**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 March 31, 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
      - 8,023,644 outstanding as of May 10, 2007










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





**INDEX**




**PAGE****PART
                I: FINANCIAL INFORMATION****ITEM
                1**
            Financial
                Statements and Supplementary Data
            3**ITEM
                2**
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21**ITEM
                3**
            Quantitative
                and Qualitative Disclosures about Market Risk
            35**ITEM
                4**
            Controls
                and Procedures
            35**PART
                II: OTHER INFORMATION****ITEM
                1**
            Legal
                Proceedings
            37**ITEM
                1A**
            Risk
                Factors
            37**ITEM
                2**
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            37**ITEM
                3**
            Defaults
                upon Senior Securities
            37**ITEM
                4**
            Submission
                of Matters to a Vote of Security Holders
            37**ITEM
                5**
            Other
                Information
            37**ITEM
                6**
            Exhibits
            37**SIGNATURES**
            
            38




-2-




**PART
      I: FINANCIAL INFORMATION**


**Item
      1**





21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      BALANCE SHEETS


Period
                  EndingMarch
                  31,
                2007
              
              December
                  31,
                2006(Dollars
                  in Thousands)ASSETSInvestmentsFixed
                  maturities, available for sale, at fair value
              
              $
              113,766
              
              $
              98,525Fixed
                  maturities, held to maturity, at amoritized cost
              
              
              20,379
              
              
              19,667Equity
                  securities, available for sale, at fair value
              
              
              7,749
              
              
              6,641Total
                  investments
              
              
              141,895
              
              
              124,834Cash
                  and short term investments
              
              
              4,149
              
              
              17,917Finance
                  contracts, net of allowance for credit losses of $109 in 2007 and
                  $116
                  in2006,
                  and net of unearned finance charges of $92 in 2007 and $90 in
                  2006
              
              
              1,687
              
              
              1,831Prepaid
                  reinsurance premiums
              
              
              21,955
              
              
              38,927Premiums
                  receivable, net of allowance for credit losses of $154 and $66,
                  respectively
              
              
              6,298
              
              
              7,222Reinsurance
                  recoverable, net
              
              
              12,690
              
              
              -Deferred
                  policy acquisition costs
              
              
              11,953
              
              
              11,153Deferred
                  income taxes, net
              
              
              5,185
              
              
              3,610Income
                  taxes receivable
              
              
              6,209
              
              
              787Property,
                  plant and equipment, net
              
              
              1,220
              
              
              1,296Other
                  assets
              
              
              4,375
              
              
              4,556Total
                  assets
              
              $
              217,616
              
              $
              212,134LIABILITIES
                  AND SHAREHOLDERS' EQUITYUnpaid
                  losses and LAE
              
              $
              48,181
              
              $
              39,615Unearned
                  premiums
              
              
              87,669
              
              
              77,829Due
                  to reinsurers, net
              
              
              -
              
              
              4,237Premiums
                  deposits and customer credit balances
              
              
              3,840
              
              
              3,793Revolving
                  credit outstanding
              
              
              10
              
              
              10Bank
                  overdraft
              
              
              694
              
              
              8,107Subordinated
                  debt
              
              
              3,125
              
              
              4,167Deferred
                  gain from sale of property
              
              
              2,352
              
              
              2,467Accounts
                  payable and accrued expenses
              
              
              5,072
              
              
              5,715Total
                  liabilities
              
              
              150,943
              
              
              145,940Commitments
                  and ContingenciesShareholders'
                  equity:Common
                    stock, $0.01 par value. Authorized 37,500,000 shares; issued
                    and
                    outstanding 7,959,330 and 7,896,919, respectively
              
              
              80
              
              
              79Additional
                  paid-in capital
              
              
              48,253
              
              
              47,070Accumulated
                  other comprehensive income (deficit)
              
              
              (1,093
              )
              
              (967
              )Retained
                  earnings
              
              
              19,434
              
              
              20,011Total
                  shareholders' equity
              
              
              66,673
              
              
              66,193Total
                  liabilities and shareholders' equity
              
              $
              217,616
              
              $
              212,134




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





-3-





21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(UNAUDITED)


Three
                  Months Ended March 31,2007
              
              2006(Dollars
                  in Thousands except
                EPS
                  and dividend data)Revenue:Gross
                  premiums written
              
              $
              49,191
              
              $
              35,609Gross
                  premiums ceded
              
              
              (6
              )
              
              -Net
                  premiums written
              
              
              49,185
              
              
              35,609(Decrease)
                  in prepaid reinsurance premiums
              
              
              (16,972
              )
              
              (8,672
              )(Increase)
                  in unearned premiums
              
              
              (9,840
              )
              
              (5,130
              )Net
                  change in prepaid reinsurance premiums and unearned
                  premiums
              
              
              (26,812
              )
              
              (13,802
              )Net
                  premiums earned
              
              
              22,373
              
              
              21,807Finance
                  revenue
              
              
              187
              
              
              636Managing
                  general agent fees
              
              
              618
              
              
              658Net
                  investment income
              
              
              1,569
              
              
              1,196Net
                  realized investment (losses) gains
              
              
              (128
              )
              
              196Other
                  income
              
              
              967
              
              
              621Total
                  revenue
              
              
              25,585
              
              
              25,115Expenses:Loss
                  and LAE
              
              
              14,103
              
              
              7,569Operating
                  and underwriting expenses
              
              
              3,966
              
              
              2,304Salaries
                  and wages
              
              
              1,556
              
              
              1,838Interest
                  expense
              
              
              85
              
              
              229Policy
                  acquisition costs, net of amortization
              
              
              4,608
              
              
              3,918Total
                  expenses
              
              
              24,318
              
              
              15,858Income
                  before provision for income tax expense
              
              
              1,267
              
              
              9,257Provision
                  for income tax expense
              
              
              425
              
              
              3,243Net
                  income
              
              $
              843
              
              $
              6,013Basic
                  net income per share
              
              $
              0.11
              
              $
              0.88Fully
                  diluted net income per share
              
              $
              0.10
              
              $
              0.83Weighted
                  average number of common shares outstanding
              
              
              7,958,366
              
              
              6,844,859Weighted
                  average number of common shares outstanding (assuming
                  dilution)
              
              
              8,187,310
              
              
              7,238,311Dividends
                  paid per share
              
              $
              0.18
              
              $
              0.12




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




-4-




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)


Three
                  Months Ended March 31,2007
              
              2006(Dollars
                  in Thousands)Cash
                  flow from operating activities:Net
                  income
              
              $
              843
              
              $
              6,013Adjustments
                  to reconcile net income to net cash provided by operatingactivities:Amortization
                  of investment discount, net
              
              
              (89
              )
              
              (67
              )Depreciation
                  and amortization of property plant and equipment, net
              
              
              79
              
              
              91Net
                  realized investment (losses) gains
              
              
              (128
              )
              
              196Gain
                  on sale of assets
              
              
              (115
              )
              
              -Common
                  Stock issued for interest on Notes
              
              
              63
              
              
              -Provision
                  for credit losses, net
              
              
              (19
              )
              
              31Provision
                  for uncollectible premiums receivable
              
              
              88
              
              
              15Non-cash
                  compensation
              
              
              1
              
              
              98Changes
                  in operating assets and liabilities:Premiums
                  receivable
              
              
              837
              
              
              (2,794
              )Prepaid
                  reinsurance premiums
              
              
              16,972
              
              
              8,672Reinsurance
                  recoverable, net
              
              
              (16,926
              )
              
              84,801Income
                  taxes recoverable
              
              
              (5,422
              )
              
              -Deferred
                  income tax expense
              
              
              (1,575
              )
              
              (1,606
              )Deferred
                  gain on sale of assets
              
              
              115
              
              
              -Policy
                  acquisition costs, net of amortization
              
              
              (800
              )
              
              (644
              )Premium
                  finance contracts receivable
              
              
              163
              
              
              2,443Other
                  assets
              
              
              66
              
              
              2,258Unpaid
                  losses and LAE
              
              
              8,566
              
              
              (100,241
              )Unearned
                  premiums
              
              
              9,840
              
              
              5,130Premium
                  deposits and customer credit balances
              
              
              47
              
              
              390Income
                  taxes payable
              
              
              -
              
              
              1,192Bank
                  overdraft
              
              
              (7,413
              )
              
              18,476Accounts
                  payable and accrued expenses
              
              
              (643
              )
              
              (1,452
              )Net
                  cash provided by operating activities
              
              
              4,547
              
              
              23,002Cash
                  flow used in investing activities:Proceeds
                  from sale of investment securities available for sale
              
              
              55,018
              
              
              103,868Purchases
                  of investment securities available for sale
              
              
              (71,987
              )
              
              (111,407
              )Purchases
                  of property and equipment
              
              
              (3
              )
              
              (244
              )Proceeds
                  from sale of assets
              
              
              -
              
              
              2,663Net
                  cash used in investing activities
              
              
              (16,972
              )
              
              (5,120
              )Cash
                  flow (used in) provided by financing activities:Subordinated
                  debt
              
              
              -
              
              
              (1,667
              )Exercised
                  stock options
              
              
              78
              
              
              1,082Dividends
                  paid
              
              
              (1,421
              )
              
              (884
              )Exercised
                  warrants, net
              
              
              -
              
              
              5,964Tax
                  benefit related to non-cash compensation
              
              
              -
              
              
              59Revolving
                  credit outstanding
              
              
              -
              
              
              (139
              )Net
                  cash (used in) provided by financing activities
              
              
              (1,342
              )
              
              4,414Net
                  (decrease) increase in cash and short term investments
              
              
              (13,767
              )
              
              22,296Cash
                  and short term investments at beginning of period
              
              
              17,917
              
              
              6,071Cash
                  and short term investments at end of period
              
              $
              4,149
              
              $
              28,368





**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
              
              $
              1
              
              $
              157Non-cash
                  investing and finance activities:Accrued
                  dividends payable
              
              $
              1,433
              
              $
              762Retirement
                  of subordinated debt by Common Stock issuance
              
              $
              1,042
              
              $
              -Stock
                  issued to pay interest on subordinated debt
              
              $
              63
              
              $
              -





**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, Federated 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 an application pending authorization as a surplus lines carrier in the
      state
      of California, and applications pending submission to the states of Mississippi
      and Nevada.





During
      the three months ended March 31, 2007, 81.0%, 16.6% and 2.4% of the premiums
      we
      underwrote were for homeowners’ property and casualty insurance, commercial
      general liability insurance and personal automobile insurance, respectively.
      During the three months ended March 31, 2006, 64.9%, 23.1% and 12.0% 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 shall contract with 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 bases for our reserves with
      respect to finance contracts, premiums receivable and deferred income taxes.
      Various assumptions and other factors underlie the determination of these
      significant estimates.





The
      process of determining significant estimates is fact specific and takes into
      account factors such as historical experience, current and expected economic
      conditions, and in the case of unpaid loss and LAE, an actuarial valuation.
      Management regularly reevaluates these significant factors and makes adjustments
      where facts and circumstances dictate. In selecting the best estimate, we
      utilize 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 loss adjustment expenses, salvage
      and other recoveries received, reported claim counts, open claim counts and
      counts for claims closed with and without payment of loss.





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





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**





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 FAS 159 on its
      effective date, January 1, 2008.  We do not expect the adoption of FAS
      159 to have a material impact, if any, on our financial position or results
      of
      operations.


-8-
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


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 $4,000, of which approximately $800 was charged to income
      from continuing operations before provision for income taxes for the three
      months ended March 31, 2007. The effect on earnings per share for the three
      months ended March 31, 2007 for both undiluted and fully diluted was less than
      $0.01 per share. For a more detailed discussion, please see Footnote 8, titled
      Stock Compensation Plans.





**(C)
      Stock Options**





At
      March
      31, 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 three months ended
      March 31, 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 three months ended March 31, 2007, 5,000 qualified stock options were issued
      with an average option price of $21.38 per share. Like all other outstanding
      stock options, these stock options contain service conditions and do not contain
      any performance conditions. For a further discussion regarding the provisions
      of
      SFAS No. 123R and its effect on our operations, please refer to footnote 8,
      Stock Compensation Plans.





**(D)** **E** **arnings
      per Share**





Basic
      earnings per share (“Basic EPS”) is computed by dividing net income by the
      weighted average number of common shares outstanding during 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.


-9-
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


**(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 March
      31,
      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 20.25% and 11.64% for the three
      months ended March 31, 2007 and 2006, respectively. Interest expense on this
      revolving credit line for the three months ended March 31, 2007 and 2006 totaled
      approximately $510 and $3,700, 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, the Florida Insurance Guarantee Association, Citizens
      Property Insurance Corporation (“Citizens”) and the Florida Hurricane
      Catastrophic Fund.





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 premium by line of business
      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 association. For statutory accounting purposes
      these assessments are not charged to operations in contrast GAPP treatment
      to
      charge current operations for the assessments. Through policyholder surcharges,
      as approved by the Florida Office of Insurance Regulation (“OIR”), we collected
      during the three months ended March 31, 2007 approximately $267,000. 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 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 $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 this assessment and has recouped
      approximately $0.2 million during the quarter ended March 31, 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 Florida
      Hurricane Catastrophic Fund (“FHCF”) assessment. Sighting the unprecedented
      hurricane seasons of 2004 and 2005, the FHCF has exhausted nearly all of the
      $6
      billion in reserves it had accumulated since its inception in 1993. The Florida
      State Board of Administration, the body that oversees the FHCF, has issued
      its
      directive to levy an emergency assessment upon all property and casualty
      business in the state of Florida. There is no statutory requirement that
      policyholders be notified of the FCHF assessment. The FHCF and OIR are, however,
      recommending that insurers include the FHCF assessment in a line item on the
      declaration page for two reasons: (1) this is a multi-year assessment and (2)
      there may be concurrent assessments and the insureds should know what amount
      is
      for which assessment. The assessment will become effective on all policies
      effective after January 1, 2007 and will be remitted to the administrator of
      the
      assessment as collected 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 Florida Statutes Section 627.351, which is referred
      to
      as a Joint Underwriting Plan (“JUA Plan”). The JUA Plan provides for the
      equitable apportionment of any profits realized, or losses and expenses
      incurred, among participating motor vehicle insurers. In the event of an
      underwriting deficit incurred by the JUA Plan, which is not recovered through
      the policyholders in the JUA Plan, such deficit shall be recovered from the
      companies participating in the JUA Plan in the proportion that the net direct
      written premiums of each such member during the preceding calendar year bear
      to
      the aggregate net direct premiums written in this state by all members of the
      JUA Plan. During the three months ended March 31, 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.




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.


-11-
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


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


Fiscal
                  Year
              
              Lease
                  payments2007
              
              
              452,1652008
              
              
              612,9342009
              
              
              625,1932010
              
              
              637,6972011
              
              
              650,451Total
              
              $
              2,978,440





**(5)
      Comprehensive Income**





For
      the
      three months ended March 31, 2007 and 2006, comprehensive income consisted
      of
      the following:


For
                  the three months ended
                March
                  31,2007
              
              2006Net
                  income
              
              $
              842,805
              
              $
              6,013,312Change
                  in net unrealized gains on investments available for sale
              
              
              (263,989
              )
              
              182,260Comprehensive
                  income, before tax
              
              
              578,816
              
              
              6,195,572Income
                  tax benefit (expense) related to items of other
                  comprehensiveincome
              
              
              99,339
              
              
              (68,585
              )Comprehensive
                  income
              
              $
              678,155
              
              $
              6,126,987





**(6)
      Segment Information**





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





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





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




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




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





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





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.





-12-


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


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


First
                  Event Participation
              
              Reinstated
                  Premium ProtectionCurrent
                  AM
              
              
              
              $20m
                    inexcess of
              
              $40m
                  in excess of
              
              $72m
                    in excess of
                    $75m
                      and FHCF
              
              $20m
                    inexcess 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
      are
      based on management’s current 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. This analysis of our exposure level
      in
      relation to the total exposures to the FHCF may produce changes in retentions,
      limits and reinsurance premiums as a result of increases or decreases in our
      exposure level.





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





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


-13-
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


For
      the
      first and second catastrophic events with aggregate losses in excess of the
      first $15.0 million discussed above and less than $35 million, Federated
      National has acquired 100% reinsurance protection with a single automatic
      premium reinstatement protection provision. The $20 million of coverage afforded
      in this layer is by way of 42% traditional, single season, excess of loss
      (“Traditional”) treaties and 58% structured multi-year, excess of loss
      (“Structured”) treaties. As noted in the chart above, American Vehicle will
      reinsure Federated National via a traditional treaty for 25% of this $20 million
      layer. Relative to the structured excess of loss reinsurance treaties, terms
      contained in these treaties afford capacity in this layer beyond the 2006 -
      2007
      season for two additional hurricane seasons. The structured treaties offer
      respective coverage for a single event in each of the three hurricane seasons
      and one additional respective coverage that may be applied as needed in any
      one
      of the three hurricane seasons. One of the structured treaties, representing
      25%
      of this layer, contains a provision which prevents the Company from recovery
      if
      any single event results in damages that exceed $20 billion in the Unites States
      and its territories.





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





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





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





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





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





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


-14-
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


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




Claim
              
              Gross
              
              Reinsurance
              
              Net2004
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Charley
                  (August 13)
              
              
              2,572
              
              $
              63.1
              
              $
              53.1
              
              $
              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
              
              $
              156.9
              
              $
              96.4
              
              $
              60.5
  Claim
              
              Gross
              
              Reinsurance
              
              Net2005
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              322
              
              $
              2.8
              
              $
              -
              
              $
              2.8Katrina
                  (August 25)
              
              
              2,110
              
              
              14.5
              
              
              11.5
              
              
              3.0Rita
                  (September 20)
              
              
              19
              
              
              0.1
              
              
              -
              
              
              0.1Wilma
                  (October 24)
              
              
              11,650
              
              
              175.2
              
              
              172.2
              
              
              3.0Total
                  Loss Estimate
              
              
              14,101
              
              $
              192.6
              
              $
              183.7
              
              $
              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 will facilitate 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 allows
      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.





-15-


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


During
      2005, Federated National entered into a 100% quota-share agreement with its
      affiliate American Vehicle. The agreement ceded 100% of its premium and losses
      on all policies with an effective date between July 1, 2005 and December 31,
      2005. For presentation purposes, and in accordance with the principles of
      consolidation, the agreement between the two affiliated insurance companies
      has
      been eliminated.





**(8)
      Stock Compensation Plans**





We
      implemented a stock option plan in November 1998 that provides for the granting
      of stock options to officers, directors, employees and consultants. The
      objectives of this plan include attracting and retaining the best personnel,
      providing for additional performance incentives, and promoting our success
      by
      providing employees the opportunity to acquire common stock. Options outstanding
      under this plan have been granted at prices which are either equal to or above
      the market value of the stock on the date of grant, typically vest over a
      four-year period, and expire ten years after the grant date. Under this plan,
      we
      are authorized to grant options to purchase up to 900,000 common shares, and,
      as
      of March 31, 2007 and December 31, 2006, we had outstanding exercisable options
      to purchase 47,750 and 44,750 shares, respectively.





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 March 31, 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 March 31, 2007
      and
      December 31, 2006, we had outstanding exercisable options to purchase 621,858
      and 637,358 shares, respectively.





Activity
      in the Company’s stock option plans for the period from January 1, 2005 to March
      31, 2007, is summarized below:


-16-
 **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
                  Exercise
                    Price
              
              Number
                    of
                  Shares
              
              Option
                  Exercise
                    Price
              
              Number
                    of
                  Shares
              
              Option
                  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
              
              
              5,000
              
              $
              21.38
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -Exercised
              
              
              (2,000
              )
              $
              6.67
              
              
              -
              
              $
              -
              
              
              (6,100
              )
              $
              10.62Cancelled
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
              
              
              (9,400
              )
              $
              16.58Outstanding
                  at March 31, 2007
              
              
              47,750
              
              $
              19.27
              
              
              -
              
              $
              -
              
              
              621,858
              
              $
              13.79





Options
      outstanding as of March 31, 2007 are exercisable as follows :


**1998
                  Plan**
              
              **2001
                  Franchisee Plan**
              
              **2002
                  Plan**Weighted
              
              
              
              Weighted
              
              
              
              WeightedAverage
              
              
              
              Average
              
              
              
              AverageNumber
                    of
                  Shares
              
              Option
                  Exercise
                    Price
              
              Number
                    of
                  Shares
              
              Option
                  Exercise
                    Price
              
              Number
                    of
                  Shares
              
              Option
                  Exercise
                    PriceOptions
                  Exercisable at:March
                  31, 2007
              
              
              17,750
              
              $
              6.67
              
              
              -
              
              $
              -
              
              
              254,608
              
              $
              10.62December
                  31, 2007
              
              
              25,000
              
              $
              6.67
              
              
              -
              
              $
              -
              
              
              118,648
              
              $
              10.62December
                  31, 2008
              
              
              1,000
              
              $
              6.67
              
              
              -
              
              $
              -
              
              
              93,001
              
              $
              10.62December
                  31, 2009
              
              
              1,000
              
              $
              6.67
              
              
              -
              
              $
              -
              
              
              81,599
              
              $
              10.62December
                  31, 2010
              
              
              1,000
              
              $
              6.67
              
              
              -
              
              $
              -
              
              
              57,501
              
              $
              10.62December
                  31, 2011
              
              
              1,000
              
              $
              6.67
              
              
              -
              
              $
              -
              
              
              16,501
              
              $
              10.62Thereafter
              
              
              1,000
              
              $
              6.67
              
              
              -
              
              $
              -
              
              
              -
              
              $
              10.62Total
                  options exercisible
              
              
              47,750
              
              
              
              
              
              -
              
              
              
              
              
              621,858





At
      March
      31, 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 three months
      ended March 31, 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 three months ended March
      31,
      2007, are lower by approximately $800 and $500, respectively, than if it had
      continued to account for share-base compensation under ABP Opinion No. 25.


-17-
 **21** **st** **Century Holding Company**
 **Notes
            to Consolidated Financial Statements**


Basic
      and
      diluted earnings per share for the three month period ended March 31, 2007
      would
      have been as reported at $0.11 and $0.10, respectively, if the Company had
      not
      adopted SFAS No. 123R.





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 5,000 new options granted during the three
      months ended March 31, 2007, estimated on the date of grant using the
      Black-Scholes option-pricing model was $5.36 per option. There were no new
      options granted during the quarter ending March 31, 2006.





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


March
                  31, 2007
              
              March
                  31, 2006Dividend
                  yield
              
              
              3.20
              %
              
              2.80
              %Expected
                  volatility
              
              
              42.87
              %
              
              44.30
              %Risk-free
                  interest rate
              
              
              4.85%
                  to 4.86
              %
              
              4.83
              %Expected
                  life (in years)
              
              
              2.58
              
              
              2.04
                  to 2.82





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 March 31,
      2007:


Range
                  of
              
              Outstanding
                  at
              
              Weighted
                    Average
                    Contractual
              
              WeightedAverage
              
              Exercisable
                  atExercise
                  Price
              
              March
                  31, 2007
              
              Periods
                  in Years
              
              Exercise
                  Price
              
              March
                  31, 20071998
                  Plan
              
              $
              6.67
                  - $27.79
              
              
              47,750
              
              
              7.19
              
              $
              19.27
              
              
              17,7502001
                  Franchise Plan
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -2002
                  Plan
              
              $
              8.33
                  - $18.21
              
              
              621,858
              
              
              3.38
              
              $
              13.79
              
              
              254,608





**(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.


-18-
 **21** **st** **Century Holding Company**
 **Notes
            to Consolidated Financial
            Statements**


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.





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.





As
      indicated on the table below, we paid, pursuant to the terms of the July 2003
      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,
              
              
              n/a
              
              
              -April
                  30,
              
              
              n/a
              
              
              38,420July
                  31,
              
              
              n/a
              
              
              -October
                  31,
              
              
              n/a
              
              
              n/aTotal
                  common stock issued
              
              
              -
              
              
              38,420





As
      indicated on the table below, as of March 31, 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.


-19-
 **21** **st** **Century Holding Company**
 **Notes
            to Consolidated Financial Statements**


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





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





Our
      regularly scheduled payment of principal and interest in connection with the
      September 2004 Notes due on April 30, 2007 was paid by the issuance of 63,114
      shares of our 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)
      Discontinued Operations**





On **** December
      22, 2004 we announced our intention to sell our interest in Express Tax and
      EXPRESSTAX Franchise Corporation for approximately $2 million cash. This
      transaction closed with an effective date of January 1, 2005. The book value
      of
      Express Tax and EXPRESSTAX Franchise Corporation on January 1, 2005 was
      approximately $0.6 million.





Additionally,
      on the same day, the Company also announced a definitive agreement to sell
      the
      assets of its subsidiaries, Federated Agency Group and Fed USA, Inc., to
      affiliates of Affirmative Insurance Holdings, Inc. (“Affirmative”)(NASDAQ: AFFM)
      for approximately $9.5 million. The sale of assets to Affirmative closed on
      December 31, 2004, at which time the Company received $7 million cash, with
      up
      to an additional $2.5 million due in the first quarter of 2006, subject to
      certain performance criteria being met.





Currently,
      both parties are in discussions relative to the comparison of actual results
      to
      the established performance criteria. We have been tentatively delayed in
      reaching an agreement as to certain provisions that are specific to the
      performance criteria. The delay is primarily due to scheduling conflicts among
      the parties. We did reflect during the year ended December 31, 2006 operations,
      in other income, a $0.4 million receivable.





Assets
      and liabilities, including goodwill, that were sold totaled approximately $2.1
      million on December 31, 2004.


-20-




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


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





**Item
      2**





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





**Forward-Looking
      Statements**





Statements
      in this report or in documents that are incorporated by reference that are
      not
      historical fact are forward-looking statements that are subject to certain
      risks
      and uncertainties that could cause actual events and results to differ
      materially from those discussed herein. Without limiting the generality of
      the
      foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”
“intend,” “could,” “would,” “estimate,” or “continue” or the negative other
      variations thereof or comparable terminology are intended to identify
      forward-looking statements. The risks and uncertainties include, without
      limitation, uncertainties related to estimates, assumptions and projections
      relating to losses from the nine hurricanes that occurred in fiscal years 2005
      and 2004 and other estimates, assumptions and projections contained in this
      10-Q; inflation and other changes in economic conditions (including changes
      in
      interest rates and financial markets); 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 insureds through our wholly owned claims
      adjusting company, Superior.





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, Louisiana, Texas,
      South Carolina and Virginia are on-going. American Vehicle operations in Alabama
      and Kentucky are expected to begin this year. American Vehicle has a pending
      application to be authorized as a surplus lines carrier in the state of
      California.




-21-




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


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


During
      the three months ended March 31, 2007, 81.0%, 16.6% and 2.4% of the premiums
      we
      underwrote were for homeowners’ property and casualty insurance, commercial
      general liability insurance and personal automobile insurance, respectively.
      During the three months ended March 31, 2006, 64.9%, 23.1% and 12.0% of the
      premiums we underwrote were for homeowners’ property and casualty insurance,
      commercial general liability insurance and personal automobile insurance,
      respectively. We internally process claims made by our own and third-party
      insureds through our wholly owned claims adjusting company, Superior. We also
      offer premium financing to our own and third-party insureds through our wholly
      owned subsidiary, Federated Premium.





We
      market
      and distribute our own and third-party insurers’ products and our other services
      primarily in 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. As American
      Vehicle continues its expansion into other states we shall contract with 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 A.M. Best ratings and
      offer more diversified insurance coverage. Our competitors include companies
      which market their products through agents, as well as companies which sell
      insurance directly to their customers. Large national writers may have certain
      competitive advantages over agency writers, including increased name
      recognition, increased loyalty of their customer base and reduced policy
      acquisition costs. 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
      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
      last year’s catastrophic hurricanes. We have experienced an increase in policy
      volume relative to our homeowners’ insurance products due to the narrowed
      competition.





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.




-22-


**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 bases for our reserves with respect
      to
      finance contracts, premiums receivable and deferred income taxes. Various
      assumptions and other factors underlie the determination of these significant
      estimates.





The
      process of determining significant estimates is fact specific and takes into
      account factors such as historical experience, current and expected economic
      conditions, and in the case of unpaid loss and LAE, an actuarial valuation.
      Management regularly reevaluates these significant factors and makes adjustments
      where facts and circumstances dictate. In selecting the best estimate, we
      utilize 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 loss adjustment expenses, salvage
      and other recoveries received, reported claim counts, open claim counts and
      counts for claims closed with and without payment of loss.





Accounting
      for loss contingencies pursuant to 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.




-23-


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


Please
      see Note 2 of the Notes to Consolidated Financial Statements for additional
      discussions regarding critical accounting policies.




**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 FAS 159 on its
      effective date, January 1, 2008.  We do not expect the adoption of FAS
      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 March 31, 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, Held-to-maturity, Trading securities or Available-for-sale.





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




-24-


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


Total
      Investments increased $17.1 million, or 13.7%, to $141.9 million as of March
      31,
      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 85.6% of total investments as of March 31, 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 March 31, 2007 and December
      31, 2006 by category.


Unrealized
                  Gains and (Losses)March
                  31,
                2007
              
              December
                  31,
                2006Fixed
                  maturities:U.S.
                  government obligations and agency obligations
              
              $
              (672,318
              )
              $
              (688,190
              )Obligations
                  of states and political subdivisions
              
              
              (133,889
              )
              
              (145,505
              )(806,207
              )
              
              (833,695
              )Corporate
                  securities:Communications
              
              
              6,740
              
              
              6,842Financial
              
              
              (17,300
              )
              
              (18,790
              )Other
              
              
              (71,548
              )
              
              (73,983
              )(82,108
              )
              
              (85,931
              )Equity
                  securities:Common
                  stocks
              
              
              (926,299
              )
              
              (631,000
              )Total
                  unrealized gains and (losses), net
              
              $
              (1,814,614
              )
              $
              (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, principle and interest payments, ratings from nationally
      recognized statistical rating organizations such as Standard and Poor’s and
      Moody’s as well as information released via the general media
      channels.





The
      investments held at March 31, 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.




-25-


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


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 Cash Equivalents**





Cash
      and
      cash equivalents, which include cash, certificates of deposits, and money market
      accounts decreased $13.8 million, or 76.8%, to $4.1 million as of March 31,
      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.





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





Finance
      contracts receivable, net of allowance for credit losses, decreased $0.1
      million, or 7.9%, to $1.7 million as of March 31, 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 $17.0 million, or 43.6%, to $22.0 million as
      of
      March 31, 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 $0.9 million, or
      12.8%, to $6.3 million as of March 31, 2007, as compared to $7.2 million as
      of
      December 31, 2006.





Our
      homeowners’ insurance premiums receivable decreased $1.4 million, or 33.2%, to
      $2.8 million as of March 31, 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 $0.4
      million, or 15.2%, to $3.1 million as of March 31, 2007, as compared to $2.7
      million as of December 31, 2006.





Premiums
      receivable in connection with our automobile line of business increased $0.2
      million, or 14.4%, to $1.3 million as of March 31, 2007, as compared to $1.2
      million as of December 31, 2006.





**Reinsurance
      Recoverable**





Reinsurance
      recoverable increased to $12.7 million as of March 31, 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 $0.8 million, or 7.2%, to $12.0 million
      as of
      March 31, 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 to this
      asset.




-26-


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


**Deferred
      Income Taxes, net**





Deferred
      income taxes, net, increased $1.6 million, or 43.6%, to $5.2 million as of
      March
      31, 2007, as compared to $3.6 million as of December 31, 2006. The increase
      is
      comprised primarily of $2.0 million related to discounted unearned premiums
      and
      $0.4 million in conjunction with other deferred tax assets, offset by $0.8
      million associated with deferred policy acquisition costs.





**Income
      Taxes Receivable**




Income
      taxes receivable increased $5.4 million, or 688.6%, to $6.2 million as of March
      31, 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 5.8%, to $1.2 million
      as of
      March 31, 2007, as compared to $1.3 million as of December 31, 2006.





**Other
      Assets**





Other
      assets decreased $0.2 million, or 4.0%, to $4.4 million as of March 31, 2007,
      as
      compared to $4.6 million as of December 31, 2006. Major components of other
      assets are as follows:


March
                  31,
                2007
              
              
              December
                  31,
                2006Accrued
                  interest income
              
              $
              1,052,474
              
              $
              1,515,584Notes
                  receivable
              
              
              921,963
              
              
              1,027,958Revenue
                  sharing due from reinsurer
              
              
              1,481,525
              
              
              979,677Unamortized
                  loan costs
              
              
              29,165
              
              
              61,572Compensating
                  cash balances
              
              
              9,911
              
              
              9,911Due
                  from sale of discontinued operations, net
              
              
              320,000
              
              
              320,000Prepaid
                  expenses
              
              
              454,710
              
              
              531,008Other
              
              
              104,873
              
              
              110,642$
              4,374,621
              
              $
              4,556,352




**Unpaid
      Losses and LAE**





Unpaid
      losses and LAE increased $8.6 million, or 21.6%, to $48.2 million as of March
      31, 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:


March
                  31,
                2007
              
              
              December
                  31,
                2006Homeowners'
              
              $
              29,521,387
              
              $
              21,788,126Commercial
                  General Liability
              
              
              12,268,728
              
              
              11,100,116Automobile
              
              
              6,391,140
              
              
              6,727,236$
              48,181,255
              
              $
              39,615,478





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.




-27-


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


**Unearned
      Premium**





Unearned
      premiums increased $9.8 million, or 12.6%, to $87.7 million as of March 31,
      2007, as compared to $77.8 million as of December 31, 2006. The increase was
      due
      to a $10.1 million increase in unearned homeowners’ insurance premiums, a $0.1
      million decrease in unearned commercial general liability premiums, and a $0.1
      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 March 31, 2007, as compared to $4.2 million as of
      December 31, 2006.





**Premium
      Deposits and Customer Credit Balances**





Premium
      deposits and customer credit balances remained unchanged at $3.8 million as
      of
      March 31, 2007, as compared to December 31, 2006. Premium deposits are monies
      received on policies not yet in force as of March 31, 2007.





**Revolving
      Credit Outstanding**





Revolving
      credit outstanding remained unchanged at nearly nothing as of March 31, 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 decreased $7.4 million, or 91.4%, to $0.7 as of March 31, 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 decrease relates to our payment patterns
      in
      relationship to the rate at which those cash disbursements are presented to
      the
      bank for payment.




**Subordinated
      Debt**





Subordinated
      debt decreased $1.0 million, or 25.0%, to $3.1 million as of March 31, 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 $0.1 million, or 4.7%, to $2.4 as of March
      31, 2007, as compared to $2.5 as of December 31, 2006. In accordance with the
      provisions of FASB No. 13, we will amortize the deferred gain over the term
      of
      the lease-back which is scheduled to end in December 2011.




**Accounts
      Payable and Accrued Expenses**





Accounts
      payable and accrued expenses decreased $0.6 million, or 11.3%, to $5.1 million
      as of March 31, 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.




-28-


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


**Results
      of Operations**


**Three
      Months Ended March 31, 2007 as Compared to Three Months Ended March 31,
      2006**





**Gross
      Premiums Written**





Gross
      premiums written increased $13.6 million, or 38.1%, to $49.2 million for the
      three months ended March 31, 2007, as compared to $35.6 million for the three
      months ended March 31, 2006. The following table denotes gross premiums written
      by major product line


Three
                  months ended March 31,2007
              
              2006Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              39,863,621
              
              
              81.0
              %
              $
              23,102,526
              
              
              64.9
              %Commercial
                  liability
              
              
              8,150,098
              
              
              16.6
              %
              
              8,220,213
              
              
              23.1
              %Automobile
              
              
              1,177,010
              
              
              2.4
              %
              
              4,286,334
              
              
              12.0
              %Gross
                  written premiums
              
              $
              49,190,729
              
              
              100.0
              %
              $
              35,609,073
              
              
              100.0
              %




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 March 31,2007
              
              2006(Dollars
                  in thousands)Amount
              
              Percentage
              
              Amount
              
              PercentageFlorida
              
              $
              5,624
              
              
              69.0
              %
              $
              6,567
              
              
              79.9
              %Georgia
              
              
              297
              
              
              3.6
              %
              
              335
              
              
              4.1
              %Kentucky
              
              
              1
              
              
              0.0
              %
              
              -
              
              
              0.0
              %Louisiana
              
              
              1,202
              
              
              14.8
              %
              
              1,318
              
              
              16.0
              %South
                  Carolina
              
              
              44
              
              
              0.5
              %
              
              -
              
              
              0.0
              %Texas
              
              
              967
              
              
              11.9
              %
              
              -
              
              
              0.0
              %Virginia
              
              
              15
              
              
              0.2
              %
              
              -
              
              
              0.0
              %Gross
                  written premiums
              
              $
              8,150
              
              
              100.0
              %
              $
              8,220
              
              
              100.0
              %





The
      Company’s sale of homeowners’ policies increased $16.8 million, or 72.6% to
      $39.9 million for the three months ended March 31, 2007, as compared to $23.1
      million for the three months ended March 31, 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.





The
      Company’s sale of auto insurance policies decreased by $3.1 million, or 72.5%,
      to $1.2 million for the three months ended March 31, 2007, as compared to $4.3
      million for the three months ended March 31, 2006.





**Gross
      Premiums Ceded**





Gross
      premiums ceded remained unchanged at nearly nothing for the three months ended
      March 31, 2007, as compared to the three months ended March 31, 2006.





**(Decrease)
      in Prepaid Reinsurance Premiums**





The
      (decrease) in prepaid reinsurance premiums was ($17.0) million for the three
      months ended March 31, 2007, as compared to ($8.7) million for the three months
      ended March 31, 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.




-29-


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


**(Increase)
      in Unearned Premiums**





The
      (increase) in unearned premiums was ($9.8) million for the three months ended
      March 31, 2007, as compared to ($5.1) million for the three months ended March
      31, 2006. The change was due to a ($10.1) million increase in unearned
      homeowners’ insurance premiums, a $0.1 million decrease in unearned commercial
      general liability premiums and a $.01 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 increased $0.6 million, or 2.6%, to $22.4 million for the three
      months ended March 31, 2007, as compared to $21.8 million for the three months
      ended March 31, 2006. The following table denotes net premiums earned by product
      line.


Three
                  months ended March 31,2007
              
              2006Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              12,810,858
              
              
              57.27
              %
              $
              11,285,520
              
              
              51.75
              %Commercial
                  liability
              
              
              8,265,715
              
              
              36.94
              %
              
              5,866,877
              
              
              26.90
              %Automobile
              
              
              1,296,455
              
              
              5.79
              %
              
              4,655,043
              
              
              21.35
              %Net
                  premiums earned
              
              $
              22,373,028
              
              
              100.00
              %
              $
              21,807,440
              
              
              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 $2.4 million, or 40.9 % to $8.3 million for the three months
      ended March 31, 2007, as compared to $5.9 million for the three months ended
      March 31, 2006.





**Finance
      Revenue**





Finance
      revenue decreased $0.4 million, or 70.7%, to $0.2 million for the three months
      ended March 31, 2007, as compared to $0.6 million for the three months ended
      March 31, 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 decreased 6.0% to $0.6 million for the three months ended
      March 31, 2007, as compared to $0.7 million for the three months ended March
      31,
      2006.





**Net
      Investment Income**





Net
      investment income increased $0.4 million, or 31.1%, to $1.6 million for the
      three months ended March 31, 2007, as compared to $1.2 million for the three
      months ended March 31, 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 4.7 % for the three months
      ended March 31, 2007 as compared to a yield of 4.6% for the three months ended
      March 31, 2006.





**Net
      Realized Investment (Losses) Gains**





Net
      realized investment (losses) gains decreased to ($0.1) million for the three
      months ended March 31, 2007, as compared to $0.2 for the three months ended
      March 31, 2006. The table below depicts (losses) gains by investment
      category.




-30-


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


Net
                  Realized (Losses) Gains
                Three
                  Months Ended Mar 31,2007
              
              2006Fixed
                  maturities:Obligations
                  of states and political subdivisions
              
              $
              (63
              )
              
              75Corporate
                  securities:Financial
              
              
              -
              
              
              (33,816
              )Equity
                  securities:Common
                  stocks
              
              
              (128,069
              )
              
              229,952Total
                  net realized (losses) gains
              
              $
              (128,132
              )
              $
              196,211




**Other
      Income**





Other
      income increased $0.3 million, or 55.7%, to $1.0 million for the three months
      ended March 31, 2007, as compared to $0.6 million for the three months ended
      March 31, 2006. Major components of other income for the three months ended
      March 31, 2007 included approximately $0.5 million of commissions in connection
      with the acquisition of our current reinsurance program, $0.3 million in
      connection with FIGA fees and $0.1 million in partial recognition of our gain
      on
      the sale of our Lauderdale Lakes property. Other sources included commissions
      in
      connection with the national flood insurance program, rental income 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 $6.5 million, or 86.3%, to $14.1 million for the three months
      ended March 31, 2007, as compared to $7.6 million for the three months ended
      March 31, 2006. The increase is primarily in connection with a 95.7% increase
      to
      first quarter operations for reinsurance costs as compared to the same three
      months last year.  Our loss ratio for the three months ended March 31, 2007
      as compared to March 31, 2006 increased by 28.3 points or 81.6%, from 63% to
      35%, of which 17.3 points are in connection with the increased reinsurance
      costs
      and 11.0 points to an overall increase in anticipated ultimate losses. 
Included in the above, we incurred a $1.0 million charge to operations for
      adverse development in connection with the 2004 hurricane season.





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 March
      31,
      2007 from the four hurricanes that occurred in July, August, September and
      October of 2005.




-31-


**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations
  2005
                  Hurricanes
              
              Claim
                  Count
              
              Gross
                  Losses
              
              Reinsurance
                  Recoveries
              
              Net
                  Losses(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -Katrina
                  (August 25)
              
              
              (3
              )
              
              -
              
              
              -
              
              
              -Rita
                  (September 20)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Wilma
                  (October 24)
              
              
              94
              
              
              11.2
              
              
              11.2
              
              
              -Total
                  Loss Estimate
              
              
              91
              
              $
              11.2
              
              $
              11.2
              
              $
              -





The
      table
      below reflects a $1.0 million charge to operations during the three months
      ended
      March 31, 2007 from the four hurricanes that occurred in July, August and
      September 2004.


2004
                  Hurricanes
              
              Claim
                  Count
              
              Gross
                  Losses
              
              Reinsurance
                  Recoveries
              
              Net
                  Losses(Dollars
                  in millions)Charley
                  (August 13)
              
              
              1
              
              $
              -
              
              $
              -
              
              $
              -Frances
                  (September 3)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Ivan
                  (September 14)
              
              
              -
              
              
              1.0
              
              
              -
              
              
              1.0Jeanne
                  (September 25)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  Loss Estimate
              
              
              1
              
              $
              1.0
              
              $
              -
              
              $
              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 three month period ended March 31, 2007 was
      63.0%
      compared with 34.7% for the same period in 2006. The table below reflects the
      loss ratios by product line.


Three
                  Months Ended March 31,2007
              
              2006Homeowners'
              
              
              70.2
              %
              
              25.6
              %Commercial
                  General Liability
              
              
              32.1
              %
              
              22.6
              %Automobile
              
              
              189.6
              %
              
              72.0
              %All
                  lines
              
              
              63.0
              %
              
              34.7
              %





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased $1.7 million, or 72.1%, to $4.0 million
      for
      the three months ended March 31, 2007, as compared to $2.3 million for the
      three
      months ended March 31, 2006. The increase is primarily 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 and a $0.1 million increase in
      rent
      due to the 2006 sale and lease-back of our building.





**Salaries
      and Wages**





Salaries
      and wages decreased $0.3 million, or 15.3%, to $1.6 million for the three months
      ended March 31, 2007, as compared to $1.8 million for the three months ended
      March 31, 2006. As a result of adopting SFAS No. 123R on January 1, 2006,
      salaries and wages for the three months ended March 31, 2006 increased $157,000,
      representing approximately 54.7% of the first quarter’s overall change.




-32-


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


**Interest
      Expense**





Interest
      expense decreased $0.1 million, or 62.9%, to $0.1 million for the three months
      ended March 31, 2007, as compared to $0.2 million for the three months ended
      March 31, 2006. The decrease is in correlation to our decreased subordinated
      debt.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $0.7 million, or 17.6%, to
      $4.6 million for the three months ended March 31, 2007, as compared to $3.9
      million for the three months ended March 31, 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 $2.8 million, or 86.9%, to $0.4
      million for the three months ended March 31, 2007, as compared to $3.2 million
      for the three months ended March 31, 2006. The effective rate for income tax
      expense was 33.5% for the three months ended March 31, 2007, as compared to
      35.0% 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
      March 31, 2007 was $0.8 million compared to net income of $6.0 million for
      the
      three months ended March 31, 2006.





**Liquidity
      and Capital Resources**





For
      the
      three months ended March 31, 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 and decreased
      premiums receivable. Operational sources of capital also included decreased
      finance contracts receivable, a decrease in deferred gain on sale of assets,
      an
      increase in the provision for uncollectible premiums receivable, depreciation
      and amortization, decreased other assets and common stock issued for interest
      on
      notes, Also contributing to our liquidity were proceeds from the sale of
      investment securities and exercised employee stock options. Because we are
      a
      holding company, we are largely dependent upon fees and commissions from our
      subsidiaries for cash flow.





For
      the
      three months ended March 31, 2007, operations provided net operating cash flow
      of $4.5 million, as compared to $23.0 million for the three months ended March
      31, 2006.





For
      the
      three months ended March 31, 2007, operations generated $37.7 million of gross
      cash flow, due to a $17.0 million decrease in prepaid reinsurance premiums,
      a
      $9.8 million increase in unearned premiums, an $8.6 million increase in unpaid
      losses and LAE, and a $0.8 million decrease in premiums receivable. To a much
      less significant extent, operations generated additional sources of cash via
      a
      $0.2 million decrease in finance contracts receivable, a $0.1 million decrease
      in deferred gain on sale of assets, a $0.1 million increase in the provision
      for
      uncollectible premiums receivable, $0.1 million in depreciation and
      amortization, a $0.1 million decrease in other assets, $0.1 million in common
      stock issued for interest on notes and less than a $0.1 million increase in
      premium deposits and customer credit balances and non-cash compensation.





For
      the
      three months ended March 31, 2007, operations used $33.1 million of gross cash
      flow primarily due to a $17.0 million increase in reinsurance recoverable,
      net,
      a $7.4 million decrease in bank overdrafts, a $5.4 million increase in income
      taxes recoverable, a $1.6 million increase in deferred income tax expense,
      a
      $0.8 million increase in policy acquisition costs, net of amortization, a $0.6
      million decrease in accounts payable and accrued expenses, $0.1 million in
      net
      realized investment losses, $0.1 million in gain on sale of assets, $0.1 million
      in amortization of investment discount, net 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.




-33-


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


For
      the
      three months ended March 31, 2007, net investing activities used $17.0 million,
      as compared to $5.1 million for the three months ended March 31, 2006. Our
      available for sale investment portfolio is highly liquid as it consists entirely
      of readily marketable securities.





For
      the
      three months ended March 31, 2007, investing activities generated $55.0 million
      and used $72.0 million from the maturity several times over of our very short
      municipal portfolio.





For
      the
      three months ended March 31, 2007, net financing activities used $1.3 million,
      as compared to providing $4.4 million for the three months ended March 31,
      2006.
      For the three months ended March 31, 2007, the sources of cash in connection
      with financing activities included $0.1 million from the exercise of stock
      options. The uses of cash in connection with financing activities included
      $1.4
      million in dividends paid.





Federated
      Premium’s operations are partially funded by the revolving loan agreement with
      FlatIron. The effective interest rate on this line of credit, based on our
      average outstanding borrowings under the revolving loan agreement, was 20.25%
      and 11.64% for the three months ended March 31, 2007 and 2006, respectively.
      Interest expense on this revolving credit line totaled approximately $500 and
      $3,700 for the three months ended March 31, 2007 and 2006,
      respectively.





Outstanding
      borrowings under the revolving loan agreement were approximately $10,000 as
      of
      both March 31, 2007 and December 31, 2006.





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
      March 31, 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.




-34-


**21** **st** **Century 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 is carried at fair value, except
      for that portion deemed as held to maturity. Gains that represent securities
      with a fair value in excess of amortized cost, and losses (amortized cost is
      in
      excess of fair value) that are deemed temporary by management are recorded
      in
      shareholders’ equity in accumulated other comprehensive income. Losses that are
      deemed other than temporary by management are recorded as net realized losses
      in
      the consolidated statement of operations. A summary of the investment portfolio
      as of March 31, 2007 follows:


Book
                  Value
              
              Fair
                  / Amortized Value
              
              Unrealized
                Gain
                  (Loss)Fixed
                  maturities:U.S.
                  government obligations and agencies available for sale
              
              $
              90,606,458
              
              
              63.06
              %
              $
              89,934,140
              
              
              63.38
              %
              $
              (672,318
              )U.S.
                  government obligations and agencies held to maturity
              
              
              19,378,016
              
              
              13.48
              %
              
              19,390,835
              
              
              13.67
              %
              
              12,819Obligations
                  of states and political subdivisions available for sale
              
              
              21,388,528
              
              
              14.88
              %
              
              21,254,640
              
              
              14.98
              %
              
              (133,888
              )Obligations
                  of states and political subdivisions held to maturity
              
              
              501,425
              
              
              0.35
              %
              
              494,864
              
              
              0.35
              %
              
              (6,561
              )131,874,427
              
              
              91.77
              %
              
              131,074,479
              
              
              92.38
              %
              
              (799,948
              )Corporate
                  securities:Communications
                  available for sale
              
              
              509,270
              
              
              0.36
              %
              
              516,010
              
              
              0.36
              %
              
              6,740Financial
                  available for sale
              
              
              500,000
              
              
              0.35
              %
              
              482,700
              
              
              0.34
              %
              
              (17,300
              )Other
                  available for sale
              
              
              1,650,000
              
              
              1.15
              %
              
              1,578,452
              
              
              1.11
              %
              
              (71,548
              )Other
                  held to maturity
              
              
              500,000
              
              
              0.35
              %
              
              493,740
              
              
              0.35
              %
              
              (6,260
              )3,159,270
              
              
              2.21
              %
              
              3,070,902
              
              
              2.16
              %
              
              (88,368
              )Equity
                  securities:Common
                  stocks available for sale
              
              
              8,675,639
              
              
              6.02
              %
              
              7,749,341
              
              
              5.46
              %
              
              (926,298
              )Total
                  fixed, corporate and equity securities
              
              $
              143,709,336
              
              
              100.00
              %
              $
              141,894,722
              
              
              100.00
              %
              $
              (1,814,614
              )





For
      our
      held to maturity portfolio as of March 31, 2007, the unrealized loss on our
      U.S.
      government obligations and agencies was approximately $685,700 and the
      unrealized loss on our obligations of states and political subdivisions was
      approximately $149,378.





As
      of
      March 31, 2007, there were no concentrations greater than 5% of total
      investments in any single investment other than United States government
      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 our Chief Executive Officer and Chief
      Financial Officer, have evaluated the effectiveness of our disclosure controls
      and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934 as of March 31, 2007. Due to the fact that the material
      weaknesses in our internal control over financial reporting as reported in
      our
      Form 10-K for the fiscal year ended December 31, 2006 have not been remediated,
      our Chief Executive Officer and Chief Financial Officer have concluded that
      our
      disclosure controls and procedures were not effective as of March 31, 2007.
      In
      our Form 10-K for the fiscal year ended December 31, 2006, we identified 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.




-35-


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




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 are not
      yet remediated. No material weaknesses will be considered remediated until
      the
      remediated procedures have operated for an appropriate period and have been
      tested, and management has concluded that they are operating effectively.




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
      Quarterly Report on 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.




-36-


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


**Part
      II: OTHER INFORMATION**





**Item
      1**





**Legal
      Proceedings**





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





**Item
      1A**





**Risk
      Factors**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31, 2006, which could materially
      affect our business, financial condition or future results. The risks described
      in our Annual Report on Form 10-K are not the only risks facing our Company.
      Additional risks and uncertainties not currently known to us or that we
      currently deem to be immaterial also may materially adversely affect our
      business, financial condition and/or operating results. The most significant
      of
      these risks include weather related conditions.





**Item
      2**





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





During
      the three months ended March 31, 2007, certain non-executive employees exercised
      options to acquire an aggregate of 8,200 shares of the Company's common stock
      with proceeds to the Company aggregating to approximately $0.1 million. 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 January and
      February 2007, we issued an aggregate of 5,000 options to two employees under
      our 1998 stock option plan. The options have an exercise price of $21.38 per
      share, vest over five years at 20% per year and expire six years from the grant
      date.





**(b)
      None**





**(c)
      None**





**Item
      3**





**Defaults
      upon Senior Securities**





None





**Item
      4**




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





None





**Item
      5**





**Other
      Information**





None





**Item
      6**





**Exhibits**


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




-37-


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


**Signatures**





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


**21****st****CENTURY HOLDING COMPANY**By:
            */s/
              Edward J. Lawson*Edward
                J. Lawson, President, Chief Executive Officer and
              Chairman
                of the Board */s/
              James G. Jennings, III*****James
                G. Jennings III, Chief Financial OfficerDate:
                May 10, 2007




-38-


**EXHIBIT
        INDEX**
 
 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
 
 39