which permits an entity to measure many financial
      assets and financial liabilities at fair value that are not currently required
      to be measured at fair value. Entities that elect the fair value option will
      report unrealized gains and losses in earnings at each subsequent reporting
      date. The fair value option may be elected on an instrument-by-instrument basis,
      with a few exceptions. SFAS No. 159 amends previous guidance to extend
      the use of the fair value option to available-for-sale and held-to-maturity
      securities. The Statement also establishes presentation and disclosure
      requirements to help financial statement users understand the effect of the
      election. We will adopt SFAS 159 on its effective date, January 1,
      2008.  We do not expect the adoption of SFAS 159 to have a material
      impact, if any, on our financial position or results of operations.





In
      June
      2006, FASB issued FIN 48, *Accounting
      for Uncertainty in Income Taxes* which
      clarifies the accounting for income tax reserves and contingencies recognized
      in
      an enterprise’s financial statements in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      This
      Interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure and transition. This
      Interpretation is effective for fiscal years beginning after December 15, 2006.
      The Company has adopted and concluded that the impact of FIN 48 will be minimal
      and includes a policy of classifying interest and penalties related to income
      tax as elements of income tax expense in the consolidated financial statements.
      As required by FIN 48, this change was done prospectively. Previously, penalties
      and interest were classified as operating and underwriting expenses.





**Analysis
      of Financial Condition**


**As
      of June 30, 2007 as Compared to December 31, 2006**





**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, (i) held-to-maturity, (ii) trading securities or (iii)
      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”.





-
          26
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




Total
      Investments increased $31.2 million, or 25.0%, to $156.1 million as of June
      30,
      2007, as compared to $124.8 million as of December 31, 2006. 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 86.9% of total investments as of June 30, 2007, as compared
      to 84.2% as of December 31, 2006.





We
      did
      not hold any non-traded investment securities during 2007 or 2006.





Below
      is
      a summary of net unrealized gains and (losses) at June 30, 2007 and December
      31,
      2006 by category.




Unrealized
                    (Losses) and GainsJune
                    30, 2007
                
                December
                    31, 2006Fixed
                    maturities:U.S.
                    government obligations and agency obligations
                
                $
                (930,538
                )
                $
                (688,190
                )Obligations
                    of states and political subdivisions
                
                
                (184,715
                )
                
                (145,505
                )(1,115,253
                )
                
                (833,695
                )Corporate
                    securities:Communications
                
                
                4,142
                
                
                6,842Financial
                
                
                (15,735
                )
                
                (18,790
                )Other
                
                
                (176,561
                )
                
                (73,983
                )(188,154
                )
                
                (85,931
                )Equity
                    securities:Common
                    stocks
                
                
                (1,450,345
                )
                
                (631,000
                )Total
                    unrealized (losses) and gains, net
                
                $
                (2,753,752
                )
                $
                (1,550,626
                )




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.





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, principal 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.





-
          27
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




The
      investments held at June 30, 2007 and December 31, 2006 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, though 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.





**Cash
      and Short Term Investments**





Cash
      and
      short term investments, which include cash, certificates of deposits, and money
      market accounts decreased $10.2 million, or 57.1%, to $7.7 million as of June
      30, 2007, as compared to $17.9 million as of December 31, 2006. These balances
      are held primarily in money market accounts at amounts deemed sufficient to
      meet
      short-term cash requirements. Our excess cash and cash equivalents are invested
      in accordance with our long-term liquidity requirements.





**Receivable
      for Investments Sold**





Receivable
      for investments sold increased to $5.0 million as of June 30, 2007, as compared
      to nothing as of December 31, 2006. The increase is a result of investment
      trading activity that occurred in late June and did not settle until early
      July
      2007.





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





Finance
      contracts receivable, net of allowance for credit losses, decreased $0.3
      million, or 19.0%, to $1.5 million as of June 30, 2007, as compared to $1.8
      million as of December 31, 2006. 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 $17.6 million, or 45.1%, to $21.4 million as
      of
      June 30, 2007, as compared to $38.9 million as of December 31, 2006. The
      decrease is due to our payments and 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, decreased $0.2 million, or
      2.4%,
      to $7.0 million as of June 30, 2007, as compared to $7.2 million as of December
      31, 2006.





Our
      homeowners’ insurance premiums receivable decreased $1.7 million, or 41.2%, to
      $2.5 million as of June 30, 2007, as compared to $4.2 million as of December
      31,
      2006. The decrease can be attributed to the seasonality of the purchasing
      patterns of our policy holders.





Our
      commercial general liability insurance premiums receivable increased $2.2
      million, or 83.4%, to $4.9 million as of June 30, 2007, as compared to $2.7
      million as of December 31, 2006.





Premiums
      receivable in connection with our automobile line of business decreased $0.3
      million, or 22.5%, to $0.9 million as of June 30, 2007, as compared to $1.2
      million as of December 31, 2006.





-
          28
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




**Reinsurance
      Recoverable**





Reinsurance
      recoverable increased to $3.0 million as of June 30, 2007, as compared to
      nothing as of December 31, 2006. The increase 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.





**Deferred
      Policy Acquisition Costs**





Deferred
      policy acquisition costs increased $1.3 million, or 11.8%, to $12.5 million
      as
      of June 30, 2007, as compared to $11.2 million as of December 31, 2006. The
      increased production volume for both the homeowners’ and commercial general
      liability product lines is the reason for the increase in this
      asset.





**Deferred
      Income Taxes, net**





Deferred
      income taxes, net, increased $2.5 million, or 69.8%, to $6.1 million as of
      June
      30, 2007, as compared to $3.6 million as of December 31, 2006.  The
      increase is comprised primarily of $2.3 million related to discounted unearned
      premiums and $0.2 million in conjunction with other deferred tax assets, offset
      by $0.5 million associated with deferred policy acquisition costs.





**Income
      Taxes Receivable**




Income
      taxes receivable increased $0.3 million, or 40.1%, to $1.1 million as of June
      30, 2007, as compared to $0.8 million as of December 31, 2006. The change is
      due
      to tax payment patterns in connection with our tax liabilities.





**Property,
      Plant and Equipment, net**





Property,
      plant and equipment, net, decreased $0.1 million, or 9.6%, to $1.2 million
      as of
      June 30, 2007, as compared to $1.3 million as of December 31, 2006. The decrease
      is primarily due to depreciation and amortization of our existing property,
      plant and equipment.





**Other
      Assets**





Other
      assets increased $6.2 million, or 135.1%, to $10.7 million as of June 30, 2007,
      as compared to $4.6 million as of December 31, 2006. Major components of other
      assets are as follows:


June
                  30, 2007
              
              December
                  31, 2006Accrued
                  interest income
              
              $
              1,713,615
              
              $
              1,515,584Commissions
                  and revenue sharing receivable
              
              
              7,278,117
              
              
              979,677Notes
                  receivable
              
              
              787,900
              
              
              1,027,958Unamortized
                  loan costs
              
              
              6,481
              
              
              61,572Compensating
                  cash balances
              
              
              9,911
              
              
              9,911Due
                  from sale of discontinued operations, net
              
              
              320,000
              
              
              320,000Prepaid
                  expenses
              
              
              476,393
              
              
              531,008Other
              
              
              117,480
              
              
              110,642$
              10,709,897
              
              $
              4,556,352




The
      increase in commissions and revenue sharing receivable is primarily due to
      two
      separate and non-reoccurring operating events. First, pursuant to the terms
      in
      our three-year reinsurance treaties, we were afforded the right to cancel the
      remaining two years and receive a no loss experience commission. In connection
      with these treaties we have reported approximately $2.8 million of commission
      income during the six months ended June 30, 2007. The second non-reoccurring
      operating event was $2.4 million in commissions that we received from our
      participation in a Citizens take out program in May through July 2004, wherein
      the commissions were only earned upon the successful retention of the
      policyholders for thirty-six months.





**Unpaid
      Losses and LAE**





Unpaid
      losses and LAE increased $5.6 million, or 14.1%, to $45.2 million as of June
      30,
      2007, as compared to $39.6 million as of December 31, 2006. The increase 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, 2007
              
              December
                  31, 2006Homeowners'
              
              $
              26,735,894
              
              $
              21,788,126Commercial
                  General Liability
              
              
              13,534,474
              
              
              11,100,116Automobile
              
              
              4,936,051
              
              
              6,727,236$
              45,206,419
              
              $
              39,615,478





-
          29
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




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 incurred but
      not yet reported (“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.





**Unearned
      Premium**





Unearned
      premiums increased $12.8 million, or 16.5%, to $90.7 million as of June 30,
      2007, as compared to $77.8 million as of December 31, 2006. The increase was
      due
      to a $12.0 million increase in unearned homeowners’ insurance premiums, a $1.6
      million increase in unearned commercial general liability premiums, and a $0.7
      million decrease in unearned automobile premiums. These changes reflect our
      continued emphasis in 2007 on property and commercial general liability
      insurance products.




**Due
      to Reinsurers, net**





Due
      to
      reinsurers, net decreased to nothing and converted to the asset reinsurance
      recoverable, net, as of June 30, 2007, as compared to $4.2 million as of
      December 31, 2006.





**Premium
      Deposits and Customer Credit Balances**





Premium
      deposits and customer credit balances increased $0.4 million, or 9.9%, to $4.2
      million as of June 30, 2007, as compared to $3.8 million as of December 31,
      2006. Premium deposits are monies received on policies not yet in force as
      of
      June 30, 2007.





**Revolving
      Credit Outstanding**





Revolving
      credit outstanding remained unchanged at nearly nothing as of June 30, 2007,
      as
      compared to December 31, 2006. The balance is due to our cash management
      efforts, our requested credit reduction, 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 increased $2.5 million, or 30.4%, to $10.6 million as of June 30,
      2007, as compared to $8.1 million as of December 31, 2006. The bank overdraft
      relates primarily to loss and LAE disbursements paid but not yet presented
      for
      payment by the policyholder or vendor. The increase relates to our payment
      patterns in relationship to the rate at which those cash disbursements are
      presented to the bank for payment.




-
          30
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




**Subordinated
      Debt**





Subordinated
      debt decreased $2.1 million, or 50.0%, to $2.1 million as of June 30, 2007,
      as
      compared to $4.2 million as of December 31, 2006. The decrease is in connection
      with the scheduled quarterly principal payments on the September 2004
      Notes.





**Deferred
      Gain from Sale of Property**





Deferred
      gain from sale of property decreased $0.2 million, or 9.5%, to $2.2 million
      as
      of June 30, 2007, as compared to $2.5 million as of December 31, 2006. In
      accordance with the provisions of FASB No. 13, we are amortizing 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 decreased $2.3 million, or 40.6%, to $3.4 million
      as of June 30, 2007, as compared to $5.7 million as of December 31, 2006. This
      decrease is due to our cash management efforts and timing of payments with
      our
      trade vendors.





**Results
      of Operations**


**Three
      Months Ended June 30, 2007 as Compared to Three Months Ended June 30,
      2006**





**Gross
      Premiums Written**





Gross
      premiums written decreased $6.3 million, or 12.4%, to $44.5 million for the
      three months ended June 30, 2007, as compared to $50.8 million for the three
      months ended June 30, 2006. The following table denotes gross premiums written
      by major product line:


Three
                  months ended June 30,2007
              
              2006Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              34,095,538
              
              
              76.6
              %
              $
              41,855,449
              
              
              82.5
              %Commercial
                  liability
              
              
              10,074,519
              
              
              22.7
              %
              
              8,236,906
              
              
              16.2
              %Automobile
              
              
              291,447
              
              
              0.7
              %
              
              660,317
              
              
              1.3
              %Gross
                  premiums written
              
              $
              44,461,504
              
              
              100.0
              %
              $
              50,752,672
              
              
              100.0
              %




The
      Company’s sale of homeowners’ policies decreased $7.8 million, or 18.5% to $34.1
      million for the three months ended June 30, 2007, as compared to $41.9 million
      for the three months ended June 30, 2006.  The
      decrease is primarily due to the soft market conditions prevailing in the State
      of Florida lead by Citizens, the state run insurance company. We believe that
      the competition in this market is based primarily on pricing insurance products
      at rates that do not reflect current economic conditions. We do not intend
      to
      compete with others solely on the basis of pricing mechanisms. Where our rates
      are competitive (and there are territories in Florida that so exist) we will
      continue to market our property insurance product. We expect additional
      challenges in the near term in connection with our rating agency, Demotech,
      Inc.’s recent decision to remove our property insurer’s financial stability
      rating “A” “Exceptional”. We intend to discuss with Demotech, Inc.
      representatives corrective actions necessary to restore our rating.





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 30,2007
              
              2006(Dollars
                  in thousands)Amount
              
              Percentage
              
              Amount
              
              PercentageFlorida
              
              $
              6,881
              
              
              68.4
              %
              $
              6,174
              
              
              75.0
              %Georgia
              
              
              295
              
              
              2.9
              %
              
              235
              
              
              2.9
              %Kentucky
              
              
              4
              
              
              0.0
              %
              
              -
              
              
              0.0
              %Louisiana
              
              
              1,481
              
              
              14.7
              %
              
              1,536
              
              
              18.6
              %South
                  Carolina
              
              
              43
              
              
              0.4
              %
              
              -
              
              
              0.0
              %Texas
              
              
              1,354
              
              
              13.4
              %
              
              292
              
              
              3.5
              %Virginia
              
              
              17
              
              
              0.2
              %
              
              -
              
              
              0.0
              %Gross
                  premiums written
              
              $
              10,075
              
              
              100.0
              %
              $
              8,237
              
              
              100.0
              %




-
          31
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




The
      Company’s sale of auto insurance policies decreased by $0.4 million, or 55.9%,
      to $0.3 million for the three months ended June 30, 2007, as compared to $0.7
      million for the three months ended June 30, 2006.





**Gross
      Premiums Ceded**





Gross
      premiums ceded increased $12.4 million, or 368.7%, to $15.8 million for the
      three months ended June 30, 2007, as compared to $3.4 million for the three
      months ended June 30, 2006.





**(Decrease)
      in Prepaid Reinsurance Premiums**





The
      (decrease) in prepaid reinsurance premiums was ($0.8) million for the three
      months ended June 30, 2007, as compared to ($0.6) million for the three months
      ended June 30, 2006. The increased charge to written premium is primarily
      associated with the timing of our reinsurance payments measured against the
      term
      of the underlying reinsurance policies.





**(Increase)
      in Unearned Premiums**





The
      (increase) in unearned premiums was ($3.0) million for the three months ended
      June 30, 2007, as compared to ($18.0) million for the three months ended June
      30, 2006 . The
      change was due to a ($1.9) million increase in unearned homeowners’ insurance
      premiums, a ($1.8) million increase in unearned commercial general liability
      premiums and a $0.6 million decrease in unearned automobile premiums. These
      changes reflect our continued growth along our homeowners’ and commercial
      general liability lines of business.





**Net
      Premiums Earned**





Net
      premiums earned decreased $3.9 million, or 13.7%, to $24.8 million for the
      three
      months ended June 30, 2007, as compared to $28.7 million for the three months
      ended June 30, 2006. The following table denotes net premiums earned by product
      line:


Three
                  months ended June 30,2007
              
              2006Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              15,540,961
              
              
              32.94
              %
              $
              18,394,591
              
              
              36.39
              %Commercial
                  liability
              
              
              8,403,025
              
              
              17.81
              %
              
              6,515,591
              
              
              12.89
              %Automobile
              
              
              869,717
              
              
              1.84
              %
              
              3,830,458
              
              
              7.58
              %Net
                  premiums earned
              
              $
              24,813,703
              
              
              52.59
              %
              $
              28,740,640
              
              
              56.86
              %




As
      noted
      above, the Company’s efforts to expand commercial general liability lines of
      insurance products are coming to fruition, as reflected by increased net
      premiums earned of $1.9 million, or 29.0 % to $8.4 million for the three months
      ended June 30, 2007, as compared to $6.5 million for the three months ended
      June
      30, 2006.





**Commission
      Income**





Commission
      income increased $6.4 million, to $6.5 million for the three months ended June
      30, 2007, as compared to $0.1 million for the three months ending June 30,
      2006.
      The primary components of our commission income are non-reoccurring operating
      events stemming from two separate events. First and pursuant to provisions
      contained in our three-year reinsurance treaties, we were afforded the right
      to
      cancel the remaining two years and receive a no loss experience commission.
      In
      connection with these treaties we have reported approximately $2.8 million
      in
      commission income during the three months ended June 30, 2007. The second
      non-reoccurring operating event was $2.4 million in commissions that we received
      from our participation in a Citizens take out program in May through July 2004,
      wherein the commissions were only earned upon the successful retention of the
      policyholders for thirty-six months.





-
          32
          -


21stCentury
        Holding Company
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




**Finance
      Revenue**





Finance
      revenue decreased $0.3 million, or 67.8%, to $0.2 million for the three months
      ended June 30, 2007, as compared to $0.5 million for the three months ended
      June
      30, 2006. The change is primarily due to the Company’s decreased emphasis on
      automobile insurance and the finance revenue derived there-from.




**Managing
      General Agent Fees**





Managing
      general agent fees increased 11.2% to $0.8 million for the three months ended
      June 30, 2007, as compared to $0.7 million for the three months ended June
      30,
      2006.





**Net
      Investment Income**





Net
      investment income increased $0.5 million, or 32.2%, to $2.1 million for the
      three months ended June 30, 2007, as compared to $1.6 million for the three
      months ended June 30, 2006. 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 5.7 % for the three months
      ended June 30, 2007 as compared to a yield of 5.4% for the three months ended
      June 30, 2006.





**Net
      Realized Investment Gains**





Net
      realized investment gains decreased to $0.1 million for the three months ended
      June 30, 2007, as compared to $0.3 million for the three months ended June
      30, 2006. The table below depicts gains by investment category.




Net
                  Realized (Losses) Gains
                Three
                  Months Ended June 30,2007
              
              2006Fixed
                  maturities:Obligations
                  of states and political subdivisions
              
              $
              -
              
              $
              (32,516
              )Corporate
                  securities:Financial
              
              
              -
              
              
              -Equity
                  securities:Common
                  stocks
              
              
              80,087
              
              
              315,857Total
                  net realized (losses) gains
              
              $
              80,087
              
              $
              283,341





**Other
      Income**





Other
      income decreased $0.3 million, or 96.5%, to nearly nothing for the three months
      ended June 30, 2007, as compared to $0.4 million for the three months ended
      June
      30, 2006. Major components of other income for the three months ended June
      30,
      2007 included approximately $0.4 million in connection with FIGA fees, $0.1
      million in partial recognition of our gain on the sale of our Lauderdale Lakes
      property and less than $0.1 million in connection with rental and interest
      income. Offsetting the components totaling $0.6 million was a $0.6 million
      reclassification of commission income included as other income during the three
      months ended March 31, 2007.





-
          33
          -


21stCentury
        Holding Company
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




**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 increased by $0.3 million, or 3.4%, to $9.7 million for the three months
      ended June 30, 2007, as compared to $9.3 million for the three months ended
      June
      30, 2006.  The
      overall increase reflects an increase of $1.1 million in our homeowners’ loss
      and LAE program, an increase of $2.5 million in our commercial general liability
      loss and LAE program netted against $3.3 million decrease in loss and LAE in
      connection with our automobile program.





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 charge to operations during the three months ended June 30,
      2007 from the four hurricanes that occurred in July, August, September and
      October of 2005.





Claim
              
              Gross
              
              Reinsurance
              
              Net2005
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -Katrina
                  (August 25)
              
              
              2
              
              
              0.1
              
              
              0.1
              
              
              -Rita
                  (September 20)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Wilma
                  (October 24)
              
              
              46
              
              
              (0.7
              )
              
              (0.7
              )
              
              -Total
                  Loss Estimate
              
              
              48
              
              $
              (0.6
              )
              $
              (0.6
              )
              $
              -





The
      table
      below reflects no charge to operations during the three months ended June 30,
      2007 from the four hurricanes that occurred in July, August and September 2004.




Claim
              
              Gross
              
              Reinsurance
              
              Net2004
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Charley
                  (August 13)
              
              
              -
              
              $
              1.3
              
              $
              1.3
              
              $
              -Frances
                  (September 3)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Ivan
                  (September 14)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Jeanne
                  (September 25)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  Loss Estimate
              
              
              -
              
              $
              1.3
              
              $
              1.3
              
              $
              -





In
      accordance with GAAP, our loss ratio is computed as loss and LAE divided by
      net
      premiums earned. A lower loss ratio generally results in higher operating
      income. Our loss ratio for the three month period ended June 30, 2007 was 38.9%
      compared with 32.5% for the same period in 2006. The table below reflects the
      loss ratios by product line.





Three
                  Months Ended June 30,2007
              
              2006Homeowners'
              
              
              37.5%
              
              
              25.8%Commercial
                  General Liability
              
              
              40.0%
              
              
              13.1%Automobile
              
              
              54.7%
              
              
              97.7%All
                  lines
              
              
              38.9%
              
              
              32.5%





-
          34
          -


21stCentury
        Holding Company
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased $0.8 million, or 34.3%, to $3.1 million
      for
      the three months ended June 30, 2007, as compared to $2.3 million for the three
      months ended June 30, 2006. The increase is primarily due to the $0.6 million
      increase in bad debts expense, which totaled $0.7 million for the three months
      ended June 30, 2007, as compared to less than $0.1 million for the three months
      ended June 30, 2006. Approximately $0.3 million of the charge to bad debts
      expense during the three months ended March 31, 2007 was due to an increase
      in
      the allowance for doubtful accounts.





**Salaries
      and Wages**





Salaries
      and wages decreased less than $0.1 million, or 2.2%, to $1.7 million for the
      three months ended June 30, 2007, as compared to $1.8 million for the three
      months ended June 30, 2006.




**Interest
      Expense**





Interest
      expense decreased $0.1 million, or 66.8%, to $0.1 million for the three months
      ended June 30, 2007, as compared to $0.2 million for the three months ended
      June
      30, 2006. The decrease is in correlation to our decreased subordinated
      debt.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $0.8 million, or 18.9%, to
      $4.9 million for the three months ended June 30, 2007, as compared to $4.1
      million for the three months ended June 30, 2006. 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 decreased $1.2 million, or 20.2%, to $4.6
      million for the three months ended June 30, 2007, as compared to $5.7 million
      for the three months ended June 30, 2006. The effective rate for income tax
      expense was 30.3% for the three months ended June 30, 2007, as compared to
      39.1%
      for the same three month period in 2006.





**Net
      Income**





As
      a
      result of the foregoing, the Company’s net income for the three months ended
      June 30, 2007 was $10.5 million, compared to net income of $8.9 million for
      the
      three months ended June 30, 2006.





**Results
      of Operations**


**Six
      Months Ended June 30, 2007 as Compared to Six Months Ended June 30,
      2006**





**Gross
      Premiums Written**





Gross
      premiums written increased $7.3 million, or 8.4%, to $93.7 million for the
      six
      months ended June 30, 2007, as compared to $86.4 million for the six months
      ended June 30, 2006. The following table denotes gross premiums written by
      major
      product line:





Six
                  months ended June 30,2007
              
              2006Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              73,959,159
              
              
              79.0
              %
              $
              64,957,975
              
              
              75.2
              %Commercial
                  liability
              
              
              18,224,617
              
              
              19.5
              %
              
              16,457,119
              
              
              19.1
              %Automobile
              
              
              1,468,457
              
              
              1.5
              %
              
              4,946,651
              
              
              5.7
              %Gross
                  premiums written
              
              $
              93,652,233
              
              
              100.0
              %
              $
              86,361,745
              
              
              100.0
              %




-
          35
          -


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations




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 30,2007
              
              2006(Dollars
                  in thousands)Amount
              
              Percentage
              
              Amount
              
              PercentageFlorida
              
              $
              12,505
              
              
              68.7
              %
              $
              12,741
              
              
              77.4
              %Georgia
              
              
              592
              
              
              3.2
              %
              
              570
              
              
              3.5
              %Kentucky
              
              
              5
              
              
              0.0
              %
              
              -
              
              
              0.0
              %Louisiana
              
              
              2,682
              
              
              14.7
              %
              
              2,854
              
              
              17.3
              %South
                  Carolina
              
              
              87
              
              
              0.5
              %
              
              -
              
              
              0.0
              %Texas
              
              
              2,322
              
              
              12.7
              %
              
              292
              
              
              1.8
              %Virginia
              
              
              32
              
              
              0.2
              %
              
              -
              
              
              0.0
              %Gross
                  premiums written
              
              $
              18,225
              
              
              100.0
              %
              $
              16,457
              
              
              100.0
              %





The
      Company’s sale of homeowners’ policies increased $9.0 million, or 13.9% to $74.0
      million for the six months ended June 30, 2007, as compared to $65.0 million
      for
      the six months ended June 30, 2006. The increase is primarily due to the
      increased rates in effect on our homeowners’ policies, and to a lesser extent, a
      greater number of in-force policies. We believe that the competition in this
      market is based primarily on pricing insurance products at rates that do not
      reflect current economic conditions. We do not intend to compete with others
      solely on the basis of pricing mechanisms. Where our rates are competitive
      (and
      there are territories in Florida that so exist) we will continue to market
      our
      property insurance product. We expect additional challenges in the near term
      in
      connection with our rating agency, Demotech, Inc.’s recent decision to remove
      our property insurer’s financial stability rating “A” “Exceptional”. We intend
      to discuss with Demotech, Inc. representatives corrective actions necessary
      to
      restore our rating.





The
      Company’s sale of auto insurance policies decreased by $3.5 million, or 70.3%,
      to $1.5 million for the six months ended June 30, 2007, as compared to $4.9
      million for the six months ended June 30, 2006.





**Gross
      Premiums Ceded**





Gross
      premiums ceded increased $12.4 million, or 368.9%, to $15.8 million for the
      six
      months ended June 30, 2007, as compared to $3.4 million for the six months
      ended
      June 30, 2006.





**(Decrease)
      in Prepaid Reinsurance Premiums**





The
      (decrease) in prepaid reinsurance premiums was ($17.8) million for the six
      months ended June 30, 2007, as compared to ($9.3) million for the six months
      ended June 30, 2006. The increased charge to written premium is primarily
      associated with the timing of our reinsurance payments measured against the
      term
      of the underlying reinsurance policies.




**(Increase)
      in Unearned Premiums**





The
      (increase) in unearned premiums was ($12.8) million for the six months ended
      June 30, 2007, as compared to ($23.2) million for the six months ended June
      30,
      2006. The change was due to a ($12.0) million increase in unearned homeowners’
insurance premiums, a ($1.6) million increase in unearned commercial general
      liability premiums and a $0.7 million decrease in unearned automobile premiums.
      These changes reflect our continued growth along our homeowners’ and commercial
      general liability lines of business.





-
          36
          -




21stCentury
      Holding Company





**Net
      Premiums Earned**





Net
      premiums earned decreased $3.4 million, or 6.6%, to $47.2 million for the six
      months ended June 30, 2007, as compared to $50.5 million for the six months
      ended June 30, 2006. The following table denotes net premiums earned by product
      line:





Six
                  months ended June 30,2007
              
              2006Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              28,351,819
              
              
              60.08
              %
              $
              29,680,112
              
              
              58.71
              %Commercial
                  liability
              
              
              16,668,739
              
              
              35.33
              %
              
              12,382,467
              
              
              24.50
              %Automobile
              
              
              2,166,173
              
              
              4.59
              %
              
              8,485,501
              
              
              16.79
              %Net
                  premiums earned
              
              $
              47,186,731
              
              
              100.00
              %
              $
              50,548,080
              
              
              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 net
      premiums earned of $4.3 million, or 34.6 % to $16.7 million for the six months
      ended June 30, 2007, as compared to $12.4 million for the six months ended
      June
      30, 2006.





**Commissions
      Income**





Commission
      income increased $6.3 million, to $6.5 million for the six months ended June
      30,
      2007 as compared to $0.2 million for the six months ending June 30, 2006. The
      primary components of our commission income are non-reoccurring operating events
      stemming from two separate events. First and pursuant to provisions contained
      in
      our three-year reinsurance treaties, we were afforded the right to cancel the
      remaining two years and be entitled to receive a no loss experience commission.
      In connection with this treaty we have reported approximately $2.8 million
      during the six months ended June 30, 2007. The second non-reoccurring operating
      event was in connection with commission income totaling approximately $2.4
      million in connection with a Citizens take out program in 2004, wherein the
      commission was only earned upon the successful retention of the policyholder
      for
      thirty-six months.





**Finance
      Revenue**





Finance
      revenue decreased $0.8 million, or 69.4%, to $0.3 million for the six months
      ended June 30, 2007, as compared to $1.1 million for the six months ended June
      30, 2006. The change is primarily due to the Company’s decreased emphasis on
      automobile insurance and the finance revenue derived there-from.




**Managing
      General Agent Fees**





Managing
      general agent fees was unchanged at $1.4 million for the six months ended June
      30, 2007, as compared to $1.4 million for the six months ended June 30, 2006.





**Net
      Investment Income**





Net
      investment income increased $0.9 million, or 31.8%, to $3.7 million for the
      six
      months ended June 30, 2007, as compared to $2.8 million for the six months
      ended
      June 30, 2006. 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 5.3 % for the six months ended June 30,
      2007
      as compared to a yield of 4.8% for the six months ended June 30, 2006.





**Net
      Realized Investment (Losses) Gains**





Net
      realized investment (losses) gains were nearly nothing for the six months ended
      June 30, 2007, as compared to $0.5 for the six months ended June 30, 2006.
      The
      table below depicts (losses) gains by investment category.




37


21stCentury
        Holding Company


Net
                  Realized (Losses) GainsSix
                  Months Ended June 30,2007
              
              2006Fixed
                  maturities:U.S.
                  government obligations and agencies
              
              $
              -
              
              $
              (32,516
              )Obligations
                  of states and political subdivisions
              
              
              (63
              )
              
              75(63
              )
              
              (32,441
              )Corporate
                  securities:Other
              
              
              -
              
              
              (33,816
              )Equity
                  securities:Common
                  stocks
              
              
              (47,982
              )
              
              545,809Total
                Net Realized (Losses) Gains
              
              $
              (48,045
              )
              $
              479,552





**Other
      Income**





Other
      income increased less than $0.1 million, or 3.2%, to $1.0 million for the six
      months ended June 30, 2007, as compared to $0.9 million for the six months
      ended
      June 30, 2006. Major components of other income for the six months ended June
      30, 2007 included approximately $0.7 million in connection with FIGA fees,
      $0.2
      million in partial recognition of our gain on the sale of our Lauderdale Lakes
      property and less than $0.1 million of rental and interest income.





**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 increased by $6.8 million, or 40.5%, to $23.8 million for the six months
      ended June 30, 2007, as compared to $16.9 million for the six months ended
      June
      30, 2006. The overall increase reflects an increase of $7.2 million in our
      homeowners’ loss and LAE program (including $1.0 million charge for adverse
      development in connection with the 2004 hurricane season), an increase of $3.8
      million in our commercial general liability loss and LAE program netted against
      $4.2 million decrease in loss and LAE in connection with our automobile
      program.





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 charge to operations during the six months ended June 30,
      2007
      from the four hurricanes that occurred in July, August, September and October
      of
      2005.




38




21stCentury
      Holding Company


Claim
              
              
              Gross
              
              
              Reinsurance
              
              
              Net2005
                  Hurricanes
              
              
              Count
              
              
              Losses
              
              
              Recoveries
              
              
              Losses(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -Katrina
                  (August 25)
              
              
              (1
              )
              
              0.1
              
              
              0.1
              
              
              -Rita
                  (September 20)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Wilma
                  (October 24)
              
              
              140
              
              
              10.5
              
              
              10.5
              
              
              -Total
                  Loss Estimate
              
              
              139
              
              $
              10.6
              
              $
              10.6
              
              $
              -





The
      table
      below reflects a $1.0 million charge to operations during the six months ended
      June 30, 2007 from the four hurricanes that occurred in July, August and
      September 2004.




Claim
              
              
              Gross
              
              
              Reinsurance
              
              
              Net2004
                  Hurricanes
              
              
              Count
              
              
              Losses
              
              
              Recoveries
              
              
              Losses(Dollars
                  in millions)Charley
                  (August 13)
              
              
              1
              
              $
              1.3
              
              $
              1.3
              
              $
              -Frances
                  (September 3)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Ivan
                  (September 14)
              
              
              -
              
              
              1.0
              
              
              -
              
              
              1.0Jeanne
                  (September 25)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  Loss Estimate
              
              
              1
              
              $
              2.3
              
              $
              1.3
              
              $
              1.0





In
      accordance with GAAP, our loss ratio is computed as loss and LAE divided by
      net
      premiums earned. A lower loss ratio generally results in higher operating
      income. Our loss ratio for the six month period ended June 30, 2007 was 50.3%
      compared with 33.5% for the same period in 2006. The table below reflects the
      loss ratios by product line.





Six
                  Months Ended June 30,2007
              
              2006Homeowners'
              
              
              52.3%
              
              
              26.7%Commercial
                  General Liability
              
              
              36.1%
              
              
              17.6%Automobile
              
              
              135.2%
              
              
              83.6%All
                  lines
              
              
              50.3%
              
              
              33.5%





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased $2.5 million, or 53.2%, to $7.1 million
      for
      the six months ended June 30, 2007, as compared to $4.6 million for the six
      months ended June 30, 2006.  The
      increase is due to the $1.1 million increase in bad debts expense, which totaled
      $1.3 million for the six months ended June 30, 2007, as compared to $0.1 million
      for the six months ended June 30, 2006. Approximately $0.4 million of the charge
      to bad debts expense during the six months ended June 30, 2007 was due to an
      increase in the allowance for doubtful accounts. The increase is also due to
      a
      charge to operations of $1.0 million in connection with the tentative and
      expected to be negotiated settlement of an expired agreement to service insureds
      for a third-party insurance company. The terms of this agreement call for our
      company to adjust claims associated with policies of the third-party insurance
      company written between January 1, 2000 and December 31, 2001. The change is
      also due to a $0.5 million increase in premium tax expense which is directly
      correlated to an increase in written premium.





**Salaries
      and Wages**





Salaries
      and wages decreased $0.3 million, or 8.9%, to $3.3 million for the six months
      ended June 30, 2007, as compared to $3.6 million for the six months ended June
      30, 2006.




39


'
 21stCentury
        Holding Company


**Interest
      Expense**





Interest
      expense decreased $0.3 million, or 64.6%, to $0.1 million for the six months
      ended June 30, 2007, as compared to $0.4 million for the six months ended June
      30, 2006. The decrease is in correlation to our decreased subordinated
      debt.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $1.5 million, or 18.3%, to
      $9.5 million for the six months ended June 30, 2007, as compared to $8.0 million
      for the six months ended June 30, 2006. 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 decreased $4.0 million, or 44.4%, to $5.0
      million for the six months ended June 30, 2007, as compared to $8.9 million
      for
      the six months ended June 30, 2006. The effective rate for income tax expense
      was 30.6% for the six months ended June 30, 2007, as compared to 37.5% the
      same
      six month period in 2006.





**Net
      Income**





As
      a
      result of the foregoing, the Company’s net income for the six months ended June
      30, 2007 was $11.3 million, compared to net income of $14.9 million for the
      six
      months ended June 30, 2006.





**Liquidity
      and Capital Resources**





For
      the
      six months ended June 30, 2007, our primary sources
      of capital were
      revenues generated from operations, including decreased prepaid reinsurance
      premiums, increased unearned premiums, an increase in unpaid losses and LAE,
      increased bank overdraft and an increase in the provision for uncollectible
      premiums receivable. Operational sources of capital also included increased
      premium deposits and customer credit balances, decreased finance contracts
      receivable, depreciation and amortization, increased non-cash compensation
      and
      common stock issued for interest on notes. Also contributing to our liquidity
      were proceeds from the sale of investment securities, 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, 2007, operations provided net operating cash flow
      of
      $30.7 million, as compared to $49.3 million for the six months ended June 30,
      2006.





For
      the
      six months ended June 30, 2007, operations generated $51.5 million of gross
      cash
      flow due to a $17.6 million decrease in prepaid reinsurance premiums, a $12.8
      million increase in unearned premiums, a $5.6 million increase in unpaid losses
      and LAE, a $2.5 million increase in bank overdraft and a $0.4 million increase
      in the provision for uncollectible premiums receivable. To a much less
      significant extent, operations generated additional sources of cash via a $0.4
      million increase in premium deposits and customer credit balances, a $0.4
      million decrease in finance contracts receivable, $0.2 million in depreciation
      and amortization, $0.1 million in non-cash compensation and $0.1 million in
      common stock issued for interest on notes, all in conjunction with net income
      of
      $11.3 million.





For
      the
      six months ended June 30, 2007, operations used $20.8 million of gross cash
      flow
      primarily due to a $7.3 million increase in reinsurance recoverable, net, a
      $6.4
      million increase in other assets, a $2.5 million increase in deferred income
      tax
      expense, a $2.3 million decrease in accounts payable and accrued expenses,
      a
      $1.3 million increase in policy acquisition costs, net of amortization, a $0.3
      million increase in income taxes recoverable, a $0.2 million increase in
      premiums receivable, $0.2 million in amortization of investment discount, net,
      less than $0.1 million in net realized investment losses and less than a $0.1
      million increase in the provision for credit losses, net.





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




40




21stCentury
      Holding Company







For
      the
      six months ended June 30, 2007, net investing activities used $36.7 million,
      as
      compared to $48.9 million for the six months ended June 30, 2006. Our available
      for sale investment portfolio is highly liquid as it consists entirely of
      readily marketable securities.





For
      the
      six months ended June 30, 2007, investing activities generated $72.0 million
      and
      used $108.7 million from the maturity several times over of our very short
      municipal portfolio.





For
      the
      six months ended June 30, 2007, net financing activities used $4.2 million,
      as
      compared to providing $3.5 million for the six months ended June 30, 2006.
      For
      the six months ended June 30, 2007, the sources of cash in connection with
      financing activities included $0.1 million from the exercise of stock options
      and $0.1 million from the tax benefit related to non-cash compensation. The
      uses
      of cash in connection with financing activities included $2.9 million in
      dividends paid and $1.5 million for the purchase of treasury stock.





Federated
      Premium’s operations are partially funded by the revolving loan agreement with
      FlatIron. Outstanding borrowings under the revolving loan agreement were
      approximately $10,000 as of both June 30, 2007 and December 31, 2006. The
      effective interest rate on this line of credit, based on our average outstanding
      borrowings under the revolving loan agreement, was 20.22% and 14.4% for the
      six
      months ended June 30, 2007 and 2006, respectively. Interest expense on this
      revolving credit line totaled approximately $1,000 and $7,000 for the six months
      ended June 30, 2007 and 2006, 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.





As
      of
      June 30, 2007, 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. Our primary assets and liabilities are monetary in nature. As a
      result, interest rates have a more significant impact on 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 we know 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 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 increasing levels of inflation
      could cause increases in the dollar amount of incurred loss and LAE and thereby
      materially adversely affect future liability requirements.




41


21stCentury
        Holding Company





**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, 2006.
      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 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 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, 2007 follows:


Book
                  Value
              
              Fair
                  / Amortized Value
              
              Unrealized
                  Gain(Loss)Fixed
                  maturities:U.S.
                  government obligations and agencies available for sale
              
              $
              81,077,632
              
              
              51.05
              %
              $
              80,147,095
              
              
              51.36
              %
              $
              (930,537
              )U.S.
                  government obligations and agencies held to maturity
              
              
              19,371,569
              
              
              12.20
              %
              
              19,371,567
              
              
              12.41
              %
              
              (2
              )Obligations
                  of states and political subdivisions available for sale
              
              
              49,009,647
              
              
              30.86
              %
              
              48,824,931
              
              
              31.29
              %
              
              (184,716
              )Obligations
                  of states and political subdivisions held to maturity
              
              
              501,355
              
              
              0.32
              %
              
              501,355
              
              
              0.32
              %
              
              -149,960,203
              
              
              94.43
              %
              
              148,844,948
              
              
              95.38
              %
              
              (1,115,255
              )Corporate
                  securities:Communications
                  available for sale
              
              
              507,508
              
              
              0.34
              %
              
              511,652
              
              
              0.33
              %
              
              4,144Financial
                  available for sale
              
              
              500,000
              
              
              0.31
              %
              
              484,265
              
              
              0.31
              %
              
              (15,735
              )Other
                  available for sale
              
              
              1,650,000
              
              
              1.04
              %
              
              1,473,439
              
              
              0.94
              %
              
              (176,561
              )Other
                  held to maturity
              
              
              500,000
              
              
              0.31
              %
              
              500,000
              
              
              0.32
              %
              
              -3,157,508
              
              
              2.00
              %
              
              2,969,356
              
              
              1.90
              %
              
              (188,152
              )Equity
                  securities:Common
                  stocks available for sale
              
              
              5,699,858
              
              
              3.57
              %
              
              4,249,513
              
              
              2.72
              %
              
              (1,450,345
              )Total
                  fixed, corporate and equity securities
              
              $
              158,817,569
              
              
              100.00
              %
              $
              156,063,817
              
              
              100.00
              %
              $
              (2,753,752
              )




For
      our
      held to maturity portfolio as of June 30, 2007, the unrealized loss totaled
      approximately $98,000 and was in connection with our U.S. government obligations
      and agencies.





As
      of
      June 30, 2007, there were no concentrations greater than 5% of total investments
      in any single investment other than United States government and agency
      obligations and obligations of states and political subdivisions.





**Item
      4**





**Controls
      and Procedures**







We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in the reports that the Company files
      or
      submits under the Securities and Exchange Act is recorded, processed,
      summarized, and reported within the time periods specified in the SEC’s rules
      and forms, and that such information is accumulated and communicated to the
      Company’s management, including its Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosures.




Our
      management, with the participation of its Chief Executive Officer and Chief
      Financial Officer, has evaluated the effectiveness of our disclosure controls
      and procedures as defined in Rules 13a-15(e) under the Securities Exchange
      Act
      of 1934, as of June 30, 2007.  Based upon their evaluation, the Chief
      Executive Officer and Chief Financial Officer concluded that the Company’s
      disclosure controls and procedures, as of June 30, 2007, were effective to
      provide reasonable assurance that information required to be disclosed by the
      Company in the reports filed or submitted by it under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms, and to provide reasonable assurance that
      information required to be disclosed by the Company in such reports is
      accumulated and communicated to our management, including its Chief Executive
      Officer and Chief Financial Officer, as appropriate to allow timely decisions
      regarding required disclosure.




42




21stCentury
      Holding Company







Our
      Company assesses the adequacy of its internal control over financial reporting
      quarterly and strives to enhance its controls in response to internal control
      assessments and external audit recommendations. No control enhancements during
      the quarter ended June 30, 2007 or through the date of this Form 10-Q have
      materially affected, or are reasonably likely to materially affect, the
      Company’s internal control over financial reporting except as stated in the
      following paragraph.





In
      our
      Form 10-K for the fiscal year ended December 31, 2006, the Company had two
      “material weaknesses” in our internal control over financial reporting with
      respect to (i) the recognition and accounting of unrecorded premium transactions
      and (ii) an income tax issue relating to computing our income tax liability
      where we failed to consider a prior year tax refund applied to our fiscal year
      ended December 31, 2006.





We
      continue our efforts to remediate these material weaknesses through ongoing
      process improvements and the implementation of enhanced policies and controls
      over the timely recognition of unreported premium transactions and tax
      accounting in fiscal 2007, and such remediation will continue during the
      remaining part of fiscal 2007. Accordingly, these material weaknesses have
      yet
      to be fully remediated and tested.




To
      compensate for these material weaknesses, the Company performed additional
      analysis and other procedures in order to prepare the unaudited quarterly
      consolidated financial statements in accordance with generally accepted
      accounting principles in the United States of America. Accordingly, management
      believes that the unaudited consolidated financial statements included in this
      Form 10-Q fairly present, in all material respects, our financial condition,
      results of operations and cash flows for the periods presented.




Except
      for our ongoing remediation efforts, there were no changes during the quarter
      that have materially affected, or are reasonably likely to materially affect,
      our internal control over financial reporting.





43




21stCentury
      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. 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.





On
        July
        27, 2007 and August 7, 2007, two securities class action lawsuits were filed
        against the Company and certain of its executive officers in the United States
        District Court for the Southern District of Florida on behalf of all persons
        and
        entities who purchased the Company's securities between October 3, 2007 through
        May 3, 2007. While the specific factual allegations vary slightly in each
        case,
        the complaints allege that the defendants made false and misleading statements
        and failed to accurately project the Company's business and financial
        performance during the putative class period. The complaints seeks an
        unspecified amount of damages and claim violations of Sections 10(b) and
        20(a)
        of the Securities Exchange Act of 1934 and Rule 10b-5. The Company expects
        that
        these two actions will be consolidated into one case in the United States
        District Court for the Southern District of Florida.


The
      Company believes the allegations are without merit, and intends to vigorously
      defend this class action lawsuit. There can be no assurance regarding the
      ultimate outcome of this matter, or the significance, if any, to the Company’s
      business, consolidated results of operations or financial position.





**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, 2006 and the risk factors
      set forth below, which could materially affect our business, financial condition
      or future results. The risks described in our Annual Report on Form 10-K and
      this Form 10-Q 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.





**We
      are named as a defendant in two securities class action lawsuits and it may
      have
      an adverse impact on our business**




On
      July
      27, 2007 and August 7, 2007, two securities class action lawsuits were filed
      against the Company and certain of its executive officers in the United States
      District Court for the Southern District of Florida on behalf of all persons
      and
      entities who purchased the Company's securities between October 3, 2007 through
      May 3, 2007. While the specific factual allegations vary slightly in each case,
      the complaints allege that the defendants made false and misleading statements
      and failed to accurately project the Company's business and financial
      performance during the putative class period. The complaints seeks an
      unspecified amount of damages and claim violations of Sections 10(b) and 20(a)
      of the Securities Exchange Act of 1934 and Rule 10b-5. The Company expects
      that
      these two actions will be consolidated into one case in the United States
      District Court for the Southern District of Florida.




While
      the
      Company believes that the allegations in the complaint are without merit, an
      unfavorable resolution of pending litigation could have a material adverse
      effect on our financial condition. Litigation may result in substantial costs
      and expenses and significantly divert the attention of the Company's management
      regardless of the outcome. There can be no assurance that the Company will
      be
      able to achieve a favorable settlement of pending litigation or obtain a
      favorable resolution of this litigation if it is not settled. In addition,
      current litigation could lead to increased costs or interruptions of normal
      business operations of the Company.





**Adverse
      ratings by insurance rating agencies may adversely impact our ability to write
      new policies, renew desirable policies or obtain adequate insurance, which
      could
      limit or halt our growth and harm our business.**




Third-party
      rating agencies assess and rate the ability of insurers to pay their claims.
      These financial strength ratings are used by the insurance industry to assess
      the financial strength and quality of insurers. These ratings are based on
      criteria established by the rating agencies and reflect evaluations of each
      insurer's profitability, debt and cash levels, customer base, adequacy and
      soundness of reinsurance, quality and estimated market value of assets, adequacy
      of reserves, and management. Ratings are based upon factors of concern to
      agents, reinsurers and policyholders and are not directed toward the protection
      of investors, such as purchasers of our common stock.




44




21stCentury
      Holding Company







There
      are
      a number of companies which currently rate insurance companies. American Vehicle
      is currently rated by Demotech with a rating of “A” “ *Exceptional”* .
      In July
      2007, we were advised by Demotech that it was unwilling to assign a preliminary
      financial stability rating at the “A” “ *Exceptional”* level to
      Federated National.





We
      were
      rated by A.M. Best until August 2004, but we requested that it stop rating
      Federated National and American Vehicle when these entities were placed under
      review with negative implications. We expect that this may negatively impact
      our
      ability to compete in the property and casualty market in Florida.





**Item
      2**





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





During
      the three months ended June 30, 2007, certain non-executive employees exercised
      options to acquire an aggregate of 1,200 shares of the Company's common stock
      with proceeds to the Company aggregating to approximately $11,000. 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.





During
      May and June 2007, we issued an aggregate 30,000 options to an employee, an
      officer and a director of the Company under our 1998 stock option plan. The
      options have an exercise price between $11.11 and $11.33 per share, vest over
      five years at 20% per year and expire six years from the grant date.





**(b)
      None**





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





On
      May
      14, 2007, the Company’s Board of Directors authorized, pursuant to Section 12 of
      the Securities Exchange Act, the repurchase of up to $5.0 million of its common
      stock. Acting upon the Board’s authorization, the Company repurchased, for
      approximately $1.5 million, 138,261 shares for an average price of $10.99
      between May 16, 2007 and May 21, 2007. The table below provides, in tabular
      format, information about our purchase of equity securities that are registered
      by the Company.




Total
              
              
              
              
              Total
                  Number of Shares
              
              Approximate
                  DollarNumber
                  of
              
              Average
              
              Purchased
                  as Part of
              
              Value
                  of Shares thatShares
              
              Price
                  Paid
              
              Publicly
                  Announced
              
              May
                  Yet Be PurchasedPeriod
              
              Purchased
              
              per
                  Share
              
              Plans
                  or Programs
              
              Under
                  the PlanApril-07
              
              None
              
              
              None
              
              None
              
              NoneMay-07
              
              138,261
              
              $
              10.99
              
              138,261
              
              $3.5
                  millionJune-07
              
              None
              
              
              None
              
              None
              
              $3.5
                  million





**Item
      3**





**Defaults
      upon Senior Securities**





None





**Item
      4**




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





Our
      annual meeting of shareholders was held on May 22, 2007. 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.





45
 
  21stCentury
        Holding Company


Both
      of
      management’s nominees for directors as listed in the proxy statement were
      elected. Edward J. Lawson and Michael H. Braun were elected as Class I directors
      to serve until the Annual Shareholder’s Meeting to be held in 2010 or until
      their successors are qualified and elected. The number of votes cast for each
      nominee is as follows:





Shares
                  Voted
              
              Votes“FOR”
              
              WithheldEdward
                  J. Lawson
              
              
              6,066,647
              
              
              503,605Michael
                  H. Braun
              
              
              6,076,616
              
              
              493,636




The
      proposal to approve the appointment of DeMeo Young McGrath as the Company’s
      independent auditors for the fiscal year ended December 31, 2007, was ratified
      by the following votes:


Shares
                  Voted
              
              Shares
                  Voted
              
              Shares
              
              Broker“FOR”
              
              “AGAINST”
              
              “ABSTAINING”
              
              “NON-VOTE”6,433,958
              
              
              106,175
              
              
              30,118
              
              
              1


**Item
      5**





**Other
      Information**





None





**Item
      6**





**Exhibits**





10.1
      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, 2007 (incorporated by
      reference to Exhibit 10.1 contained in the Company's Form 8-K filed on June
      1,
      2007).




10.2
      Addendums Number 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,
      2007 (incorporated by reference to Exhibit 10.2 contained in the Company's
      Form
      8-K filed on June 1, 2007).




10.3
      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,
      2007 (incorporated by reference to Exhibit 10.3 contained in the Company's
      Form
      8-K filed on June 1, 2007).




10.4
      Addendum No. 3 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,
      2007 (incorporated by reference to Exhibit 10.4 contained in the Company's
      Form
      8-K filed on June 1, 2007).




10.5
      Addendum No. 4 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,
      2007 (incorporated by reference to Exhibit 10.5 contained in the Company's
      Form
      8-K filed on June 1, 2007).





10.6
      Employment Agreement between the Company and Peter J. Prygelski, effective
      June
      25, 2007 (incorporated by reference to Exhibit 10.1 contained in the Company's
      Form 8-K filed on June 19, 2007).





10.7
      Annual Review Agreement between the Company and Peter J. Prygelski, effective
      June 25, 2007 (incorporated by reference to Exhibit 10.2 contained in the
      Company's Form 8-K filed on June 19, 2007).




46


21stCentury
        Holding Company


10.8
              Non-Compete
                Agreement
                between the Company and Peter J. Prygelski, effective June 25, 2007
                (incorporated by reference to Exhibit 10.3 contained in the Company's
                Form
                8-K filed on June 19, 2007)10.9
              Indemnification
                Agreement between the Company and Anthony C. Kryer, III dated June
                25,
                2007. *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


47




21stCentury
      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*****/s/* *Edward J. Lawson*Edward
              J. Lawson, Chief Executive Officer and Chairman of the
              Board /*s/
              Peter J. Prygelski, III*Peter
              J. Prygelski, III, Chief Financial OfficerDate:
              August
              09, 2007


48




**EXHIBIT
        INDEX**
  10.9
              
              Indemnification
                Agreement between the Company and Anthony C. Kryer, III dated June
                25,
                2007. *31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act.*****31.3
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act.*****32.2
              
              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





49