**Table
          of Contents**





**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 SEPTEMBER 30, 2006**


**OR**





**[ 
       ] 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 [  ]





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 [  ] Accelerated filer [X] Non-accelerated filer [ 
]





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





Yes
      [  ] No [X]





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





Common
      Stock, $. 0 1 par
      value
      - 7,756,669 outstanding as of November 10, 2006







**Table
          of Contents**


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





**INDEX**





**PART
                I: FINANCIAL INFORMATION**
            **PAGE****ITEM
                1**
            Financial
                Statements and Supplementary
                Data
            3**ITEM
                2**
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            21**ITEM
                3**
            Quantitative
                and Qualitative Disclosures about Market Risk
            41**ITEM
                4**
            Controls
                and Procedures
            41**PART
                II: OTHER INFORMATION****ITEM
                1**
            Legal
                Proceedings
            43**ITEM
                1A**
            Risk
                Factors
            43**ITEM
                2**
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            43**ITEM
                3**
            Defaults
                upon Senior Securities
            44**ITEM
                4**
            Submission
                of Matters to a Vote of Security Holders
            44**ITEM
                5**
            Other
                Information
            44**ITEM
                6**
            Exhibits
            44**SIGNATURES**
            
            46




-2-
 **Table
          of Contents**




**PART
      I: FINANCIAL INFORMATION**


**Item
      1**





21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      BALANCE SHEETS


September
                  30, 2006
              
              December
                  31, 2005ASSETSInvestmentsFixed
                  maturities, available for sale, at fair value
              
              $
              95,659,287
              
              $
              69,787,809Fixed
                  maturities, held to maturity, at amoritized cost
              
              
              19,673,555
              
              
              19,691,937Equity
                  securities, available for sale, at fair value
              
              
              13,712,670
              
              
              10,606,663Total
                  investments
              
              
              129,045,512
              
              
              100,086,409Cash
                  and cash equivalents
              
              
              7,866,388
              
              
              6,071,460Finance
                  contracts, net of allowance for credit losses of $139,977 in 2006
                  and
                  $419,445 in2005,
                  and net of unearned finance charges of $101,486 in 2006 and $379,212
                  in
                  2005
              
              
              2,250,948
              
              
              7,312,736Prepaid
                  reinsurance premiums
              
              
              51,529,121
              
              
              12,133,734Premiums
                  receivable, net of allowance for credit losses of $104,544 and
                  $158,151,
                  respectively
              
              
              4,239,736
              
              
              7,505,631Reinsurance
                  recoverable, net
              
              
              —
              
              
              136,675,703Deferred
                  policy acquisition costs
              
              
              10,788,898
              
              
              9,183,654Deferred
                  income taxes, net
              
              
              4,734,950
              
              
              2,703,978Property,
                  plant and equipment, net
              
              
              1,369,102
              
              
              3,901,385Other
                  assets
              
              
              2,885,643
              
              
              4,580,063Total
                  assets
              
              $
              214,710,298
              
              $
              290,154,753LIABILITIES
                  AND SHAREHOLDERS' EQUITYUnpaid
                  losses and LAE
              
              $
              31,227,291
              
              $
              154,038,543Unearned
                  premiums
              
              
              72,660,167
              
              
              61,839,051Due
                  to reinsurers, net
              
              
              19,008,193
              
              
              —Premiums
                  deposits
              
              
              2,714,447
              
              
              2,144,863Revolving
                  credit outstanding
              
              
              10,164
              
              
              196,943Bank
                  overdraft
              
              
              288,489
              
              
              12,237,735Funds
                  held under reinsurance treaties
              
              
              1,547,814
              
              
              1,544,544Income
                  taxes payable
              
              
              10,911,600
              
              
              3,019,696Subordinated
                  debt
              
              
              5,208,333
              
              
              10,208,333Deferred
                  gain from sale of property
              
              
              2,565,500
              
              
              —Accounts
                  payable and accrued expenses
              
              
              2,366,079
              
              
              4,157,675Total
                  liabilities
              
              
              148,508,077
              
              
              249,387,383Shareholders'
                  equity:Common
                  stock, $0.01 par value. Authorized 37,500,000 shares; issued 8,262,698
                  and7,468,713
                  shares, respectively; Outstanding 7,564,788 and 6,771,864,
                  respectively
              
              
              82,627
              
              
              74,688Additional
                  paid-in capital
              
              
              41,612,236
              
              
              31,825,053Accumulated
                  other comprehensive (deficit)
              
              
              (938,888
              )
              
              (1,537,243
              )Retained
                  earnings
              
              
              25,446,246
              
              
              10,404,872Total
                  shareholders' equity
              
              
              66,202,221
              
              
              40,767,370Total
                  liabilities and shareholders' equity
              
              $
              214,710,298
              
              $
              290,154,753


**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


-3-
 **Table
          of Contents**




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(UNAUDITED)


Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30, 2006
              
              September
                  30, 2005
              
              September
                  30, 2006
              
              September
                  30, 2005Revenue:Gross
                  premiums written
              
              $
              24,669,503
              
              $
              25,355,235
              
              $
              111,031,248
              
              $
              86,815,187Gross
                  premiums ceded
              
              
              (57,378,252
              )
              
              (7,188,343
              )
              
              (60,750,033
              )
              
              (12,142,786
              )Net
                  premiums (ceded) written
              
              
              (32,708,749
              )
              
              18,166,892
              
              
              50,281,215
              
              
              74,672,401Increase
                  (Decrease) in prepaid reinsurance premiums
              
              
              42,060,048
              
              
              72,745
              
              
              32,795,387
              
              
              (5,437,633
              )Decrease
                  (Increase) in unearned premiums
              
              
              12,356,106
              
              
              2,462,575
              
              
              (10,821,117
              )
              
              (7,808,508
              )Net
                  change in prepaid reinsurance premiums and unearned
                  premiums
              
              
              54,416,154
              
              
              2,535,320
              
              
              21,974,270
              
              
              (13,246,141
              )Net
                  premiums earned
              
              
              21,707,405
              
              
              20,702,212
              
              
              72,255,485
              
              
              61,426,260Finance
                  revenue
              
              
              335,181
              
              
              807,778
              
              
              1,467,324
              
              
              2,849,989Managing
                  general agent fees
              
              
              483,413
              
              
              558,883
              
              
              1,983,107
              
              
              1,811,576Net
                  investment income
              
              
              1,572,606
              
              
              972,302
              
              
              4,380,885
              
              
              2,776,098Net
                  realized investment gains
              
              
              263,072
              
              
              —
              
              
              742,624
              
              
              285,033Other
                  income
              
              
              408,750
              
              
              614,393
              
              
              1,397,805
              
              
              1,018,774Total
                  revenue
              
              
              24,770,427
              
              
              23,655,568
              
              
              82,227,230
              
              
              70,167,730Expenses:Loss
                  and loss adjustment expense
              
              
              10,270,956
              
              
              13,275,690
              
              
              27,182,957
              
              
              32,494,462Operating
                  and underwriting expenses
              
              
              3,779,909
              
              
              1,607,749
              
              
              8,392,485
              
              
              5,396,561Salaries
                  and wages
              
              
              1,698,993
              
              
              1,600,716
              
              
              5,309,465
              
              
              4,759,417Interest
                  expense
              
              
              135,168
              
              
              313,962
              
              
              545,455
              
              
              1,123,893Policy
                  acquisition costs, net of amortization
              
              
              4,998,739
              
              
              3,920,679
              
              
              13,043,776
              
              
              10,968,721Total
                  expenses
              
              
              20,883,765
              
              
              20,718,796
              
              
              54,474,138
              
              
              54,743,054Income
                  from continuing operations before provision for income tax expense
              
              
              3,886,662
              
              
              2,936,772
              
              
              27,753,092
              
              
              15,424,676Provision
                  for income tax expense
              
              
              857,377
              
              
              1,084,054
              
              
              9,805,936
              
              
              5,762,741Net
                  income from continuing operations
              
              
              3,029,285
              
              
              1,852,718
              
              
              17,947,156
              
              
              9,661,935Discontinued
                  operations:Income
                  from discontinued operations (including gain on disposal of $0
                  and
                  $1,630,000, respectively)
              
              
              —
              
              
              —
              
              
              —
              
              
              1,630,000Provision
                  for income tax expense
              
              
              —
              
              
              —
              
              
              —
              
              
              595,396Income
                  from discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              1,034,604Net
                  income
              
              $
              3,029,285
              
              $
              1,852,718
              
              $
              17,947,156
              
              $
              10,696,539Basic
                  net income per share from continuing operations
              
              $
              0.40
              
              $
              0.29
              
              $
              2.41
              
              $
              1.56Basic
                  net income per share from discontinued operations
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              0.17Basic
                  net income per share
              
              $
              0.40
              
              $
              0.29
              
              $
              2.41
              
              $
              1.73Fully
                  diluted net income per share from continuing operations
              
              $
              0.40
              
              $
              0.28
              
              $
              2.27
              
              $
              1.48Fully
                  diluted net income per share from discontinued operations
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              0.16Fully
                  diluted net income per share
              
              $
              0.40
              
              $
              0.28
              
              $
              2.27
              
              $
              1.64Weighted
                  average number of common shares outstanding
              
              
              7,560,872
              
              
              6,384,386
              
              
              7,433,953
              
              
              6,189,040Weighted
                  average number of common shares outstanding (assuming
                  dilution)
              
              
              7,562,563
              
              
              6,589,257
              
              
              7,912,077
              
              
              6,533,575Dividends
                  declared per share
              
              $
              0.12
              
              $
              0.08
              
              $
              0.36
              
              $
              0.24


**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


-4-
 **Table
          of Contents**




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)


Nine
                  months ended September 302006
              
              2005Cash
                  flow from operating activities:
              
              
              
              Restated
                  -
                See
                  note 10Net
                  income
              
              $
              17,947,156
              
              $
              9,661,935Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Amortization
                  of investment discount, net
              
              
              (220,787
              )
              
              (167,113
              )Depreciation
                  and amortization of property plant and equipment, net
              
              
              250,624
              
              
              345,868Net
                  realized investment gains
              
              
              742,624
              
              
              339,267Gain
                  on sale of assets
              
              
              (462,796
              )
              
              —Common
                  Stock issued for interest on Notes
              
              
              128,125
              
              
              315,625Provision
                  for credit losses, net
              
              
              118,579
              
              
              455,699Provision
                  (recovery) for uncollectible premiums receivable
              
              
              (53,607
              )
              
              (366,824
              )Non-cash
                  compensation
              
              
              395,358
              
              
              —Changes
                  in operating assets and liabilities:Premiums
                  receivable
              
              
              3,319,502
              
              
              205,263Prepaid
                  reinsurance premiums
              
              
              (39,395,387
              )
              
              5,437,633Reinsurance
                  recoverable, net
              
              
              155,683,896
              
              
              4,786,145Income
                  taxes recoverable
              
              
              —
              
              
              7,056,250Deferred
                  income tax expense
              
              
              (2,030,972
              )
              
              587,906Deferred
                  gain on sale of assets
              
              
              (2,481,540
              )
              
              —Policy
                  acquisition costs, net of amortization
              
              
              (1,605,244
              )
              
              (1,550,042
              )Finance
                  contracts receivable
              
              
              4,943,209
              
              
              263,514Other
                  assets
              
              
              4,259,921
              
              
              (1,651,186
              )Unpaid
                  losses and loss adjustment expenses
              
              
              (122,811,252
              )
              
              (10,442,550
              )Unearned
                  premiums
              
              
              10,821,116
              
              
              7,808,508Premium
                  deposits
              
              
              569,584
              
              
              75,877Funds
                  held under reinsurance treaties
              
              
              3,270
              
              
              1,568,872Income
                  taxes payable
              
              
              7,891,904
              
              
              —Bank
                  overdraft
              
              
              (11,949,246
              )
              
              (11,414,110
              )Accounts
                  payable and accrued expenses
              
              
              (1,791,596
              )
              
              (785,471
              )Net
                  cash provided by operating activities - continuing
                  operations
              
              
              24,272,441
              
              
              12,531,066Net
                  cash (used for) operating activities - discontinued
                  operations
              
              
              —
              
              
              (1,380,265
              )Net
                  cash provided by operating activities
              
              
              24,272,441
              
              
              11,150,801Cash
                  flow (used in) investing activities:Proceeds
                  from sale of investment securities available for sale
              
              
              230,940,088
              
              
              59,047,950Purchases
                  of investment securities available for sale
              
              
              (259,822,673
              )
              
              (69,288,240
              )Receivable
                  for investments sold
              
              
              —
              
              
              (1,450,000
              )Purchases
                  of property and equipment
              
              
              (381,271
              )
              
              (148,954
              )Proceeds
                  from sale of assets
              
              
              5,607,266
              
              
              —Net
                  cash (used in) investing activities - continuing
                  operations
              
              
              (23,656,590
              )
              
              (11,839,244
              )Net
                  cash provided by investing activities - discontinued
                  operations
              
              
              —
              
              
              1,689,129Net
                  cash (used in) provided by investing activities
              
              
              (23,656,590
              )
              
              (10,150,115
              )Cash
                  flow provided by (used in) financing activities:Subordinated
                  debt repaid
              
              
              (3,333,334
              )
              
              (3,764,584
              )Acquisition
                  of common stock
              
              
              (2,000,880
              )
              
              —Exercised
                  stock options
              
              
              1,637,259
              
              
              1,698,809Dividends
                  paid
              
              
              (2,905,782
              )
              
              (1,526,713
              )Exercised
                  warrants
              
              
              7,968,593
              
              
              —Revolving
                  credit outstanding
              
              
              (186,779
              )
              
              (2,070,438
              )Net
                  cash provided by (used in) financing activities - continuing
                  operations
              
              
              1,179,077
              
              
              (5,662,926
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              1,794,928
              
              
              (4,662,240
              )Cash
                  and cash equivalents at beginning of period
              
              
              6,071,460
              
              
              6,127,706Cash
                  and cash equivalents at end of period
              
              $
              7,866,388
              
              $
              1,465,466


**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


-5-
 **Table
          of Contents**




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)


Nine
                  months ended September 30(continued)
              
              2006
              
              2005Supplemental
                  disclosure of cash flow information:Cash
                  paid during the period for:Interest
              
              $
              260,199
              
              $
              499,855Non-cash
                  investing and finance activities:Accrued
                  dividends payable
              
              $
              991,216
              
              $
              448,195Retirement
                  of subordinated debt by Common Stock issuance
              
              $
              1,666,667
              
              $
              1,666,667Stock
                  issued to pay interest on subordinated debt
              
              $
              128,125
              
              $
              315,625


**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


-6-
 **Table
          of Contents**
  **21** **st** **Century Holding Company**


**Notes
        to Consolidated Financial Statements**
   **(1)**
              **Organization
                  and Business**





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





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





Federated
      National is authorized to underwrite 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 California.





During
      the nine months ended September 30, 2006, 72.8%, 22.3% and 4.9% of the premiums
      we underwrote were for homeowners’ property and casualty insurance, commercial
      general liability insurance and personal automobile insurance, respectively.
      During the nine months ended September 30, 2005, 61.4%, 19.6% and 19.0% 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-
 **Table
          of Contents**


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


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





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





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





The
      most
      significant accounting estimates inherent in the preparation of our financial
      statements include estimates associated with management’s evaluation of the
      determination of liability for unpaid loss and loss adjustment expense (“LAE”),
      and the amount and recoverability of amortization of deferred policy acquisition
      costs. In addition, significant estimates form the basis for our reserves with
      respect to finance contracts, premiums receivable and deferred income taxes.
      Various assumptions and other factors underlie the determination of these
      significant estimates.





The
      process of determining significant estimates is fact specific and takes into
      account factors such as historical experience, current and expected economic
      conditions, and in the case of unpaid loss and LAE, an actuarial valuation.
      Management regularly reevaluates these significant factors and makes adjustments
      where facts and circumstances dictate. In selecting the best estimate, we
      utilize up to 6 different actuarial methodologies. Each of these methodologies
      is designed to forecast the number of claims we will be called upon to pay
      and
      the amounts we will pay on average to settle those claims. In arriving at our
      best estimate, our actuaries consider the likely predictive value of the various
      loss development methodologies employed in light of underwriting practices,
      premium rate changes and claim settlement practices that may have occurred,
      and
      weigh 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.





-8-
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          of Contents**





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


**Notes
      to Consolidated Financial Statements**






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





In
      December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS
      No. 123, Share-Based Payments (“SFAS No. 123R”). This statement eliminates the
      option to apply the intrinsic value measurement provisions of the Accounting
      Principles Board (“APB”) No. 25 to stock compensation awards issued to
      employees. Rather, SFAS No. 123R requires companies to measure the cost of
      employee services received in exchange for an award of equity instruments based
      on the grant date fair value of the award. That cost will be recognized over
      the
      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 2006 will
      total approximately $0.6 million, of which approximately $0.4 million was
      charged to income from continuing operations before provision for income taxes
      for the nine months ended September 30, 2006. The effect on earnings per share
      for the nine months ended September 30, 2006 for both undiluted and fully
      diluted was approximately $0.03 per share. The effect on earnings per share
      for
      the three months ended September 30, 2006 for both undiluted and fully diluted
      was approximately $0.01 per share. For a more detailed discussion, please see
      Footnote 8, titled Stock Compensation Plans.





**(C)**
            **Stock
                Options**





At
      September 30, 2006, the Company has two stock-based employee compensation plans
      and one stock-based franchise compensation plan, which are described later
      in
      footnote 8, Stock Compensation Plans. Prior to January 1, 2006, we accounted
      for
      those plans under the recognition and measurement provisions of stock-based
      compensation using the intrinsic value method prescribed by APB Opinion No.
      25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Under
      these provisions, no stock-based employee compensation cost was recognized
      in
      the Statement of Operations for the year ended December 31, 2005 as all options
      granted under those plans had an exercise price equal to or less than the market
      value of the underlying common stock on the date of grant.





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123R using the modified-prospective-transition method. Under that
      transition method, compensation cost recognized during the nine months ended
      September 30, 2006 includes: (a) compensation cost for all share-based payments
      granted prior to, but not yet vested as of January 1, 2006, based on the grant
      date fair value estimated in accordance with the original provisions of
      Statement 123, and (b) compensation cost for all share-based payments granted
      subsequent to January 1, 2006, based on the grant-date fair-value estimated
      in
      accordance with the provisions of SFAS No. 123R. Results for prior periods
      have
      not been restated.





During
      the nine months ended September 30, 2006, 41,000 non-qualified and 40,000
      qualified stock options were issued with an average option price of $16.40
      per
      share. Like all other outstanding stock options, these stock options contain
      service conditions and do not contain any performance conditions. For a further
      discussion regarding the provisions of SFAS No. 123R and its effect on our
      operations, please refer to footnote 8, Stock Compensation Plans.





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





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





**(E)**
            **Reclassifications**




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


-9-
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          of Contents**




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


**Notes
        to Consolidated Financial Statements**





**(3)**
            **Revolving
                Credit Outstanding**





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





The
      amounts of WPAC’s advances are subject to availability under a borrowing base
      calculation, with maximum advances outstanding not to exceed the maximum credit
      commitment. The annual interest rate on advances under the Revolving Agreement
      equals the prime rate plus additional interest varying from 1.25% to 3.25%
      based
      on the prior month’s ratio of contracts receivable related to insurance
      companies with an A. M. Best rating of B or lower, to total contracts
      receivable. The effective interest rate on this line of credit, based on our
      average outstanding borrowings under the Revolving Agreement, was 9.78% and
      8.22% for the nine months ended September 30, 2006 and 2005, respectively.





Outstanding
      borrowings under the Revolving Agreement as of September 30, 2006 and December
      31, 2005 were approximately $10,000 and $197,000, respectively. Interest expense
      on this revolving credit line for the nine months ended September 30, 2006
      and
      2005 totaled approximately $7,600 and $68,600, 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 Company and the Florida Hurricane Catastrophic
      Fund.





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 nine months ended September 30, 2006, Federated National
      and American Vehicle were assessed approximately $111,000 and $2,000,
      respectively by the JUA Plan based on their respective Cash Activity Reports.
      These assessments are charged to operations as paid. Future assessments by
      this
      association are undeterminable at this
      time.


-10-
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          of Contents**




**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 Property Insurance Corporation (“Citizens”) determined a 2004 plan year
      deficit existed in their High Risk Account. Citizen’s Board decided that a $515
      million Regular Assessment was in the best interest of Citizens and consistent
      with Florida Statutes. On this basis, Citizen’s Board certified for a Regular
      Assessment. Federated National’s participation in this assessment totaled $2.0
      million. Provisions contained in our excess of loss reinsurance policies for
      this period provided for their participation totaling $1.5 million. Pursuant
      to
      Section 627.3512, Florida Statutes, insurers are permitted to recoup the
      assessment by adding a surcharge to policies in an amount not to exceed the
      amount paid by the insurer to Citizens. Federated National is currently
      underwriting the recoupment in connection with this assessment which began
      in
      March 2006. As noted above, Federated National is entitled to recoup this
      assessment, and subrogated $1.5 million to our reinsurers. Through September
      30,
      2006 Federated National has recouped approximately $1.5 million in connection
      with this assessment. No charge to operations was recorded in connection with
      this assessment.




During
      a
      regularly scheduled meeting on September 14, 2006, the Citizens Board determined
      a 2005 plan year deficit existed in their High Risk Account. Citizen’s Board
      decided that a $163 million Regular Assessment was in the best interest of
      Citizens and consistent with Florida Statutes. On this basis, Citizen’s Board
      has applied to the OIR for a Regular Assessment. There are no participation
      provisions in our excess of loss reinsurance policies covering any potential
      assessment however Federated National has currently qualified for limited
      apportionment status which in effect greatly limits our exposure to an
      assessment in connection with the 2005 plan year deficit. Our estimation of
      the
      Citizens 2005 plan year deficit is between zero and approximately $324,000.
      Accordingly, Federated National has not recognized a liability in connection
      with this assessment. Although not yet formally certified by the OIR we
      anticipate that the OIR will. Future assessments by Citizens are undeterminable
      at this time.


As
          a
          direct premium writer in the state of Florida, we are required to participate
          in
          an insurer solvency association under Florida Statutes 631.57(3) (a) by
          way of
          the Florida Insurance Guarantee Association (“FIGA”). Participation in this pool
          is based on our written premium by line of business to total premiums written
          statewide by all insurers. Our participation has resulted in an assessment
          due
          to the insolvency of other property and casualty insurance carriers in
          the state
          of Florida. The assessment was approximately 2% of our 2005 net written
          premium
          In Florida and totaled $1.2 million, net of $0.7 million taxes, and was
          charged
          to operations during the quarter ended September 30, 2006. Approval by
          Florida’s
          Office of Insurance Regulation (“OIR”) to recoup the assessment through a 0.9%
          policy surcharge to all Federated National homeowner policies issued in
          Florida
          for new and renewal business is pending. Already approved by the OIR is our
          assessment, through a 1.3% policy surcharge, to all American Vehicle general
          liability policies issued in Florida with effective dates of August 15,
          2006 for
          new business and October 15, 2006 for renewal business. As of September
          30, 2006
          approximately $10,000 has been recouped in connection with this assessment.





The
      OIR
      issued OIR-06-008M 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.


-11-
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          of Contents**




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





Relative
      to the Company’s commitments stemming from operational matters, effective on or
      about March 1, 2006, 21 st Century
      sold its interest in the Lauderdale Lakes property to an unrelated party. As
      part of this transaction, 21 st Century
      has agreed to lease the same facilities for a six year term. Our lease for
      this
      office space expires in December 2011.





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




Fiscal
                  Year
              
              Lease
                  payments2006
              
              $
              139,3962007
              
              
              557,5832008
              
              
              557,5832009
              
              
              557,5832010
              
              
              557,583Thereafter
              
              
              557,583Total
              
              $
              2,927,311


**(5)**
            **Comprehensive
                Income**





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




Three
                  months ended
                September
                  30,
              
              Nine
                  months ended
                September
                  30,2006
              
              2005
              
              2006
              
              2005Net
                  income
              
              $
              3,029,285
              
              $
              1,852,718
              
              $
              17,947,156
              
              $
              10,696,539Change
                  in net unrealized gains on investments available for sale
              
              
              1,312,936
              
              
              (860,601
              )
              
              959,364
              
              
              (1,139,339
              )Comprehensive
                  income, before tax
              
              
              4,342,221
              
              
              992,117
              
              
              18,906,520
              
              
              9,557,200Income
                  tax (expense) benefit related to items of other comprehensive
                  income
              
              
              (494,058
              )
              
              321,308
              
              
              (361,009
              )
              
              433,672Comprehensive
                  income
              
              $
              3,848,163
              
              $
              1,313,425
              
              $
              18,545,511
              
              $
              9,990,872




**(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.


-12-
 **Table
          of Contents**
  **21** **st** **Century Holding Company**


**Notes
        to Consolidated Financial Statements**


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 due to the finance segment not
      exceeding the 10% threshold for revenues, earnings or assets.





**(7)**
            **Reinsurance
                Agreements**





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





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




First
                  Event Participation
              
              Reinstated
                  Premium ProtectionCurrent
                  AM Best Rating
              
              Reinsurer
              
              $20m
                  in excess of $15m
              
              $40m
                  in excess of $35m
              
              $72m
                  in excess of $75m and FHCF participation
              
              $20m
                  in excess of $15m
              
              $40m
                  in excess of $35mA+
              
              
              Ace
                  Temlpest 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
              %NR4
              
              
              American
                  Vehicle Insurance 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 will be subjected to exposure


-13-
 **Table
          of Contents**




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


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.





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


-14-
 **Table
          of Contents**




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


through
      earned premium in accordance with the provisions and terms contained in the
      respective treaties.





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





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.





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
              
              $
              63.3
              
              $
              53.3
              
              $
              10.0Frances
                  (September 3)
              
              
              3,811
              
              
              51.5
              
              
              41.5
              
              
              10.0Ivan
                  (September 14)
              
              
              1,063
              
              
              25.9
              
              
              —
              
              
              25.9Jeanne
                  (September 25)
              
              
              1,564
              
              
              13.4
              
              
              —
              
              
              13.4Total
                  Loss Estimate
              
              
              9,010
              
              $
              154.1
              
              $
              94.8
              
              $
              59.3
  Claim
              
              
              Gross
              
              
              Reinsurance
              
              
              Net2005
                  Hurricanes
              
              
              Count
              
              
              Losses
              
              
              Recoveries
              
              
              Losses(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              324
              
              $
              2.7
              
              $
              —
              
              $
              2.7Katrina
                  (August 25)
              
              
              2,116
              
              
              13.0
              
              
              10.0
              
              
              3.0Rita
                  (September 20)
              
              
              19
              
              
              0.1
              
              
              —
              
              
              0.1Wilma
                  (October 24)
              
              
              11,458
              
              
              154.5
              
              
              151.5
              
              
              3.0Total
                  Loss Estimate
              
              
              13,917
              
              $
              170.3
              
              $
              161.5
              
              $
              8.8


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





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





**(8)**
            **Stock
                Compensation Plans**





We
      implemented a stock option plan in November 1998 that provides for the granting
      of stock options to officers, directors, employees and consultants. The
      objectives of this plan include attracting and retaining the best personnel,
      providing for additional performance incentives, and promoting our success
      by
      providing employees the


-15-
 **Table
          of Contents**




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


opportunity
      to acquire common stock. Options outstanding under this plan have been granted
      at prices which are either equal to or above the market value of the stock
      on
      the date of grant, vest over a four-year period, and expire ten years after
      the
      grant date. Under this plan, we are authorized to grant options to purchase
      up
      to 900,000 common shares, and, as of September 30, 2006 and December 31, 2005,
      we had outstanding exercisable options to purchase 45,500 and 97,650 shares,
      respectively.





In
      2001,
      we implemented a franchise stock option plan that provides for the granting
      of
      stock options to individuals purchasing Company owned agencies which were then
      converted to franchised agencies. The purpose of the plan was to advance our
      interests by providing an additional incentive to encourage managers of Company
      owned agencies to purchase the agencies and convert them to franchises. Options
      outstanding under the plan have been granted at prices which are above the
      market value of the stock on the date of grant and expire ten years after the
      grant date. Under this plan, we are authorized to grant options to purchase
      up
      to 988,500 common shares, though in connection with our sale of our franchise
      operations, we do not anticipate additional options to be granted under this
      plan. As of September 30, 2006 we had no outstanding exercisable options to
      purchase. As of December 31, 2005, we had 15,000 outstanding exercisable options
      to purchase.





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 September 30,
      2006
      and December 31, 2005, we had outstanding exercisable options to purchase
      727,508 and 823,608 shares, respectively.





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


**1998
                  Plan**
              
              **2001
                  Franchisee Plan**
              
              **2002
                  Plan**Number
                  of
                Shares
              
              Weighted
                  Average Option Exercise Price
              
              Number
                  of
                Shares
              
              Weighted
                  Average Option Exercise Price
              
              Number
                  of
                Shares
              
              Weighted
                  Average 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
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —
              
              
              81,000
              
              $
              16.40Exercised
              
              
              (52,150
              )
              $
              6.67
              
              
              (15,000
              )
              $
              9.17
              
              
              (121,200
              )
              $
              9.21Cancelled
              
              
              —
              
              $
              6.67
              
              
              —
              
              
              
              
              
              (55,900
              )
              $
              14.87Outstanding
                  at September 30, 2006
              
              
              45,500
              
              $
              6.67
              
              
              —
              
              $
              —
              
              
              727,508
              
              $
              13.13


-16-
 **Table
          of Contents**




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


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


**1998
                  Plan**
              
              **2001
                  Franchisee Plan**
              
              **2002
                  Plan**Options
                  Exercisable at:
              
              Number
                  of
                Shares
              
              Weighted
                  Average Option Exercise Price
              
              Number
                  of
                Shares
              
              Weighted
                  Average Option Exercise Price
              
              Number
                  of
                Shares
              
              Weighted
                  Average Option Exercise PriceSeptember
                  30, 2006
              
              
              45,500
              
              $
              6.67
              
              
              —
              
              $
              —
              
              
              297,458
              
              $
              9.21December
                  31, 2006
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              47,800
              
              $
              9.21December
                  31, 2007
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              126,650
              
              $
              9.21December
                  31, 2008
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              95,000
              
              $
              9.21December
                  31, 2009
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              83,600
              
              $
              9.21December
                  31, 2010
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              61,300
              
              $
              9.21Thereafter
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              15,700Total
                  options exercisible
              
              
              45,500
              
              
              
              
              
              —
              
              
              
              
              
              727,508


At
      September 30, 2006, 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 nine months
      ended September 30, 2006 includes:





·
            Compensation
                cost for all share-based payments granted prior to, but not yet vested
                as
                of January 1, 2006, based on the grant date fair value estimated
                in
                accordance with the original provisions of Statement 123, and





·
            Compensation
                cost for all share-based payments granted subsequent to January 1,
                2006,
                based on the grant-date fair-value estimated in accordance with the
                provisions of SFAS No. 123R. Results for prior periods have not been
                restated.





As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
      continuing operations before provision for income taxes and net income for
      the
      nine months ended September 30, 2006, are lower by approximately $395,000 and
      $245,000, respectively, than if it had continued to account for share-base
      compensation under ABP Opinion No. 25. For the three months ended September
      30,
      2006, income from continuing operations before provision for income taxes and
      net income are lower by approximately $115,000 and $70,000, respectively, than
      if it had continued to account for share-base compensation under ABP Opinion
      No.
      25.





Basic
      and
      diluted earnings per share for the nine month period ended September 30, 2006
      would have been $2.45 and $2.30, respectively, if the Company had not adopted
      SFAS No. 123R, compared to reported basic and diluted earnings per share of
      $2.41 and $2.27, respectively.





Basic
      and
      diluted earnings per share for the three month period ended September 30, 2006
      would have been $0.41 and $0.41, respectively, if the Company had not adopted
      SFAS No. 123R, compared to reported basic and diluted earnings per share of
      $0.40 and $0.40, respectively.





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


-17-
 **Table
          of Contents**




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


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




Three
                  months ended
              
              Nine
                  months endedSeptember
                  30, 2005
              
              September
                  30, 2005Net
                  Income as reported
              
              $
              1,852,718
              
              $
              10,696,539Compensation,
                  net of tax effect
              
              
              132,308
              
              
              932,007Pro
                  forma net income
              
              $
              1,720,410
              
              $
              9,764,532Net
                  income per shareAs
                  reported - Basic
              
              $
              0.29
              
              $
              1.73As
                  reported - Diluted
              
              $
              0.28
              
              $
              1.64Pro
                  forma - Basic
              
              $
              0.27
              
              $
              1.58Pro
                  forma - Diluted
              
              $
              0.26
              
              $
              1.49


The
      weighted average fair value for the 32,500 new options granted during the three
      months ended September 30, 2006 and the 48,500 new options granted during the
      three months ended June 30, 2006, estimated on the date of grant using the
      Black-Scholes option-pricing model was $4.31 and $4.67, respectively. There
      were
      no new options granted during the quarter ending March 31, 2006.





The
      weighted average fair value for new options granted during the nine months
      ended
      September 30, 2005, estimated on the date of grant using the Black-Scholes
      option-pricing model was $5.07. The fair value range of new options granted
      using the Black-Scholes option-pricing model during the nine months ended
      September 30, 2006 and during the nine months ended September 30, 2005 is from
      $3.62 to $5.02 and $2.81 to $10.75, respectively.





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




September
                  30, 2006
              
              September
                  30, 2005Dividend
                  yield
              
              2.10%
                  to 3.70%
              
              2.33%
                  to 2.43%Expected
                  volatility
              
              43.06%
                  to 44.30%
              
              49.85%
                  to 96.76%Risk-free
                  interest rate
              
              4.60%
                  to 4.90%
              
              3.34%
                  to 4.17%Expected
                  life (in years)
              
              2.04
                  to 2.86
              
              2.56
                  to 2.63


In
      connection with the sale of Express Tax Service, Inc. and EXPRESSTAX Franchise
      Corporation on January 1, 2005, 105,000 Incentive Stock Options under the 2002
      Stock Option plan were cancelled and reissued as Non-Qualified Stock
      Options.





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 September 30,
      2006:




Range
                      ofExercise
                    Price
                
                Outstanding
                      atSeptember
                    30, 2006
                
                Weighted
                        AverageContractualPeriods
                    in Years
                
                WeightedAverageExercise
                    Price
                
                Exercisable
                      atSeptember
                    30, 20061998
                    Plan
                
                $
                6.67
                
                
                45,500
                
                
                2.52
                
                $
                6.67
                
                
                45,5002001
                    Franchise Plan
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —2002
                    Plan
                
                $
                8.33
                    - $18.21
                
                
                727,508
                
                
                2.77
                
                $
                13.13
                
                
                297,458
 
 -18-
 **Table
          of Contents**
  **21** **st** **Century Holding Company**


**Notes
        to Consolidated Financial Statements**


**(9)**
            **Subordinated
                Debt**





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





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





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





On
      July
      31, 2006, we made the final principal payment of $625,000 on the July 2003
      notes
      and the July 2003 warrants expired. Of the 612,074 shares that could have been
      issued in connection with the July 2003 warrants, 301,430 were exercised,
      225,000 were reacquired in the open market by us and 85,644 were unexercised.
      The unexercised warrants were cancelled as of July 31, 2006.





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





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


-19-
 **Table
          of Contents**




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


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, 623,299 have been exercised to
      date.





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





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




Quarterly
                  payment due date
              
              2006
              
              2005January
                  31,
              
              
              —
              
              
              55,537April
                  30,
              
              
              38,420
              
              
              —July
                  31,
              
              
              —
              
              
              —October
                  31,
              
              
              n/a
              
              
              —Total
                  common stock issued
              
              
              38,420
              
              
              55,537


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




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


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





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





For
      the
      September 2004 Notes, the quarterly principal and interest payments, totaling
      approximately $1.1 million per payment, are due quarterly for two more years
      with the last installment due on September 30, 2007. The scheduled loan payments
      for the next two years are as follows:




For
                  the periodYear
                  ending December 31, 2006
              
              $
              1,041,667Year
                  ending December 31, 2007
              
              
              4,166,666Total
              
              $
              5,208,333




-20-
 **Table
          of Contents**




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


**(10)**
            **Discontinued
                Operations**





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





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





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





In
      connection with the transaction, the Company extended the expiration dates
      for
      the 75,000 outstanding stock options previously granted to Mr. Kluba and the
      30,000 outstanding stock options previously granted to Mr. Kluba’s wife. No
      options remain outstanding under this arrangement.


-21-
 **Table
          of Contents**
 **21** **st** **Century Holding Company**


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





**Item
      2**





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





**Forward-Looking
      Statements**





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




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





**Overview**





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





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


-22-
 **Table
          of Contents**




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


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






During
      the nine months ended September 30, 2006, 72.8%, 22.3% and 4.9% of the premiums
      we underwrote were for homeowners’ property and casualty insurance, commercial
      general liability insurance and personal automobile insurance, respectively.
      During the nine months ended September 30, 2005, 61.5%, 19.5% and 19.0% 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. 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
      companies’ products through the Company’s distribution network. The 6%
      commission fee from Federated National and American Vehicle was made effective
      January 1, 2005. Assurance MGA plans to establish relationships with additional
      carriers and add additional insurance products in the future.





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





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





In
      Florida, more than 200 companies are authorized to underwrite homeowners’
insurance. Comparable companies which compete with us in the homeowners’ market
      include Allstate Insurance Company, State Farm Insurance Company, First
      Floridian Insurance Company, and Vanguard Insurance Company. During the nine
      months ended September 30, 2006 the Florida OIR announced the take over of
      three
      of our major competitors due to the poor financial condition stemming from
      the
      effects of last year’s catastrophic hurricanes. We 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 general liability insurance market
      include Century Surety Insurance Company, Atlantic Casualty Insurance Company,
      Colony Insurance Company and Burlington/First Financial Insurance
      Companies.





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





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


-23-
 **Table
          of Contents**
  **21** **st** **Century Holding Company**


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






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




**Critical
      Accounting Policies**




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




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




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




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




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




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




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




·
            Legislative
                actions,




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




·
            Changes
                in our underwriting standards, and




·
            Any
                changes in our claim handling
                procedures.




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




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


-24-
 **Table
          of Contents**




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


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




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




**New
      Accounting Pronouncements**




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




At
      September 30, 2006, the Company has two stock-based employee compensation plans
      and one stock-based franchise compensation plan, which are described in Item
      1,
      Part I, “Financial Statements - Note 8 - Stock Compensation Plans” of this Form
      10-Q. Prior to January 1, 2006, we accounted for those plans under the
      recognition and measurement provisions of stock-based compensation using the
      intrinsic value method prescribed by APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Under
      these provisions, no stock-based employee compensation cost was recognized
      in
      the Statement of Operations for the years ended December 31, 2005 or 2004 as
      all
      options granted under those plans had an exercise price equal to or greater
      than
      the market value of the underlying common stock on the date of grant.





Effective
      January 1, 2006, the Company adopted the fair value recognitions provisions
      of
      FASB Statement No. 123 (R) using the modified-prospective-transition method.
      Under that transition method, compensation cost recognized for the nine months
      and three months ending September 30, 2006 include: (a) compensation cost for
      all share-based payments granted prior to, but not yet vested as of January
      1,
      2006, based on the grant date fair value estimated in accordance with the
      original provisions of Statement 123, totaling approximately $377,600 and
      $103,600, respectively and (b) compensation cost for all share-based payments
      granted subsequent to January 1, 2006, based on the grant-date fair-value
      estimated in accordance with the provisions of SFAS No. 123R; and totaling
      approximately $17,400 and $11,400, respectively. Results for prior periods
      have
      not been restated and there were no cumulative adjustments recorded in the
      September 30, 2006 Statement of Operations as a result of the adoption of FASB
      Statement 123 (R).





As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
      continuing operations before provision for income taxes and net income for
      the
      nine months ended September 30, 2006, are lower by approximately $395,000 and
      $245,000, respectively, than if it had continued to account for share-base
      compensation under ABP Opinion No. 25. For the three months ended September
      30,
      2006, income from continuing operations before provision for income taxes and
      net income are lower by approximately $115,000 and $70,000, respectively, than
      if it had continued to account for share-base compensation under ABP Opinion
      No.
      25.





Basic
      and
      diluted earnings per share for the nine month period ended September 30, 2006
      would have been $2.45 and $2.30, respectively, if the Company had not adopted
      SFAS No. 123R, compared to reported basic and diluted earnings per share of
      $2.41 and $2.27, respectively.





Basic
      and
      diluted earnings per share for the three month period ended September 30, 2006
      would have been $0.41 and $0.41, respectively, if the Company had not adopted
      SFAS No. 123R, compared to reported basic and diluted earnings per share of
      $0.40 and $0.40, respectively.





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


-25-
 **Table
          of Contents**


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


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






The
      weighted average fair value for the 32,500 new options granted during the three
      months ended September 30, 2006 and the 48,500 new options granted during the
      three months ended June 30, 2006, estimated on the date of grant using the
      Black-Scholes option-pricing model was $4.31 and $4.67, respectively. There
      were
      no new options granted during the quarter ending March 31, 2006.





The
      weighted average fair value for new options granted during the nine months
      ended
      September 30, 2005, estimated on the date of grant using the Black-Scholes
      option-pricing model was $5.07. The fair value range of new options granted
      using the Black-Scholes option-pricing model during the nine months ended
      September 30, 2006 and during the nine months ended September 30, 2005 is from
      $3.62 to $5.02 and $2.81 to $10.75, respectively.





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




September
                  30, 2006
              
              September
                  30, 2005Dividend
                  yield
              
              2.10%
                  to 3.70%
              
              2.33%
                  to 2.43%Expected
                  volatility
              
              43.06%
                  to 44.30%
              
              49.85%
                  to 96.76%Risk-free
                  interest rate
              
              4.60%
                  to 4.90%
              
              3.34%
                  to 4.17%Expected
                  life (in years)
              
              2.04
                  to 2.86
              
              2.56
                  to 2.63


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





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





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





**Analysis
      of Financial Condition**


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




**Total
      Investments**





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





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


-26-
 **Table
          of Contents**




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


Total
      Investments increased $29.0 million, or 28.9%, to $129.0 million as of September
      30, 2006, as compared to $100.1 million as of December 31, 2005. The increase
      is
      primarily a result of our investment of the proceeds from an increase in written
      insurance premiums.





The
      fixed
      maturities and the equity securities that are available for sale and carried
      at
      fair value represent 84.8% of total investments as of September 30, 2006, as
      compared to 80.3% as of December 31, 2005.





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





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




Unrealized
                  Gains and (Losses)September
                  30, 2006
              
              December
                  31, 2005Fixed
                  maturities:U.S.
                  government obligations and agency obligations
              
              $
              (678,091
              )
              $
              (618,703
              )Obligations
                  of states and political subdivisions
              
              
              (130,626
              )
              
              (135,305
              )(808,717
              )
              
              (754,008
              )Corporate
                  securities:Communications
              
              
              9,225
              
              
              14,735Financial
              
              
              (21,105
              )
              
              (225,768
              )Other
              
              
              (39,418
              )
              
              (19,681
              )(51,298
              )
              
              (230,714
              )Equity
                  securities:Common
                  stocks
              
              
              (645,337
              )
              
              (1,479,994
              )Total
                  unrealized gains and (losses), net
              
              $
              (1,505,352
              )
              $
              (2,464,716
              )


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





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





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





The
      investments held at September 30, 2006 and December 31, 2005 were comprised
      mainly of United States government and agency bonds as well as municipal bonds
      which are viewed by the Company as conservative


-27-
 **Table
          of Contents**
  **21** **st** **Century Holding Company**


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






and
      less
      risky holdings, though sensitive to interest rate changes. There is a smaller
      concentration of corporate bonds predominantly held in the financial and
      conglomerate industries. Approximately two-thirds of the equity holdings are
      in
      income funds while the other third is invested in equities related to the
      mortgage investment industry and business service industry.





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





**Cash
      and Cash Equivalents**





Cash
      and
      cash equivalents, which include cash, certificates of deposits, and money market
      accounts increased $1.8 million, or 29.6%, to $7.9 million as of September
      30,
      2006, as compared to $6.1 million as of December 31, 2005. These balances are
      held primarily in money market accounts and are available for the settlement
      of
      hurricanes related claims.





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





Finance
      contracts receivable, net of allowance for credit losses, decreased $5.1
      million, or 69.2%, to $2.3 million as of September 30, 2006, as compared to
      $7.3
      million as of December 31, 2005. The decrease is primarily due to our sale
      in
      December 2004 of our assets related to our non-standard automobile insurance
      agency business in Florida and the associated financed contracts. We anticipate
      a continued decline in the financed contracts receivable, net over the future
      short term and its related conversion to cash, cash equivalents and
      investments.





**Prepaid
      Reinsurance Premiums**





Prepaid
      reinsurance premiums increased $39.4 million, or 324.7%, to $51.5 million as
      of
      September 30, 2006, as compared to $12.1 million as of December 31, 2005. The
      increase 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 $3.3 million, or
      43.5%, to $4.2 million as of September 30, 2006, as compared to $7.5 million
      as
      of December 31, 2005.





Our
      homeowners’ insurance premiums receivable decreased $1.7 million, or 89.2%, to
      $0.2 million as of September 30, 2006, as compared to $1.9 million as of
      December 31, 2005. The decrease can be attributed to the seasonality of the
      purchasing patterns of our policy holders.





Our
      commercial general liability insurance premiums receivable increased $0.9
      million, or 38.1%, to $3.1 million as of September 30, 2006, as compared to
      $2.3
      million as of December 31, 2005.





Premiums
      receivable in connection with our automobile line of business decreased $2.4
      million, or 58.0%, to $1.8 million as of September 30, 2006, as compared to
      $4.2
      million as of December 31, 2005. The decrease in automobile related premiums
      receivable is associated with the sale of our distribution channels in
      connection with the sale of our agencies, effective December 31, 2004.





**Reinsurance
      Recoverable**





Reinsurance
      recoverable decreased to nothing as of September 30, 2006, as compared to $136.7
      million as of December 31, 2005. The decrease is due to the timing of
      settlements with our reinsurers in connection with the adjustment of loss and
      LAE claims as they relate to costs recoverable under our reinsurance
      agreements.


-28-
 **Table
          of Contents**
  **21** **st** **Century Holding Company**


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





**Deferred
      Policy Acquisition Costs**


Deferred
      policy acquisition costs increased $1.6 million, or 17.5%, to $10.8 million
      as
      of September 30, 2006, as compared to $9.2 million as of December 31, 2005.
      The
      increased production volume for both the homeowners’ and commercial general
      liability product lines is the reason for the increase to this
      asset.





**Deferred
      Income Taxes, net**





Deferred
      income taxes, net, increased $2.0 million, or 75.1%, to $4.7 million as of
      September 30, 2006, as compared to $2.7 million as of December 31, 2005. The
      increase is comprised primarily of $1.5 million related to discounted unearned
      premiums and $0.9 million in connection with the sale of our property in
      Lauderdale Lakes and $0.7 million related to FIGA assessments, offset by $0.6
      million associated with deferred policy acquisition costs and $0.4 million
      related to our investments portfolio.





**Property,
      Plant and Equipment, net**





Property,
      plant and equipment, net, decreased $2.5 million, or 64.9%, to $1.4 million
      as
      of September 30, 2006, as compared to $3.9 million as of December 31, 2005.
      Effective on or about March 1, 2006, 21 st Century
      sold its interest in the Lauderdale Lakes property to an unrelated party for
      approximately $5.0 million cash and a $0.9 million six year 5% note, generating
      a gain on sale totaling approximately $2.9 million. As part of the transaction,
      21 st Century
      has agreed to lease the same facilities for a six year term. Our lease for
      this
      office space expires in February 2011. The Company recognized a deferred gain
      in
      connection with the sale totaling approximately $2.8 million.





**Other
      Assets**





Other
      assets decreased $1.7 million, or 26.0%, to $2.9 million as of September 30,
      2006, as compared to $4.6 million as of December 31, 2005. Major components
      of
      other assets are as follows:




September
                  30, 2006
              
              December
                  31, 2005Accrued
                  interest income
              
              $
              1,003,657
              
              $
              734,059Notes
                  receivable
              
              
              900,521
              
              
              —Unamortized
                  loan costs
              
              
              103,701
              
              
              310,832Compensating
                  cash balances
              
              
              9,911
              
              
              363,021Due
                  from sale of discontinued operations, net
              
              
              —
              
              
              410,000Prepaid
                  expenses
              
              
              278,554
              
              
              349,138Recoupment
                  of assessments
              
              
              485,731
              
              
              2,025,210Other
              
              
              103,568
              
              
              387,803Total
              
              $
              2,885,643
              
              $
              4,580,063


**Unpaid
      Losses and LAE**





Unpaid
      losses and LAE decreased $122.8 million, or 79.7%, to $31.2 million as of
      September 30, 2006, as compared to $154.0 million as of December 31, 2005.
      The
      decrease in unpaid losses and LAE relates to our payment patterns primarily
      relative to the settling of hurricane related claims. The composition of unpaid
      loss and LAE by product line is as follows:




September
                  30, 2006
              
              December
                  31, 2005Homeowners'
              
              $
              18,104,629
              
              $
              135,173,026Commercial
                  general liability
              
              
              4,901,418
              
              
              3,661,256Automobile
              
              
              8,221,244
              
              
              15,204,261$
              31,227,291
              
              $
              154,038,543


Factors
      that affect unpaid losses and LAE include the estimates made on a claim-by-claim
      basis known as “case reserves” coupled with bulk estimates known as IBNR.
      Periodic estimates by management of the ultimate costs required to settle all
      claim files are based on the Company’s analysis of historical data and
      estimations of the impact of numerous factors such as (i) per claim information;
      (ii) company and industry historical loss experience; (iii) legislative
      enactments, judicial decisions, legal developments in the awarding of damages,
      and changes in political


-29-
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          of Contents**




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


attitudes;
      and (iv) trends in general economic conditions, including the effects of
      inflation. Management revises its estimates based on the results of its
      analysis. This process assumes that past experience, adjusted for the effects
      of
      current developments and anticipated trends, is an appropriate basis for
      estimating the ultimate settlement of all claims. There is no precise method
      for
      subsequently evaluating the impact of any specific factor on the adequacy of
      the
      reserves, because the eventual redundancy or deficiency is affected by multiple
      factors.





**Unearned
      Premium**





Unearned
      premiums increased $10.8 million, or 17.5%, to $72.7 million as of September
      30,
      2006, as compared to $61.8 million as of December 31, 2005. The increase was
      due
      to a $12.2 million increase in unearned homeowners’ insurance premiums, a $4.6
      million increase in unearned commercial general liability premiums, and a $6.0
      million decrease in unearned automobile premiums. These changes reflect our
      continued emphasis in 2006 on property and commercial general liability
      insurance products.




**Due
      to Reinsurers, net**





Due
      to
      reinsurers, net increased to $19.0 million as of September 30, 2006, as compared
      to nothing as of December 31, 2005 at which time the company had an asset,
      Reinsurance recoverable, net.





**Premium
      Deposits**





Premium
      deposits increased $0.6 million, or 26.6%, to $2.7 million as of September
      30,
      2006, as compared to $2.1 million as of December 31, 2005. Premium deposits
      are
      monies received on policies not yet in force as of September 30, 2006. The
      change is due to our policyholders purchasing patterns, the Company’s marketing
      efforts and our policies renewal patterns.





**Revolving
      Credit Outstanding**





Revolving
      credit outstanding decreased to nearly nothing as of September 30, 2006, as
      compared to $0.2 million as of December 31, 2005. The decrease 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 $11.9 million, or 97.6%, to $0.3 million as of September
      30,
      2006, as compared to $12.2 million as of December 31, 2005. The bank overdraft
      relates to hurricane-related loss and LAE disbursements paid but not yet
      presented for payment by the policyholder or vendor. The decrease relates to
      our
      payment patterns in relationship to the rate at which those cash disbursements
      are presented to the bank for payment.





**Funds
      Held Under Reinsurance Treaties**





Funds
      held under reinsurance treaties remained relatively unchanged at $1.5 million
      as
      of September 30, 2006, as compared to $1.5 million as of December 31, 2005.
      During its regularly scheduled meeting on August 17, 2005, the Board of
      Governors of Citizens determined a 2004 plan year deficit existed in their
      High
      Risk Account. Citizen’s Board decided that a $515 million Regular Assessment was
      in the best interest of Citizens and consistent with Florida Statutes. On this
      basis, Citizen’s Board certified for a Regular Assessment. Federated National’s
      participation in this assessment totaled $2.0 million. Provisions contained
      in
      our excess of loss reinsurance policies provided for their participation
      totaling $1.5 million of our $2.0 million assessment. Pursuant to Section
      627.3512, Florida Statutes, insurers are permitted to recoup the assessment
      by
      adding a surcharge to policies in an amount not to exceed the amount paid by
      the
      insurer to Citizens. Federated National recouped $1.5 million of this assessment
      from our reinsurers.




**Income
      Taxes Payable**





Income
      taxes payable increased $7.9 million, or 261.3%, to $10.9 million as of
      September 30, 2006, as compared to $3.0 million as of December 31, 2005. The
      increase is due to our continued profitable operations and the one time gain
      in
      connection with the sale of our property in Lauderdale Lakes.


-30-
 **Table
          of Contents**




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


**Subordinated
      Debt**





Subordinated
      Debt decreased $5.0 million, or 49.0%, to $5.2 million as of September 30,
      2006,
      as compared to $10.2 million as of December 31, 2005. The decrease is in
      connection with the retirement of the 2003 notes on July 31, 2006 and the
      scheduled quarterly principal payments on the 2004 notes.





**Deferred
      Gain from Sale of Property**





Deferred
      gain from sale of property increased to $2.6 million as of September 30, 2006
      as
      compared to nothing as of December 31, 2005. In accordance with the provisions
      of FASB No. 13, we will amortize the deferred gain over the term of the
      lease-back which is scheduled to end in December 2011.





**Accounts
      Payable and Accrued Expenses**





Accounts
      payable and accrued expenses decreased $1.8 million, or 43.1%, to $2.4 million
      as of September 30, 2006 as compared to $4.2 million as of December 31, 2005.
      This decrease is due to our cash management efforts and timing of payments
      with
      our trade vendors.




**Results
      of Operations**


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





**Gross
      Premiums Written**





Gross
      premiums written decreased $0.7 million, or 2.7%, to $24.7 million for the
      three
      months ended September 30, 2006, as compared to $25.4 million for the three
      months ended September 30, 2005. The following table denotes gross premiums
      written by major product line.




Three
                  months ended September 30,2006
              
              2005Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              15,907,467
              
              
              64.48
              %
              $
              16,275,500
              
              
              64.19
              %Commercial
                  liability
              
              
              8,292,591
              
              
              33.62
              %
              
              5,451,419
              
              
              21.50
              %Automobile
              
              
              469,445
              
              
              1.90
              %
              
              3,628,316
              
              
              14.31
              %Gross
                  written premiums
              
              $
              24,669,503
              
              
              100.00
              %
              $
              25,355,235
              
              
              100.00
              %


As
      noted
      above, the Company’s efforts to expand commercial general liability lines of
      insurance products are coming to fruition, as reflected by increased premiums
      written of $2.8 million, or 52.1 % to $8.3 million for the three months ended
      September 30, 2006, as compared to $5.5 million for the same three month period
      last year.





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




Three
                  months ended September 30,2006
              
              2005Amount
              
              Percentage
              
              Amount
              
              PercentageStateFlorida
              
              $
              5,428
              
              
              65.45
              %
              $
              4,525
              
              
              83.01
              %Georgia
              
              
              660
              
              
              7.96
              %
              
              440
              
              
              8.08
              %Lousiania
              
              
              1,380
              
              
              16.64
              %
              
              486
              
              
              8.91
              %Texas
              
              
              825
              
              
              9.95
              %
              
              —
              
              
              0.00
              %Total
              
              $
              8,293
              
              
              100.00
              %
              $
              5,451
              
              
              100.00
              %


-31-
 **Table
          of Contents**




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


The
      Company’s sale of homeowners’ policies decreased $0.4 million, or 2.27% to $15.9
      million for the three months ended September 30, 2006, as compared to $16.3
      million in the same three months ended September 30, 2005.





The
      Company’s sale of auto insurance policies decreased by $3.2 million, or 87.1%,
      to $0.5 million for the three months ended September 30, 2006, as compared
      to
      $3.6 million in the same three months ended September 30, 2005.





**Gross
      Premiums Ceded**





Gross
      premiums ceded increased to a debit balance of ($57.4) million for the three
      months ended September 30, 2006, as compared to a debit balance of ($7.2)
      million for the three months ended September 30, 2005. The increase is
      associated with the change in our prepaid reinsurance premiums.





**Increase
      in Prepaid Reinsurance Premiums**





The
      increase in prepaid reinsurance premiums was $42.1 million for the three months
      ended September 30, 2006, as compared to $0.1 million for the three months
      ended
      September 30, 2005. The increased credit to written premium is primarily
      associated with the timing of our reinsurance payments measured against the
      term
      of the underlying reinsurance policies.




**Decrease
      in Unearned Premiums**





The
      decrease in unearned premiums was $12.4 million for the three months ended
      September 30, 2006, as compared to $2.5 million for the three months ended
      September 30, 2005. The change was due to a $10.4 million decrease in unearned
      homeowners’ insurance premiums, a $0.5 million increase in unearned commercial
      general liability premiums, a $2.5 million decrease in unearned automobile
      premiums, and a $0.1 million decrease in unearned mobile home insurance
      premiums. These changes reflect our continued growth along our homeowners’ and
      commercial general liability lines of business. For further discussion, see
      “Analysis of Financial Condition - Unearned Premiums” on page 29.





**Net
      Premiums Earned**





Net
      premiums earned increased $1.0 million, or 4.9%, to $21.7 million for the three
      months ended September 30, 2006, as compared to $20.7 million for the three
      months ended September 30, 2005. The following table denotes net premiums earned
      by product line.




Three
                  months ended September 30,2006
              
              2005Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              11,040,823
              
              
              50.87
              %
              $
              9,613,286
              
              
              46.44
              %Commercial
                  liability
              
              
              7,743,852
              
              
              35.67
              %
              
              4,943,853
              
              
              23.88
              %Automobile
              
              
              2,922,730
              
              
              13.46
              %
              
              6,145,073
              
              
              29.68
              %Net
                  premiums earned
              
              $
              21,707,405
              
              
              100.00
              %
              $
              20,702,212
              
              
              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 $2.8 million, or 56.6 % to $7.7 million for the three months
      ended September 30, 2006, as compared to $4.9 million for the same three month
      period last year.





**Finance
      Revenue**





Finance
      revenue decreased $0.5 million, or 58.5%, to $0.3 million for the three months
      ended September 30, 2006, as compared to $0.8 million for the three months
      ended
      September 30, 2005. The decrease is primarily due to the sale in December 2004
      of our assets related to our non-standard automobile insurance agency business
      in Florida and the finance revenue derived there-from.


-32-
 **Table
          of Contents**




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


**Managing
      General Agent Fees**





Managing
      general agent fees decreased $0.1 million, or 13.5%, to $0.5 million for the
      three months ended September 30, 2006, as compared to $0.6 million for the
      three
      months ended September 30, 2005. The decrease is associated with the number
      of
      policies issued during the respective periods.





**Net
      Investment Income**





Net
      investment income increased $0.6 million, or 61.7%, to $1.6 million for the
      three months ended September 30, 2006, as compared to $1.0 million for the
      three
      months ended September 30, 2005. The increase in investment income is primarily
      a result of the additional amounts of invested assets. Also affecting our net
      investment income was an increase in overall yield to 5.59 % for the three
      months ended September 30, 2006 as compared to a yield of 4.37% for the three
      months ended September 30, 2005.





**Net
      Realized Investment Gains**





Net
      realized investment gains increased to $0.3 million for the three months ended
      September 30, 2006, as compared to nothing for the three months ended September
      30, 2005. These gains were in connection with various common stocks held by
      the
      company.





**Other
      Income**





Other
      income decreased $0.2 million, or 33.5%, to $0.4 million for the three months
      ended September 30, 2006, as compared to $0.6 million for the three months
      ended
      September 30, 2005. Major components of other income for the three months ended
      September 30, 2006 included approximately $0.1 million of commissions in
      connection with the acquisition of our current reinsurance program, $0.1 million
      in connection with the recognition of our gain on the sale of our Lauderdale
      Lakes property and $0.1 million of commissions in connection with the national
      flood insurance program.





**Loss
      and LAE**





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





Loss
      and
      LAE decreased by $3.0 million, or 22.6%, to $10.3 million for the three months
      ended September 30, 2006, despite $4.0 million adverse development in connection
      with the 2004 hurricane season, as compared to $13.3 million for the three
      months ended September 30, 2005, which also included significant adverse
      development in connection with the same 2004 hurricanes.





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





The
      table
      below reflects a recovery to operations of $0.2 million during the three months
      ended September 30, 2006 from the four hurricanes that occurred in July, August,
      September and October of 2005.


-33-
 **Table
          of Contents**




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


Claim
              
              Gross
              
              Reinsurance
              
              Net2005
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              2
              
              $
              —
              
              $
              —
              
              $
              —Katrina
                  (August 25)
              
              
              20
              
              
              (1.5
              )
              
              (1.5
              )
              
              —Rita
                  (September 20)
              
              
              —
              
              
              (0.1
              )
              
              —
              
              
              (0.1
              )Wilma
                  (October 24)
              
              
              168
              
              
              8.3
              
              
              8.4
              
              
              (0.1
              )Total
                  Loss Estimate
              
              
              190
              
              $
              6.7
              
              $
              6.9
              
              $
              (0.2
              )


The
      following table reflects the changes during the three months ended September
      30,
      2006 in connection with the four hurricanes that occurred in August and
      September of 2004. During the three months ended September 30, 2006, the
      resolution of other lawsuits involving similarly styled coverage issues
      involving other property insurers came to fruition. Accordingly, based on the
      resolution of these lawsuits involving similarly styled coverage issues we
      have
      charged operations with approximately $3.9 million of additional loss and LAE
      during the quarter ended September 30, 2006.




Claim
              
              Gross
              
              Reinsurance
              
              Net2004
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Charley
                  (August 13)
              
              
              2
              
              $
              2.5
              
              $
              2.5
              
              $
              —Frances
                  (September 3)
              
              
              3
              
              
              0.7
              
              
              0.8
              
              
              (0.1
              )Ivan
                  (September 14)
              
              
              2
              
              
              3.9
              
              
              —
              
              
              3.9Jeanne
                  (September 25)
              
              
              4
              
              
              0.2
              
              
              —
              
              
              0.2Total
                  Loss Estimate
              
              
              11
              
              $
              7.3
              
              $
              3.3
              
              $
              4.0


Our
      loss
      ratio, as determined in accordance with GAAP, for the three month period ended
      September 30, 2006 was 47.32% compared with 64.13% for the same period in 2005.
      The table below reflects the loss ratios by product line.




Three
                  months ended
                September
                  30,2006
              
              2005Homeowners'
              
              
              63.42
              %
              
              99.25
              %Commercial
                  liability
              
              
              18.01
              %
              
              6.83
              %Automobile
              
              
              64.13
              %
              
              55.27
              %All
                  lines
              
              
              47.32
              %
              
              64.13
              %


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




**Operating
      and Underwriting
      Expenses**




Operating
      and underwriting expenses increased $2.2
      million, or 135.1%, to $3.8 million for the three months ended September 30,
      2006, as compared to $1.6 million for the three months ended September 30,
      2005.
      The increase is primarily due to a charge to operations of $1.9 million in
      connection with a FIGA assessment. Approval by the OIR to recoup the assessment
      through a 0.9% policy surcharge over a twelve month period for new and renewal
      business is pending.




**Salaries
      and Wages**





Salaries
      and wages increased $0.1 million, or 6.1%, to $1.7 million for the three months
      ended September 30, 2006, as compared to $1.6 million for the three months
      ended
      September 30, 2005. As a result of adopting SFAS No. 123R on January 1, 2006,
      salaries and wages for the three months ended September 30, 2006 increased
      $115,000, representing approximately 117.4% of the 2006 third quarter’s overall
      increase.


-34-
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**21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations


**Interest
      Expense**





Interest
      expense decreased $0.2 million, or 57.0%, to $0.1 million for the three months
      ended September 30, 2006, as compared to $0.3 million for the three months
      ended
      September 30, 2005. The decrease is in correlation to our decreased subordinated
      debt.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $1.1 million, or 27.5%, to
      $5.0 million for the three months ended September 30, 2006, as compared to
      $3.9
      million for the three months ended September 30, 2005. Policy acquisition costs,
      net of amortization, consists of the actual policy acquisition costs, including
      commissions, payroll and premium taxes, less commissions earned on reinsurance
      ceded and policy fees earned.





**Provision
      for Income Tax Expense**





The
      provision for income tax expense for continuing and discontinued operations
      decreased $0.2 million, or 20.9%, to $0.9 million for the three months ended
      September 30, 2006, as compared to $1.1 million for the three months ended
      September 30, 2005. The effective rate for income tax expense is 22.1% for
      the
      three months ended September 30, 2006, as compared to 36.9% for the same three
      month period in 2005.





**Net
      Income**





As
      a
      result of the foregoing, the Company’s net income for the three months ended
      September 30, 2006 was $3.0 million compared to net income of $1.9 million
      for
      the three months ended September 30, 2005.





**Results
      of Operations**


**Nine
      Months Ended September 30, 2006 as Compared to Nine Months Ended September
      30,
      2005**





**Gross
      Premiums Written**





Gross
      premiums written increased $24.2 million, or 27.9%, to $111.0 million for the
      nine months ended September 30, 2006, as compared to $86.8 million for the
      nine
      months ended September 30, 2005. The following table denotes gross premiums
      written by major product line.




Nine
                  months ended September 30,2006
              
              2005Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              80,865,442
              
              
              72.83
              %
              $
              53,361,787
              
              
              61.47
              %Commercial
                  liability
              
              
              24,749,710
              
              
              22.29
              %
              
              16,977,589
              
              
              19.56
              %Automobile
              
              
              5,416,096
              
              
              4.88
              %
              
              16,475,811
              
              
              18.98
              %Gross
                  written premiums
              
              $
              111,031,248
              
              
              100.00
              %
              $
              86,815,187
              
              
              100.00
              %


As
      noted
      above, the Company’s efforts to expand commercial general liability lines of
      insurance products are coming to fruition, as reflected by increased premiums
      written of $7.8 million, or 45.8 % to $24.7 million for the nine months ended
      September 30, 2006, as compared to $17.0 million for the same nine month period
      last year.





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


-35-
 **Table
          of Contents**




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


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






Nine
                  months ended September 30,2006
              
              2005Amount
              
              Percentage
              
              Amount
              
              Percentage(Dollars
                  in Thousands)StateFlorida
              
              $
              18,169
              
              
              73.41
              %
              $
              14,520
              
              
              85.52
              %Georgia
              
              
              1,230
              
              
              4.97
              %
              
              977
              
              
              5.75
              %Lousiania
              
              
              4,234
              
              
              17.11
              %
              
              1,481
              
              
              8.73
              %Texas
              
              
              1,117
              
              
              4.51
              %
              
              -
              
              
              0.00
              %Total
              
              $
              24,750
              
              
              100.00
              %
              $
              16,978
              
              
              100.00
              %


The
      Company’s sale of homeowners’ policies increased $27.5 million, or 51.6%, to
      $80.9 million for the nine months ended September 30, 2006, as compared to
      $53.4
      million in the same nine months ended September 30, 2005. The increase in
      homeowners’ gross premiums written is primarily due to the Company’s rate
      increase, and to a lesser extent, the addition of new customers.





The
      Company’s sale of auto insurance policies decreased $11.1 million, or 67.1%, to
      $5.4 million for the nine months ended September 30, 2006, as compared to $16.5
      million in the same nine months ended September 30, 2005.





**Gross
      Premiums Ceded**





Gross
      premiums ceded increased to a debit balance of ($60.8) million for the nine
      months ended September 30, 2006, as compared to a debit balance of ($12.1)
      million for the nine months ended September 30, 2005. The increase is associated
      with the change in our prepaid reinsurance premiums in connection with our
      2006-2007 hurricane season. For further discussion please see Footnote 7 titled
      “Reinsurance Agreements”.





**Increase
      (Decrease) in Prepaid Reinsurance Premiums**





The
      increase (decrease) in prepaid reinsurance premiums was $32.8 million for the
      nine months ended September 30, 2006, as compared to ($5.4) million for the
      nine
      months ended September 30, 2005. The increased credit to written premium is
      primarily associated with the timing of our reinsurance payments measured
      against the term of the underling reinsurance policies.




**(Increase)
      in Unearned Premiums**





The
      (increase) in unearned premiums was ($10.8) million for the nine months ended
      September 30, 2006, as compared to ($7.8) million for the nine months ended
      September 30, 2005. The change was due to a $12.2 million increase in unearned
      homeowners’ insurance premiums, a $4.6 million increase in unearned commercial
      general liability premiums, and a $6.0 million decrease in unearned automobile
      premiums. These changes reflect our continued growth along our homeowners’ and
      commercial general liability lines of business. For further discussion, see
      “Analysis of Financial Condition - Unearned Premiums” on page 29.





**Net
      Premiums Earned**





Net
      premiums earned increased $10.8 million, or 17.6%, to $72.3 million for the
      nine
      months ended September 30, 2006, as compared to $61.4 million for the nine
      months ended September 30, 2005. The following table denotes net premiums earned
      by major product line.


-36-
 **Table
          of Contents**




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


Nine
                  months ended September 30,2006
              
              2005Amount
              
              Percentage
              
              Amount
              
              PercentageHomeowners'
              
              $
              40,720,936
              
              
              56.36
              %
              $
              29,319,478
              
              
              47.73
              %Commercial
                  liability
              
              
              20,126,319
              
              
              27.85
              %
              
              13,277,426
              
              
              21.62
              %Automobile
              
              
              11,408,230
              
              
              15.79
              %
              
              18,829,356
              
              
              30.65
              %Net
                  premiums earned
              
              $
              72,255,485
              
              
              100.00
              %
              $
              61,426,260
              
              
              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 $6.8 million, or 51.6 % to $20.1 million for the nine months
      ended September 30, 2006, as compared to $13.3 million for the same nine month
      period last year.





**Finance
      Revenue**





Finance
      revenue decreased $1.4 million, or 48.5%, to $1.5 million for the nine months
      ended September 30, 2006, as compared to $2.8 million for the nine months ended
      September 30, 2005. The decrease is primarily due to the sale in December 2004
      of our assets related to our non-standard automobile insurance agency business
      in Florida and the finance revenue derived there from.





**Managing
      General Agent Fees**





Managing
      general agent fees increased $0.2 million, or 9.5%, to $2.0 million for the
      nine
      months ended September 30, 2006, as compared to $1.8 million for the nine months
      ended September 30, 2005.





**Net
      Investment Income**




Net
      investment income increased $1.6 million, or 57.8%, to $4.4 million for the
      nine
      months ended September 30, 2006, as compared to $2.8 million for the nine months
      ended September 30, 2005. The increase in investment income is primarily a
      result of the additional amounts of invested assets. Also affecting our net
      investment income was an increase in overall yield to 4.69% for the nine months
      ended September 30, 2006 as compared to a yield of 3.54% for the nine months
      ending September 30, 2005.





**Net
      Realized Investment Gains**





Net
      realized investment gains increased $0.5 million, or 160.5%, to $0.7 million
      for
      the nine months ended September 30, 2006, as compared to $0.3 million for the
      nine months ended September 30, 2005. The table below depicts the gains (losses)
      by investment category.




Net
                  Realized Gains (Losses)Nine
                  Months Ended September 30,2006
              
              2005Fixed
                  maturities:U.S.
                  government obligations and agencies
              
              $
              (32,516
              )
              $
              (131,066
              )Obligations
                  of states and political subdivisions
              
              
              76
              
              
              (43
              )(32,440
              )
              
              (131,109
              )Corporate
                  securities:Other
              
              
              (33,816
              )
              
              31,521Equity
                  securities:Common
                  stocks
              
              
              808,880
              
              
              384,621Total
                  net realized gains
              
              $
              742,624
              
              $
              285,033


-37-
 **Table
          of Contents**
 **21** **st** **Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations


**Other
      Income**





Other
      income increased $0.4 million, or 37.2%, to $1.4 million for the nine months
      ended September 30, 2006, as compared to $1.0 million for the nine months ended
      September 30, 2005. Major components of other income for the nine months ended
      September 30, 2006 included approximately $0.4 million in connection with the
      recognition of our gain on the sale of our Lauderdale Lakes property, $0.4
      million of commissions in connection with the acquisition of our current
      reinsurance program, $0.2 million of commissions in connection with the national
      flood insurance program, $0.2 million of business interruption recovery, and
      $0.1 million of rental 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 decreased by $5.3 million, or 16.3%, to $27.2 million for the nine months
      ended September 30, 2006, as compared to $32.5 million for the nine months
      ended
      September 30, 2005. The decrease is attributable to the increase in loss and
      LAE
      incurred during the nine months ended September 30, 2005 which was in connection
      with the adverse development associated with the 2004 hurricanes.





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





The
      table
      below reflects a recovery to operations of $0.2 million during the nine months
      ended September 30, 2006 from the four hurricanes that occurred in July, August,
      September and October of 2005.




Claim
              
              Gross
              
              Reinsurance
              
              Net2005
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              2
              
              $
              —
              
              $
              —
              
              $
              —Katrina
                  (August 25)
              
              
              40
              
              
              (1.5
              )
              
              (1.5
              )
              
              —Rita
                  (September 20)
              
              
              (5
              )
              
              (0.1
              )
              
              —
              
              
              (0.1
              )Wilma
                  (October 24)
              
              
              1,419
              
              
              16.4
              
              
              16.5
              
              
              (0.1
              )Total
                  Loss Estimate
              
              
              1,456
              
              $
              14.8
              
              $
              15.0
              
              $
              (0.2
              )


The
      following table reflects the changes during the nine months ended September
      30,
      2006 in connection with the four hurricanes that occurred in August and
      September of 2004. A charge of $5.3 million occurred during the nine months
      ended September 30, 2006 in connection with these storms.


-38-
 **Table
          of Contents**




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


Claim
              
              Gross
              
              Reinsurance
              
              Net2004
                  Hurricanes
              
              Count
              
              Losses
              
              Recoveries
              
              Losses(Dollars
                  in millions)Charley
                  (August 13)
              
              
              7
              
              $
              3.8
              
              $
              3.8
              
              $
              —Frances
                  (September 3)
              
              
              6
              
              
              1.2
              
              
              1.2
              
              
              —Ivan
                  (September 14)
              
              
              (2
              )
              
              4.9
              
              
              —
              
              
              4.9Jeanne
                  (September 25)
              
              
              16
              
              
              0.4
              
              
              —
              
              
              0.4Total
                  Loss Estimate
              
              
              27
              
              $
              10.3
              
              $
              5.0
              
              $
              5.3


Our
      loss
      ratio, as determined in accordance with GAAP, for the nine month period ended
      September 30, 2006 was 37.62% compared with 52.9% for the same period in 2005.
      The table below reflects the loss ratios by product line.




Nine
                  months ended
                September
                  30,2006
              
              2005Homeowners'
              
              
              36.17
              %
              
              64.76
              %Commercial
                  liability
              
              
              17.76
              %
              
              17.00
              %Automobile
              
              
              77.83
              %
              
              59.75
              %All
                  lines
              
              
              37.62
              %
              
              52.90
              %


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





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased $3.0 million, or 55.5%, to $8.4 million
      for
      the nine months ended September 30, 2006, as compared to $5.4 million for the
      nine months ended September 30, 2005. The change is primarily due to a charge
      to
      operations of $1.9 million in connection with a FIGA assessment and premium
      tax
      expense which increased $1.1 million. Approval by the OIR to recoup the
      assessment through a 0.9% policy surcharge over a twelve month period for new
      and renewal business is pending. Premium tax expense is directly correlated
      to
      written premium, which experienced an increase in 2006.





**Salaries
      and Wages**





Salaries
      and wages increased $0.6 million, or 11.6%, to $5.3 million for the nine months
      ended September 30, 2006, as compared to $4.8 million for the nine months ended
      September 30, 2005. As a result of the adoption of SFAS No. 123R on January
      1,
      2006, salaries and wages for the nine months ended September 30, 2006 include
      a
      $0.4 million charge, representing approximately 71.8% of the 2006 overall
      increase. The remaining increase in salaries and wages was due in part to the
      increased labor costs in connection with additional claims loss adjusters added
      to our staff. We believe that salaries and wages are consistent with retaining
      quality management and increased premium production.





**Interest
      Expense**





Interest
      expense decreased $0.6 million, or 51.5%, to $0.5 million for the nine months
      ended September 30, 2006, as compared to $1.1 million for the nine months ended
      September 30, 2005. The change is primarily attributed to our decreased reliance
      upon outside sources for financing our contracts receivable.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $2.1 million, or 18.9%, to
      $13.0 million for the nine months ended September 30, 2006, as compared to
      $11.0
      million for the nine months ended September 30, 2005. Policy acquisition costs,
      net of amortization, consists of the actual policy acquisition costs, including
      commissions, payroll and premium taxes, less commissions earned on reinsurance
      ceded and policy fees earned.


-39-
 **Table
          of Contents**




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


**Provision
      for Income Tax Expense**





The
      provision for income tax expense for continuing and discontinued operations
      increased $3.4 million, or 54.2%, to $9.8 million for the nine months ended
      September 30, 2006, as compared to $6.4 million for the nine months ended
      September 30, 2005. The effective rate for income tax expense is 35.3% for
      the
      nine months ended September 30, 2006, as compared to 37.3% for the same nine
      month period in 2005.





**Net
      Income**





As
      a
      result of the foregoing, the Company’s net income for the nine months ended
      September 30, 2006 was $17.9 million compared to net income of $10.7 million
      for
      the nine months ended September 30, 2005.








**Liquidity
      and Capital Resources**





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





For
      the
      nine months ended September 30, 2006, operations provided net operating cash
      flow of $24.3 million, as compared to $11.2 million for the nine months ended
      September 30, 2005.





For
      the
      nine months ended September 30, 2006, operations generated $207.1 million of
      gross cash flow, due to a $155.7 million decrease in amounts due from
      reinsurers, net, a $10.8 million increase in unearned premiums, a $7.9 million
      increase in income taxes payable, a $4.9 million decrease in finance contracts
      receivable, a $3.3 million decrease in premiums receivable, a $4.3 million
      decrease in other assets and $0.7 million of net realized investment gains.
      To a
      much less significant extent, operations generated additional sources of cash
      via a $0.6 million increase in premium deposits, $0.4 million of non-cash
      compensation, $0.3 million in depreciation and amortization, $0.1 million of
      common stock issued for interest on notes and a $0.1 million increase in the
      provision for credit losses; all in conjunction with net income of $17.9
      million.





For
      the
      nine months ended September 30, 2006, operations used $182.8 million of gross
      cash flow primarily due to a $122.8 million decrease in unpaid losses and LAE,
      a
      $39.4 million increase in prepaid reinsurance premiums, a $11.9 million decrease
      in bank overdrafts, a $2.5 million increase in deferred gain on sale of our
      building, a $1.8 million decrease in accounts payable and accrued expenses,
      a
      $1.6 million increase in policy acquisition costs, net of amortization, a $2.0
      million increase in deferred income tax expense, a $0.5 million increase in
      recognized gain in connection with the sale of our building, $0.2 million in
      amortization of investment discount, net and a $0.1 million recovery of
      uncollectible premiums receivable.





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





For
      the
      nine months ended September 30, 2006, net investing activities used $23.7
      million, as compared to $10.2 million for the nine months ended September 30,
      2005. Our available for sale investment portfolio is highly liquid as it
      consists entirely of readily marketable securities.





For
      the
      nine months ended September 30, 2006, investing activities generated $230.9
      million and used $259.8 million from the maturity several times over of our
      very
      short municipal portfolio. Sources of cash flow from investing activities
      included the sale of property with net book value of $2.7 million, for which
      we
      received $5.6 million in proceeds and recorded a $2.9 million deferred gain.
      The
      Company also used $0.4 million for the purchase of equipment.


-40-
 **Table
          of Contents**




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


For
      the
      nine months ended September 30, 2006, net financing activities provided $1.2
      million, as compared to using $5.7 million for the nine months ended September
      30, 2005. For the nine months ended September 30, 2006, the sources of cash
      in
      connection with financing activities included $8.0 million from the exercise
      of
      warrants and $1.6 million from the exercise of stock options. The uses of cash
      in connection with financing activities included $3.3 million for the regularly
      scheduled principal and interest payments on our Notes, $2.9 million in
      dividends paid, $2.0 million for the acquisition of common stock and $0.2
      million in connection with the reduction of our outstanding revolving credit.





Federated
      Premium’s operations are partially funded by the revolving loan agreement with
      FlatIron. The effective interest rate on this line of credit, based on our
      average outstanding borrowings under the Revolving Agreement, was 9.78% and
      8.22% for the nine months ended September 30, 2006 and 2005, respectively.
      Interest expense on this revolving credit line totaled approximately $7,600
      and
      $68,600 for the nine months ended September 30, 2006 and 2005,
      respectively.





Outstanding
      borrowings under the Revolving Agreement were approximately $10,000 and $200,000
      as of September 30, 2006 and December 31, 2005, respectively.





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





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





Federated
      National’s and American Vehicle’s statutory capital surplus levels as of
      September 30, 2006 were approximately $21.5 million and $27.0 million,
      respectively, and their statutory net income for the nine months ended September
      30, 2006 were $9.4 million and $6.6 million, respectively.





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





**Impact
      of Inflation and Changing Prices**





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





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


-41-
 **Table
          of Contents**




**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, 2005.
      No material changes have occurred in market risk since this information was
      disclosed except as discussed below.





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




Book
                  Value
              
              Fair
                  / Amortized Value
              
              Unrealized
                  Gain (Loss)Fixed
                  maturities:U.S.
                  government obligations and agencies available for sale
              
              $
              69,348,494
              
              
              53.13
              %
              $
              68,670,403
              
              
              53.21
              %
              $
              (678,091
              )U.S.
                  government obligations and agencies held to maturity
              
              
              18,672,001
              
              
              14.30
              %
              
              18,672,001
              
              
              14.47
              %
              
              —Obligations
                  of states and political subdivisions available for sale
              
              
              24,508,085
              
              
              18.77
              %
              
              24,377,459
              
              
              18.89
              %
              
              (130,626
              )Obligations
                  of states and political subdivisions held to maturity
              
              
              501,554
              
              
              0.38
              %
              
              501,554
              
              
              0.39
              %
              
              —113,030,134
              
              
              86.58
              %
              
              112,221,417
              
              
              86.96
              %
              
              (808,717
              )Corporate
                  securities:Communications
                  available for sale
              
              
              512,723
              
              
              0.40
              %
              
              521,948
              
              
              0.40
              %
              
              9,225Financial
                  available for sale
              
              
              500,000
              
              
              0.38
              %
              
              478,895
              
              
              0.37
              %
              
              (21,105
              )Other
                  available for sale
              
              
              1,650,000
              
              
              1.26
              %
              
              1,610,582
              
              
              1.25
              %
              
              (39,418
              )Other
                  held to maturity
              
              
              500,000
              
              
              0.38
              %
              
              500,000
              
              
              0.39
              %
              
              -3,162,723
              
              
              2.42
              %
              
              3,111,425
              
              
              2.41
              %
              
              (51,298
              )Equity
                  securities:Common
                  stocks available for sale
              
              
              14,358,007
              
              
              11.00
              %
              
              13,712,670
              
              
              10.63
              %
              
              (645,337
              )Total
                  fixed, corporate and equity securities
              
              $
              130,550,864
              
              
              100.00
              %
              $
              129,045,512
              
              
              100.00
              %
              $
              (1,505,352
              )


For
      our
      held to maturity portfolio as of September 30, 2006, the unrealized loss on
      our
      U.S. government obligations and agencies was approximately $76,000 and the
      unrealized loss on our Obligations of states and political subdivisions was
      approximately $946.





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





**Item
      4**





**Controls
      and Procedures**







We
      carried out an evaluation required by the Securities and Exchange Act of 1934
      (the “1934 Act”), under the supervision and with the participation of our
      principal executive officer and principal financial officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of September 30,
      2006, the end of the period covered by this report.




Based
      on
      this evaluation, our principal executive officer and principal financial officer
      concluded that our disclosure controls and procedures were effective to provide
      reasonable assurance that information required to be disclosed by us in the
      reports that we file or submit under the 1934 Act is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms and to provide reasonable assurance that


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


such
      information is accumulated and communicated to our management, including our
      principal executive officer and principal financial officer, as appropriate
      to
      allow timely decisions regarding required disclosure.




During
      the most recent fiscal quarter, there has not occurred any change in our
      internal control over financial reporting that has materially affected, or
      is
      reasonably likely to materially affect, our internal control over financial
      reporting.




Management
      does not expect that our disclosure controls and procedures will prevent or
      detect all error and fraud. Any control system, no matter how well designed
      and
      operated, is based upon certain assumptions and can provide only reasonable,
      not
      absolute, assurance that its objectives will be met. Further, no evaluation
      of
      controls can provide absolute assurance that misstatements due to error or
      fraud
      will not occur or that all control issues and instances of fraud, if any, within
      the Company have been detected.


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


**Part
      II: OTHER INFORMATION**





**Item
      1**





**Legal
      Proceedings**





We
      are
      involved in various claims and legal actions arising in the ordinary course
      of
      business. Specifically, we are a party to approximately seven lawsuits in
      connection with coverage disputes associated with claims resulting from
      Hurricanes Ivan and Jeanne. Hurricane Ivan occurred on September 14, 2004.
      Hurricane Jeanne occurred on September 25, 2004. During the three months ended
      September 30, 2006, the resolution of other lawsuits involving similarly styled
      coverage issues involving other property insurers came to fruition. Accordingly,
      based on the resolution of these lawsuits involving similarly styled coverage
      issues we have charged operations with approximately $3.9 million of additional
      loss and LAE during the quarter ended September 30, 2006.





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





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





**Item
      1A**





**Risk
      Factors**





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





**Item
      2**





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





Our
      warrant holders exercised an aggregate of 49,926 warrants at an exercise price
      of $12.65 per share and 102,663 warrants at an exercise price of $12.75 per
      share during the three months ended September 30, 2006.





Each
      of
      the warrant holders paid for their shares with cash. Each of these warrant
      holders exercised their warrants in reliance upon Section 4(2) of the Securities
      Act of 1933, because each of these holders was knowledgeable, sophisticated
      and
      had access to comprehensive information about us. We placed legends on the
      certificates stating that the securities were not registered under the
      Securities Act and set forth the restrictions on their transferability and
      sale.
      We have filed registration statements to register the resale of the shares
      acquired upon exercise of the 2003 and 2004 warrants.





During
      the three months ended September 30, 2006, fourteen employees exercised options
      to acquire an aggregate of 6,750 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, except the Company has
      issued stop-transfer instructions against any shares held by
      affiliates.


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


**(b)**
            **None**





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





On
      May
      16, 2006, the Company’s Board of Directors authorized, pursuant to Section 12 of
      the Securities Exchange Act, the repurchase of up to $2.0 million of its common
      stock. Acting upon the Board’s authorization, the Company repurchased, for
      approximately $2.0 million, 130,461 shares for an average price of $15.34
      between May 16, 2006 and May 24, 2006. The Company did not repurchase any shares
      during the three month period ended September 30, 2006.





**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**





10.1
            Excess
                Catastrophe Reinsurance Contract between Federated National Insurance
                Company and American Vehicle Insurance Company, effective July 1,
                2006.
                *





10.2
            Industry
                Loss Warranty Catastrophe Excess of Loss Reinsurance between Federated
                National Insurance Company and Liberty Mutual Insurance Company for
                $15
                million Ultimate Net Loss, effective July 1, 2006.
                *





10.3
            Industry
                Loss Warranty Catastrophe Excess of Loss Reinsurance between Federated
                National Insurance Company and Liberty Mutual Insurance Company for
                $10
                million Ultimate Net Loss, effective July 1, 2006.
                *





10.4
            Industry
                Loss Warranty Catastrophe Excess of Loss Reinsurance between Federated
                National Insurance Company and Odyssey America Reinsurance Corporation
                for
                $2.5 million Ultimate Net Loss, effective July 1, 2006.
                *





10.5
            Multi-Year
                Supplemental Excess Catastrophe Reinsurance Contract between Federated
                National Insurance Company and Allianz Risk Transfer (Bermuda) Limited,
                effective July 1, 2006. *





10.6
            Multi-Year
                Supplemental Excess Catastrophe Reinsurance Contract between Federated
                National Insurance Company and Catlin Insurance Company, Ltd., effective
                July 1, 2006. *





10.7
            Reinstatement
                Premium Protection Reinsurance Contract between Federated National
                Insurance Company and National Liability and Fire Insurance Company,
                effective July 1, 2006. *





10.8
            Supplemental
                Excess Catastrophe Reinsurance Contract between Federated National
                Insurance Company and National Liability and Fire Insurance Company,
                effective July 1, 2006. *




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





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





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





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





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





*
            filed
                herewith




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


**Signatures**





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





**21** **st** **CENTURY HOLDING COMPANY**




By: */s/
      Edward J. Lawson*


Edward
      J.
      Lawson, President, Chief Executive Officer


and
      Chairman of the Board




*/s/
      James G. Jennings, III*


James
        G.
        Jennings III, Chief Financial Officer





Date:
      November 14, 2006


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