**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, 2008**


**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


21stCentury 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 shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes x No  ̈





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


Large
                  accelerated filer ̈
              Accelerated
                  filerx
              Non-accelerated
                  filer ̈
              Smaller
                  reporting company ̈





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
– 8,013,894 outstanding as of November 10, 2008







**21** **ST** **CENTURY HOLDING COMPANY**
 
 **INDEX**
 
 **PAGE****PART
                  I: FINANCIAL INFORMATION****ITEM
                  1**
              Financial
                  Statements and Supplementary Data
              3**ITEM
                  2**
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              21**ITEM
                  3**
              Quantitative
                  and Qualitative Disclosures about Market Risk
              43**ITEM
                  4**
              Controls
                  and Procedures
              43**PART
                  II: OTHER INFORMATION****ITEM
                  1**
              Legal
                  Proceedings
              44**ITEM
                  1A**
              Risk
                  Factors
              44**ITEM
                  2**
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              45**ITEM
                  3**
              Defaults
                  upon Senior Securities
              46**ITEM
                  4**
              Submission
                  of Matters to a Vote of Security Holders
              46**ITEM
                  5**
              Other
                  Information
              46**ITEM
                  6**
              Exhibits
              46**SIGNATURES**
              
              47
  2
  **PART
        I: FINANCIAL INFORMATION**
 **Item
        1**
 
 21 st CENTURY
        HOLDING COMPANY
 CONSOLIDATED
        BALANCE SHEETS
 (UNAUDITED)
 Period
                    EndingSeptember 30, 2008
                
                December 31, 2007(Dollars in Thousands)ASSETSInvestmentsFixed
                    maturities, available for sale, at fair value
                
                $
                67,239
                
                $
                99,484Fixed
                    maturities, held to maturity, at amoritized cost
                
                
                14,547
                
                
                20,210Equity
                    securities, available for sale, at fair value
                
                
                6,240
                
                
                16,530Total
                    investments
                
                
                88,027
                
                
                136,224Cash
                    and short term investments
                
                
                69,465
                
                
                22,524Receivable
                    for investments sold
                
                
                1,037
                
                
                6,420Finance
                    contracts, net of allowance for credit losses of $26 in 2008
                    and $38 in
                    2007, and net of unearned finance charges of $10 in 2008 and
                    $15 in
                    2007
                
                
                199
                
                
                420Prepaid
                    reinsurance premiums
                
                
                1,282
                
                
                8,471Premiums
                    receivable, net of allowance for credit losses of $183 and $288,
                    respectively
                
                
                3,467
                
                
                3,797Reinsurance
                    recoverable, net
                
                
                14,330
                
                
                22,942Deferred
                    policy acquisition costs
                
                
                6,825
                
                
                8,958Deferred
                    income taxes, net
                
                
                7,588
                
                
                5,640Income
                    taxes receivable
                
                
                3,144
                
                
                -Property,
                    plant and equipment, net
                
                
                894
                
                
                1,046Other
                    assets
                
                
                2,176
                
                
                2,918Total
                    assets
                
                $
                198,435
                
                $
                219,361LIABILITIES
                    AND SHAREHOLDERS' EQUITYUnpaid
                    losses and loss adjustment expenses ("LAE")
                
                $
                59,202
                
                $
                59,685Unearned
                    premiums
                
                
                44,675
                
                
                56,394Premiums
                    deposits and customer credit balances
                
                
                1,607
                
                
                2,761Bank
                    overdraft
                
                
                8,912
                
                
                8,695Income
                    taxes payable
                
                
                -
                
                
                4,226Deferred
                    gain from sale of property
                
                
                1,615
                
                
                1,998Accounts
                    payable and accrued expenses
                
                
                2,700
                
                
                4,346Total
                    liabilities
                
                
                118,711
                
                
                138,104Commitments
                    and Contingencies
                
                
                -
                
                
                -Shareholders'
                    equity:Common
                    stock, $0.01 par value. Authorized 37,500,000 shares; issued
                    and
                    outstanding 8,013,894 and 7,871,234, respectively
                
                
                80
                
                
                79Additional
                    paid-in capital
                
                
                49,839
                
                
                48,240Accumulated
                    other comprehensive (deficit)
                
                
                (1,770
                )
                
                (2,596
                )Retained
                    earnings
                
                
                31,575
                
                
                35,534Total
                    shareholders' equity
                
                
                79,724
                
                
                81,257Total
                    liabilities and shareholders' equity
                
                $
                198,435
                
                $
                219,361
  **SEE
        ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
  3
  21 ST CENTURY
        HOLDING COMPANY
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Three Months Ended September 30,
              
              Nine Months Ended September 30,2008
              
              2007
              
              2008
              
              2007(Dollars in Thousands except EPS and dividend data)
              
              (Dollars in Thousands except EPS and dividend data)Revenue:Gross
                  premiums written
              
              $
              15,851
              
              $
              16,064
              
              $
              70,695
              
              $
              109,716Gross
                  premiums ceded
              
              
              (25,699
              )
              
              (30,736
              )
              
              (33,931
              )
              
              (46,545
              )Net
                  premiums (ceded) written
              
              
              (9,848
              )
              
              (14,673
              )
              
              36,764
              
              
              63,171Increase
                  in prepaid reinsurance premiums
              
              
              15,351
              
              
              19,322
              
              
              1,831
              
              
              1,504Decrease
                  in unearned premiums
              
              
              10,746
              
              
              22,532
              
              
              11,719
              
              
              9,693Net
                  change in prepaid reinsurance premiums and unearned
                  premiums
              
              
              26,097
              
              
              41,854
              
              
              13,550
              
              
              11,197Net
                  premiums earned
              
              
              16,249
              
              
              27,181
              
              
              50,314
              
              
              74,368Commission
                  income
              
              
              133
              
              
              431
              
              
              1,160
              
              
              6,922Finance
                  revenue
              
              
              91
              
              
              116
              
              
              268
              
              
              463Managing
                  general agent fees
              
              
              346
              
              
              178
              
              
              1,376
              
              
              1,600Net
                  investment income
              
              
              1,541
              
              
              2,329
              
              
              5,317
              
              
              6,029Net
                  realized investment (losses)
              
              
              (2,995
              )
              
              (1,441
              )
              
              (9,309
              )
              
              (1,489
              )Regulatory
                  assessments recovered
              
              
              384
              
              
              579
              
              
              1,619
              
              
              1,260Other
                  income
              
              
              216
              
              
              199
              
              
              690
              
              
              496Total
                  revenue
              
              
              15,966
              
              
              29,571
              
              
              51,435
              
              
              89,649Expenses:LAE
              
              
              9,888
              
              
              14,850
              
              
              30,255
              
              
              38,610Operating
                  and underwriting expenses
              
              
              1,671
              
              
              3,884
              
              
              4,699
              
              
              10,949Salaries
                  and wages
              
              
              2,086
              
              
              1,775
              
              
              5,608
              
              
              5,065Interest
                  expense
              
              
              -
              
              
              28
              
              
              -
              
              
              173Policy
                  acquisition costs, net of amortization
              
              
              4,170
              
              
              5,379
              
              
              11,794
              
              
              14,896Total
                  expenses
              
              
              17,815
              
              
              25,916
              
              
              52,356
              
              
              69,693(Loss)
                  Income before provision for income tax (benefit) expense
              
              
              (1,849
              )
              
              3,656
              
              
              (921
              )
              
              19,956Provision
                  for income tax (benefit) expense
              
              
              (336
              )
              
              1,787
              
              
              (1,216
              )
              
              6,766Net
                  (loss) income
              
              $
              (1,513
              )
              $
              1,869
              
              $
              295
              
              $
              13,190Basic
                  net (loss) income per share
              
              $
              (0.19
              )
              $
              0.24
              
              $
              0.04
              
              $
              1.66Fully
                  diluted net (loss) income per share
              
              $
              (0.19
              )
              $
              0.24
              
              $
              0.04
              
              $
              1.64Weighted
                  average number of common shares outstanding
              
              
              8,013,894
              
              
              7,891,650
              
              
              7,967,087
              
              
              7,927,366Weighted
                  average number of common shares outstanding (assuming
                  dilution)
              
              
              8,013,894
              
              
              7,948,385
              
              
              7,978,178
              
              
              8,050,983Dividends
                  paid per share
              
              $
              0.18
              
              $
              0.18
              
              $
              0.54
              
              $
              0.54
 
 **SEE
        ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
  4
  21 ST CENTURY
        HOLDING COMPANY
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 
 Nine Months Ended September 30,2008
              
              2007(Dollars
                  in Thousands)Cash
                  flow from operating activities:Net
                  income
              
              $
              295
              
              $
              13,190Adjustments
                  to reconcile net income to net cash (used) provided by operating
                  activities:Amortization
                  of investment (discount), net
              
              
              (177
              )
              
              (272
              )Depreciation
                  and amortization of property plant and equipment, net
              
              
              235
              
              
              232Net
                  realized investment (losses)
              
              
              (9,309
              )
              
              (352
              )Common
                  Stock issued for interest on Notes
              
              
              -
              
              
              109Provision
                  (Recovery) for credit losses, net
              
              
              2
              
              
              (48
              )Provision
                  for uncollectible premiums receivable
              
              
              95
              
              
              320Non-cash
                  compensation
              
              
              292
              
              
              309Changes
                  in operating assets and liabilities:Premiums
                  receivable
              
              
              235
              
              
              3,762Prepaid
                  reinsurance premiums
              
              
              7,189
              
              
              (456
              )Reinsurance
                  recoverable, net
              
              
              8,611
              
              
              3,432Income
                  taxes recoverable
              
              
              (3,144
              )
              
              (413
              )Deferred
                  income tax expense
              
              
              (1,948
              )
              
              (1,203
              )Policy
                  acquisition costs, net of amortization
              
              
              2,133
              
              
              686Premium
                  finance contracts receivable
              
              
              219
              
              
              1,049Other
                  assets
              
              
              360
              
              
              1,635Unpaid
                  losses and LAE
              
              
              (482
              )
              
              10,704Unearned
                  premiums
              
              
              (11,719
              )
              
              (9,693
              )Premium
                  deposits and customer credit balances
              
              
              (1,154
              )
              
              (1,744
              )Income
                  taxes payable
              
              
              (4,226
              )
              
              -Bank
                  overdraft
              
              
              217
              
              
              1,773Accounts
                  payable and accrued expenses
              
              
              (1,646
              )
              
              973Net
                  cash (used) provided by operating activities
              
              
              (13,921
              )
              
              23,995Cash
                  flow provided by (used in) investing activities:Proceeds
                  from sale of investment securities available for sale
              
              
              99,453
              
              
              159,573Purchases
                  of investment securities available for sale
              
              
              (35,562
              )
              
              (181,182
              )Purchases
                  of property and equipment
              
              
              (83
              )
              
              (47
              )Net
                  cash provided by (used) in investing activities
              
              
              63,808
              
              
              (21,657
              )Cash
                  flow (used in) financing activities:Subordinated
                  Debt
              
              
              -
              
              
              (2,083
              )Exercised
                  stock options
              
              
              1,337
              
              
              103Dividends
                  paid
              
              
              (4,254
              )
              
              (4,316
              )Exercised
                  warrants, net
              
              
              -
              
              
              2,035Acquisition
                  of Common Stock
              
              
              (144
              )
              
              (2,000
              )Tax
                  benefit related to non-cash compensation
              
              
              115
              
              
              159Revolving
                  credit outstanding
              
              
              -
              
              
              -Net
                  cash (used in) financing activities
              
              
              (2,946
              )
              
              (6,104
              )Net
                  increase (decrease) in cash and short term investments
              
              
              46,941
              
              
              (3,766
              )Cash
                  and short term investments at beginning of period
              
              
              22,524
              
              
              17,917Cash
                  and short term investments at end of period
              
              $
              69,465
              
              $
              14,151
  **SEE
        ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
  5
  21 ST CENTURY
        HOLDING COMPANY
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine Months Ended September 30,(continued)
                
                2008
                
                2007(Dollars in Thousands)Supplemental disclosure
                    of cash flow information:Cash
                    paid during the period for:Interest
                
                $
                -
                
                $
                44Income
                    taxes
                
                $
                8,500
                
                $
                7,300Non-cash
                    investing and finance activities:Accrued
                    dividends payable
                
                $
                1,443
                
                $
                1,473Retirement
                    of subordinated debt by Common Stock issuance
                
                $
                -
                
                $
                2,083Stock
                    issued to pay interest on subordinated debt
                
                $
                -
                
                $
                109
  **SEE
        ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 6
  **21** **st** **Century Holding Company**
 **Notes
        to Consolidated Financial Statements**
 
 **(1)**  **Organization
        and Business**
 
 The
        accompanying unaudited consolidated financial statements of 21 st Century
        Holding Company (“21 st Century,” “Company,” “we,” “us”) 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, 2007.
        The
        December 31, 2007 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
        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 processes. We are authorized to underwrite homeowners’ property and
        casualty insurance, commercial general liability insurance, personal automobile
        insurance and commercial 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”). 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.
 
 Federated
        National is authorized to underwrite homeowners’ property and casualty insurance
        in Florida as an admitted carrier. American Vehicle is authorized in several
        states to underwrite commercial general liability coverage as either an admitted
        or non-admitted carrier. A n
        admitted carrier is an insurance company that has received a license from
        the
        state department of insurance giving the company the authority to write specific
        lines of insurance in that state. These companies are also bound by rate
        and
        form regulations, and are strictly regulated to protect policyholders from
        a
        variety of illegal and unethical practices, including fraud. Admitted carriers
        are also required to financially contribute to the state guarantee fund,
        which
        is used to pay for losses if an insurance carrier becomes insolvent or unable
        to
        pay the losses due their policyholders. A non-admitted carrier is not licensed
        by the state, but is allowed to do business in that state and is strictly
        regulated to protect policyholders from a variety of illegal and unethical
        practices, including fraud. Sometimes, non-admitted carriers are referred
        to as
“excess and surplus” lines carriers. Non-admitted carriers are subject to
        considerably less regulation with respect to policy rates and forms. Additionally,
        both Federated National and American Vehicle are authorized to underwrite
        personal and commercial automobile insurance in Florida as an admitted carrier.
 
 During
        the nine months ended September 30, 2008, 72.1%, 27.4% and 0.5% 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, 2007, 75.2%, 23.3% and 1.5% of
        the
        premiums we underwrote were for homeowners’ property and casualty insurance,
        commercial general liability insurance and personal automobile insurance,
        respectively. 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. In addition, 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.
 
 7
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  The
        table
        below denotes American Vehicle’s authority, by state.
  
   In
        January 2008, the Florida OIR granted American Vehicle licenses to underwrite
        commercial multiple peril, inland marine and surety lines of business as
        an
        admitted carrier.
  Assurance
        Managing General Agents, Inc. (“Assurance MGA”), a wholly owned subsidiary, acts
        as Federated National’s and American Vehicle’s exclusive managing general agent
        in the state of Florida. As American Vehicle continues its expansion into
        other
        states, we intend to retain other general agents to market our commercial
        general liability insurance product. During the nine months ended September
        30,
        2008, Assurance MGA became licensed in the states of Georgia, Illinois,
        Mississippi, North Carolina, Texas and Virginia. 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. For the above-mentioned services,
        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. The 6% commission fee from Federated National and American
        Vehicle became effective January 1, 2005. Assurance MGA plans to establish
        relationships with additional carriers and servicing additional insurance
        products in the future.
 
 Insure-Link,
        Inc. (“Insure-Link”) was formed in March 2008. Insure-Link was created to serve
        as an independent insurance agency. The insurance agency markets to the general
        public to serve all of their insurance needs. Insure-Link will acquire new
        business through marketing and acquisition.
 
 **(2)
        Summary of Significant Accounting Policies and Practices**
 
 **(A)**  **Critical
        Accounting Policies**
 
 The
        preparation of financial statements in conformity with GAAP requires management
        to make estimates and assumptions about future events that affect the amounts
        reported in the financial statements and accompanying notes. Future events
        and
        their effects cannot be determined with absolute certainty. Therefore, the
        determination of estimates requires the exercise of judgment. Actual results
        inevitably will differ from those estimates, and such differences may be
        material to the financial statements.
  8
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated 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 losses and LAE and the amount and
        recoverability of amortization of deferred policy acquisition costs (“DPAC”). In
        addition, significant estimates form the basis for our reserves with respect
        to
        finance contracts, premiums receivable and deferred income taxes. Various
        assumptions and other factors underlie the determination of these significant
        estimates, which are described in greater detail in Footnote 2 of the Company’s
        audited financial statements for the fiscal year ended December 31, 2007
        filed
        on Form 10-K with the Securities and Exchange Commission (“SEC”) on March 17,
        2008.
 
 Except
        as
        described below, we believe that during the first nine months of fiscal 2008
        there were no significant changes in those critical accounting policies and
        estimates. Senior management has reviewed the development and selection of
        our
        critical accounting policies and estimates and their disclosure in this Form
        10-Q with the Audit Committee of our Board of Directors.
 
 The
        process of determining significant estimates is fact specific and takes into
        account factors such as historical experience, current and expected economic
        conditions, and in the case of unpaid losses and LAE, an actuarial valuation.
        Management regularly reevaluates these significant factors and makes adjustments
        where facts and circumstances dictate. In selecting the best estimate, we
        utilize various actuarial methodologies. Each of these methodologies is designed
        to forecast the number of claims we will be called upon to pay and the amounts
        we will pay on average to settle those claims. In arriving at our best estimate,
        our actuaries consider the likely predictive value of the various loss
        development methodologies employed in light of underwriting practices, premium
        rate changes and claim settlement practices that may have occurred, and weight
        the credibility of each methodology. Our actuarial methodologies take into
        account various factors, including, but not limited to, paid losses, liability
        estimates for reported losses, paid allocated LAE, salvage and other recoveries
        received, reported claim counts, open claim counts and counts for claims
        closed
        with and without payment of loss.
 
 Accounting
        for loss contingencies pursuant to Statements of Financial Accounting Standards
        Number 5, *Accounting
        for Contingencies* (“SFAS
        No. 5”) involves the existence of a condition, situation or set of circumstances
        involving uncertainty as to possible loss that will ultimately be resolved
        when
        one or more future event(s) occur or fail to occur. Additionally, accounting
        for
        a loss contingency requires management to assess each event as probable,
        reasonably possible or remote. Probable is defined as the future event or
        events
        are likely to occur. Reasonably possible is defined as the chance of the
        future
        event or events occurring is more than remote but less than probable, while
        remote is defined as the chance of the future event or events occurring is
        slight. An estimated loss in connection with a loss contingency shall be
        recorded by a charge to current operations if both of the following conditions
        are met: First, the amount can be reasonably estimated, and second, the
        information available prior to issuance of the financial statements indicates
        that it is probable that a liability has been incurred at the date of the
        financial statements. It is implicit in this condition that it is probable
        that
        one or more future events will occur confirming the fact of the loss or
        incurrence of a liability.
 
 We
        are
        required to review the contractual terms of all our reinsurance purchases
        to
        ensure compliance with SFAS No. 113, *Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
        Contracts (SFAS No. 113”)* .
        The
        statement establishes the conditions required for a contract with a reinsurer
        to
        be accounted for as reinsurance and prescribes accounting and reporting
        standards for those contracts. Contracts that do not result in the reasonable
        possibility that the reinsurer may realize a significant loss from the insurance
        risk assumed generally do not meet the conditions for reinsurance accounting
        and
        must be accounted for as deposits. SFAS No. 113 also requires us to disclose
        the
        nature, purpose and effect of reinsurance transactions, including the premium
        amounts associated with reinsurance assumed and ceded. It also requires
        disclosure of concentrations of credit risk associated with reinsurance
        receivables and prepaid reinsurance premiums.
 
 **(B)
        Impact of New Accounting Pronouncements**
 
 In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 157, *Fair
        Value Measurements* (“SFAS
        No. 157”), which enhances existing guidance for measuring assets and liabilities
        using fair value and requires additional disclosure about the use of fair
        value
        for measurement. SFAS No. 157 was originally effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and interim periods
        within those fiscal years.
  9
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  In
        February 2008, FASB issued FASB Staff Position (“FSP”) FASB 157-2, *Effective
        Date of FASB No. 157* (“FSP
        FASB 157-2”). FSP FASB 157-2, which was effective upon issuance and delayed the
        effective date of SFAS No. 157 for non-financial assets and non-financial
        liabilities, except for items recognized or disclosed at fair value at least
        once a year, to fiscal years beginning after November 15, 2008. FSP FASB
        No.
        157-2 also covers interim periods within the fiscal years for items within
        the
        scope of this FSP. We adopted SFAS No. 157 effective with the first interim
        period beginning after January 1, 2008.
 
 In
        October 2008, the FASB issued FSP FAS 157-3, *“Determining
        the Fair Value of a Financial Asset When the Market for That Asset Is Not
        Active”* (“FSP
        FAS 157-3”).  The purpose of FSP FAS 157-3 was to clarify the
        application of SFAS No. 157 in a market that is not active.  It also
        allows for the use of management’s internal assumptions about future cash flows
        with appropriately risk-adjusted discount rates when relevant observable
        market
        data does not exist.  FSP FAS 157-3 did not change the objective of
        SFAS No. 157 which is the determination of the price that would be received
        in
        an orderly transaction that is not a forced liquidation or distressed sale
        at
        the measurement date.  FSP FAS 157-3 was effective upon issuance,
        including prior periods for which financial statements had not been
        issued.  Our adoption of FSP FAS 157-3 for the period ended September
        30, 2008 did not have a material effect on our financial position, results
        of
        operations, cash flows or disclosures.
 
 The
        adoption of SFAS No. 157 has not had a material impact, to date, on our
        financial position or results of operations.
 
 In
        February 2007, FASB issued SFAS No. 159 *The
        Fair Value Option for Financial Assets and Financial Liabilities —
Including an Amendment of SFAS No. 115* (“SFAS
        No. 159”), which permits an entity to measure many financial assets and
        financial liabilities at fair value that are not currently required to be
        measured at fair value. Entities that elect the fair value option will report
        unrealized gains and losses in earnings at each subsequent reporting date.
        The
        fair value option may be elected on an instrument-by-instrument basis, with
        a
        few exceptions. SFAS No. 159 amends previous guidance to extend the
        use of the fair value option to available-for-sale and held-to-maturity
        securities. The Statement also establishes presentation and disclosure
        requirements to help financial statement users understand the effect of the
        election. We adopted SFAS No. 159 on its effective date, January 1,
        2008.  The adoption of SFAS No. 159 has not had a material impact, to
        date, on our financial position or results of operations.
 
 In
        June
        2006, FASB issued FASB Interpretation No. (“FIN’) 48, *Accounting
        for Uncertainty in Income Taxes* (“FIN
        48”) that clarifies the accounting for income tax reserves and contingencies
        recognized in an enterprise’s financial statements in accordance with SFAS No.
        109, *Accounting
        for Income Taxes* .
        This
        Interpretation also provides guidance on derecognition, classification, interest
        and penalties, accounting in interim periods, disclosure and transition.
        This
        Interpretation is effective for fiscal years beginning after December 15,
        2006.
        The Company has adopted and concluded that the impact of FIN 48 will be minimal
        and includes a policy of classifying interest and penalties related to income
        tax as elements of income tax expense in the consolidated financial statements.
        As required by FIN 48, this change was done prospectively. Previously, penalties
        and interest were classified as operating and underwriting expenses.
 
 **(C)
        Stock Options**
 
 During
        the nine months ended September 30, 2008, the Company had two stock-based
        employee compensation plans and one stock-based franchise compensation plan,
        which are described later in Footnote 8, Stock Compensation Plans.
 
 Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        SFAS No. 123R using the modified-prospective-transition method. Under that
        transition method, compensation cost recognized during the nine months ended
        September 30, 2008 includes 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.
 
 During
        the nine months ended September 30, 2008, we have granted 64,156 qualified
        stock
        options and 53,844 non-qualified stock options to employees, executive officers
        and directors with an average option price of $10.71 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 6, Stock Compensation Plans.
  10
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  **(D)** **E** **arnings
        per Share**
 
 Basic
        earnings per share (“Basic EPS”) is computed by dividing net income by the
        weighted average number of common shares outstanding during the period
        presented. Diluted earnings per share (“Diluted EPS”) is computed by dividing
        net income by the weighted average number of shares of common stock and common
        stock equivalents outstanding during the period presented; outstanding warrants
        and stock options are considered common stock equivalents and are included
        in
        the calculation using the treasury stock method. Additionally, when applicable,
        we include in our computation of the weighted average number of common shares
        outstanding all common stock issued in connection with the repayment of our
        Subordinated note.
 
 **(E)
        Reclassifications**
 
 Certain
        amounts in 2007 financial statements have been reclassified to conform to
        the
        2008 presentation.
 
 **** **(3)
        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.
  The
        Company's subsidiaries are, from time to time, named as defendants in various
        lawsuits incidental to their insurance operations. Legal actions relating
        to
        claims made in the ordinary course of seeking indemnification for a loss
        covered
        by the insurance policy are considered by the Company in establishing loss
        and
        LAE reserves.
  The
        Company also faces in the ordinary course of business lawsuits that seek
        damages
        beyond policy limits, commonly known as bad faith claims. The Company
        continually evaluates potential liabilities and reserves for litigation of
        these
        types using the criteria established by SFAS No. 5. Under this guidance,
        reserves for a loss are recorded if the likelihood of occurrence is probable
        and
        the amount can be reasonably estimated. If a loss, while not probable, is
        judged
        to be reasonably possible, management will disclose, if it can be estimated,
        a
        possible range of loss or state that an estimate cannot be made. Management
        considers each legal action using this guidance and records reserves for
        losses
        as warranted. Certain claims and legal actions have been brought against
        the
        Company for which no loss has been accrued, and for which an estimate of
        a
        possible range of loss cannot be made under the rules described above. While
        it
        is not possible to predict the ultimate outcome of these claims or lawsuits,
        management does not believe they are likely to have a material effect on
        the
        Company’s financial condition or liquidity. Losses incurred as a result of these
        cases could, however, have a material adverse impact on net earnings.
  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
        Insurance Guarantee Association (“FIGA”), Citizens Property Insurance
        Corporation (“Citizens”) the Florida Hurricane Catastrophe Fund (“FHCF”) and the
        Florida Joint Underwriters Association (“JUA”).
 11
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
 
 As
        a
        direct premium writer in the state of Florida, we are required to participate
        in
        certain insurer solvency associations under Florida Statutes 631.57(3) (a).
        Participation in these pools is based on our written premiums by line of
        business compared to total premiums written statewide by all insurers.
        Participation may result in assessments against us as it did in 2006. On
        October
        11, 2007, FIGA’s Board certified the need to assess each member an amount equal
        to two percent (2%) of the member’s Florida net direct written premiums for the
        calendar year 2006. Both American Vehicle and Federated National are considered
        members of FIGA. Florida’s Insurance Commissioner approved FIGA’s certification
        on October 29, 2007. Our participation with this assessment totaled
        approximately $2.8 million and was paid November 30, 2007. During 2006, we
        were
        assessed $3.9 million in connection with the FIGA. For statutory accounting
        purposes, these assessments are not charged to operations, in contrast GAAP
        treatment is to charge current operations for the assessments. Through
        policyholder surcharges, as approved by the Florida Office of Insurance
        Regulation (“OIR”), during the twelve months ended December 31, 2007, we
        recouped approximately $1.8 million. FIGA’s October 11, 2007 assessment was
        charged to operations during the period ended September 30, 2007. Future
        assessments by this association are undeterminable at this time. There were
        no
        assessments made for the years ended December 31, 2007 or 2005.
 
 During
        its regularly scheduled meeting on August 17, 2005, the Board of Governors
        of
        Citizens determined a 2004 plan year deficit existed in the High Risk Account.
        Citizens decided that a $515 million Regular Assessment was in the best interest
        of Citizens and consistent with Florida Statutes. On this basis, Citizens
        certified for a Regular Assessment. Federated National’s participation in this
        assessment totaled $2.0 million.
 
 During
        a
        subsequent regularly scheduled meeting on or about December 18, 2006, Citizens’
Board determined an additional 2004 plan year deficit existed in the High
        Risk
        Account. Citizens decided that an additional $515 million Regular Assessment
        was
        in the best interest of Citizens and consistent with Florida Statutes. On
        this
        basis, Citizens was certified for a Regular Assessment. Federated National’s
        participation in this assessment totaled $0.3 million. Future assessments
        by
        this association are undeterminable at this time.
 
 Pursuant
        to Section 627.3512, Florida Statutes, insurers are permitted to recoup the
        assessment by adding a surcharge to policies in an amount not to exceed the
        amount paid by the insurer to Citizens. Federated National is currently
        underwriting the recoupment in connection with these assessments and has
        recouped less than $0.1 million during 2008, $0.4 million during 2007 and
        $1.3
        million during 2006. Pursuant to provisions contained in our excess of loss
        reinsurance contracts, Federated National has subrogated $0.6 million to our
        reinsurers as of September 30, 2008.
 
 The
        OIR
        issued Information Memorandum OIR-06-008M, titled *Notice
        of Anticipated Florida Hurricane Catastrophe Fund Assessment,* dated
        May
        4, 2006, to all property and casualty insurers, surplus lines insurers, and
        surplus lines agents in the state of Florida placing them on notice of an
        anticipated FHCF assessment. Sighting the unprecedented hurricane seasons
        of
        2004 and 2005, the FHCF 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, 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
        FHCF assessment. The FHCF and OIR are, however, recommending that insurers
        include the FHCF assessment in a line item on the declaration page for two
        reasons: (1) this is a multi-year assessment and (2) there may be concurrent
        assessments and the insureds should know what amount is for which assessment.
        The assessment became effective on all policies effective after January 1,
        2007
        and will be remitted to the administrator of the assessment as
        collected.
 
 In
        addition to the assessments noted above, the OIR has also issued Information
        Memorandum OIR -07-02M, titled *Information
        Regarding Emergency Assessment by Citizens Property Insurance
        Corporation,* dated
        January 11, 2007, to all property and casualty insurers in the state of Florida
        placing them on notice that an order had been approved for an emergency
        assessment by Citizens for its High Risk Account. This order requires insurers
        to begin collecting the emergency assessment for policies issued or renewed
        on
        or after July 1, 2007. Similar to the FHCF assessment discussed above, the
        Citizens emergency assessment will be remitted to the administrator of the
        assessment as collected and therefore accounted for in a manner such that
        amounts collected or receivable are not recorded as revenues and amounts
        due or
        paid are not expensed.
 12
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  Federated
        National and American Vehicle are also required to participate in an insurance
        apportionment plan under Florida Statutes Section 627.351, which is referred
        to
        as a 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 year ended December
        31,
        2007, Federated National was assessed $7,470 and American Vehicle recovered
        $842, by and from the JUA Plan based on its December 2007 Cash Activity Report.
        During the year ended December 31, 2006 Federated National and American Vehicle
        were assessed $221,765 and $1,579, respectively. These charges are contained
        in
        Operating and Underwriting Expenses in the Statement of Operations. Future
        assessments by this association are undeterminable at this time.
 
 Bonds
        totaling $3.5 million secure a $3.0 million irrevocable letter of credit,
        which
        was reduced from $10.0 million in February 2008, in order to facilitate business
        opportunities in connection with our commercial general liability program
        agreement with Republic Underwriters
        Insurance Company ("Republic"). Our agreement with Republic was terminated
        effective as of June 30, 2007. See Footnote 6 in our unaudited financial
        statements for the quarter ended June 30, 2008, which are included in Item
        I,
        Part 1 hereof.
 
 The
        2004,
        2003 and 2002 consolidated Federal Income Tax Returns filed by the Company
        have
        been examined by the Internal Revenue Service (“IRS”) during 2006 and 2005. We
        have concurred with certain IRS conclusions and have appealed other conclusions.
        Irrespective of the ongoing appellate process, we do not believe that a material
        adjustment will occur. Income taxes receivable are net of $160,000 valuation
        allowance established during the year ended December 31, 2007 in conjunction
        with this process. The Company records valuation allowances to reduce deferred
        tax assets to the amount that is more likely than not to be realized. When
        assessing the need for valuation allowances, the Company considers future
        taxable income and ongoing prudent and feasible tax planning strategies.
        Should
        a change in circumstances lead to a change in judgment about the realizability
        of deferred tax assets in future years, the Company would adjust related
        valuation allowances in the period that the change in circumstances occurs,
        along with a corresponding increase or charge to net income. The resolution
        of
        tax reserves and changes in valuation allowances could be material to the
        Company’s results of operations for any period, but is not expected to be
        material to the Company’s financial position.
  Relative
        to the Company’s commitments stemming from operational matters, effective on or
        about March 1, 2006, 21 st Century
        sold its interest in the Lauderdale Lakes property to an unrelated party.
        As
        part of this transaction, 21 st Century
        has agreed to lease the same facilities for a five-year term. Our lease for
        this
        office space expires in December 2011.
 
 The
        expected future lease payouts in connection with this lease are as
        follows:
  Fiscal Year
              
              Lease payments2008
              
              $
              153,7292009
              
              
              625,1652010
              
              
              637,6682011
              
              
              650,421Total
              
              $
              2,066,983
 
 
 We
        are
        involved in various claims and legal actions arising in the ordinary course
        of
        business. These proceedings are set forth below as either resolved or ongoing.
 
 **Resolved
        legal proceeding:**
 
 None
 13
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  **Ongoing
        legal proceedings:**
 
 From
        July
        27, 2007 to August 7, 2007, several securities class action lawsuits were
        filed
        against the Company and certain of its executive officers in the United States
        District Court for the Southern District of Florida (the “Court”) on behalf of
        all persons and entities who purchased the Company's securities during the
        various class periods specified in the complaints.  A consolidated amended
        complaint was filed on behalf of the class on January 22, 2008.  The
        complaint alleges that the Defendants made false and misleading statements
        and
        failed to accurately project the Company's business and financial performance
        during the putative class period. The complaint seeks an unspecified amount
        of
        damages and claim violations of Sections 10(b) and 20(a) of the Securities
        Exchange Act of 1934 and Rule 10b-5.  The Defendants filed their motion to
        dismiss the consolidated amended complaint on February 25, 2008.  The
        Plaintiff’s response to Defendant’s motion to dismiss was
        filed
        April 22, 2008. The
        Court
        heard oral arguments on the Motion to Dismiss on August 20, 2008. To date,
        the
        Court has not issued an Opinion.
 
 On
        March
        18, 2008, a verified shareholder derivative lawsuit was filed against certain
        current or former officers and directors of the Company in the United States
        District Court for the Southern District of Florida by Anthony Neil Sellers,
        derivatively on behalf of nominal Defendant 21 st Century
        Holding Company. The complaint alleges breaches of fiduciary duties, abuse
        of
        control, gross mismanagement, waste of corporate assets and unjust enrichment
        occurring form October 3, 2006 through the present. The complaint seeks an
        unspecified amount of damages. On
        July
        29, 2008, the Court dismissed the Plaintiff’s complaint, but provided the
        Plaintiff with 30 days to amend the complaint. Plaintiff filed its Amended
        Complaint on August 28, 2008.  The Defendants filed their Motion to Dismiss
        and Motion to Stay on September 25, 2008.  The Court, on October 10, 2008,
        granted the Defendant’s Motion to Stay in part pending ruling on Defendant’s
        Motion to Dismiss the Class Action Complaint.
 
 While
        the
        Company believes that the allegations in these complaints are without merit,
        an
        unfavorable resolution of pending litigation could have a material adverse
        effect on our financial condition. Litigation may result in substantial costs
        and expenses and significantly divert the attention of the Company's management
        regardless of the outcome. There can be no assurance that the Company will
        be
        able to achieve a favorable settlement of pending litigation or obtain a
        favorable resolution of this litigation if it is not settled. In addition,
        current litigation could lead to increased costs or interruptions of normal
        business operations of the Company.
 
 **(4)
        Fair Value Disclosure**
 
 In
        October 2008, the FASB issued FSP FAS 157-3.  The purpose of FSP FAS
        157-3 was to clarify the application of SFAS No. 157 in a market that is
        not
        active.  FSP FAS 157-3 did not change the objective of SFAS No.
        157.  FSP FAS 157-3 was effective upon issuance, including prior
        periods for which financial statements had not been issued.  Our
        adoption of FSP FAS 157-3 for the period ended September 30, 2008 did not
        have a
        material effect on our financial position, results of operations, cash flows
        or
        disclosures.
 
 In
        September 2006, FASB issued SFAS No. 157. SFAS No. 157 defines fair value
        as the
        exchange price that would be received for an asset or paid to transfer a
        liability (an exit price) in the principal or most advantageous market for
        the
        asset or liability in an orderly transaction between market participants
        on the
        measurement date. SFAS No. 157 also establishes a fair value hierarchy which
        requires an entity to maximize the use of observable inputs and minimize
        the use
        of unobservable inputs when measuring fair value. SFAS No. 157 categorizes
        assets and liabilities at fair value into one of three different levels
        depending on the observability of the inputs employed in the measurement,
        as
        follows:
 
 Level
        1 —
inputs to the valuation methodology are quoted prices (unadjusted) for
        identical assets or liabilities in active markets. A quoted price for an
        identical asset or liability in an active market provides the most reliable
        fair
        value measurement because it is directly observable to the market.
 
 Level
        2 —
inputs to the valuation methodology include quoted prices for similar assets
        and
        liabilities in active markets, and inputs are observable for the asset or
        liability, either directly or indirectly, for substantially the full term
        of the
        financial instrument.
 
 Level
        3 —
inputs to the valuation methodology are unobservable and significant to the
        fair
        value measurement
 
 **Securities
        available for sale** :
        The
        fair value of securities available for sale is determined by obtaining quoted
        prices on nationally recognized security exchanges.
 14
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  Assets
        measured at fair value on a recurring basis, for which the Company has elected
        the fair value option, are summarized below:
 
 (Dollars in thousands)Balance atLevel 1
              
              Level 2
              
              Level 3
              
              September 30,2008US government
                  obligations and agencies
              
              $
              21,786
              
              $
              -
              
              $
              -
              
              $
              21,786Corporate
                  securities and other
              
              
              45,453
              
              
              -
              
              
              -
              
              
              45,453$
              67,239
              
              $
              -
              
              $
              -
              
              $
              67,239Equity
                  securities
              
              
              6,240
              
              
              -
              
              
              -
              
              
              6,240$
              6,240
              
              $
              -
              
              $
              -
              
              $
              6,240
 
 **(5)
        Comprehensive Income**
 
 For
        the
        three and nine months ended September 30, 2008 and 2007, comprehensive income
        consisted of the following:
 
 For the three months ended September 30,
              
              For the nine months ended September 30,2008
              
              2007
              
              2008
              
              2007Net (loss) income
              
              $
              (1,513,139
              )
              $
              1,868,802
              
              $
              295,419
              
              $
              13,190,036Change
                  in net unrealized gains on investments available for sale
              
              
              (406,865
              )
              
              1,444,212
              
              
              1,268,218
              
              
              241,086Comprehensive
                  (loss) income, before tax
              
              
              (1,920,004
              )
              
              3,313,014
              
              
              1,563,637
              
              
              13,431,122Income
                  tax benefit (expense) related to items of other comprehensive
                  income
              
              
              146,345
              
              
              (620,872
              )
              
              (442,462
              )
              
              (90,721
              )Comprehensive
                  income
              
              $
              (1,773,659
              )
              $
              2,692,142
              
              $
              1,121,175
              
              $
              13,340,401
  **(6)
        Reinsurance Agreements**
 
 We
        follow
        industry practice of reinsuring a portion of our risks and paying for that
        protection based primarily upon total insured values of all policies in effect
        and subject to such reinsurance. Reinsurance involves an insurance company
        transferring or “ceding” all or a portion of its exposure on insurance
        underwritten by it to another insurer, known as a “reinsurer.” The ceding of
        insurance does not legally discharge the insurer from its primary liability
        for
        the full amount of the policies. If the reinsurer fails to meet its obligations
        under the reinsurance agreement, the ceding company is still required to
        pay the
        insured for the loss. Our reinsurance agreements are designed to coincide
        with
        the June through November Florida hurricane season.
 
 The
        availability and costs associated with the acquisition of reinsurance will
        vary
        year to year. These fluctuations, which can be significant, are not subject
        to
        our control and may limit our ability to purchase adequate coverage. The
        recovery of increased reinsurance costs through rate action is not immediate
        and
        can not be presumed, as it is subject to OIR approval.
 
 For
        the
        2008-2009 hurricane season, the excess of loss and FHCF treaties will insure
        us
        for approximately $310.0 million of aggregate catastrophic losses and LAE
        with a
        maximum single event coverage totaling approximately $245.0 million, with
        the
        Company retaining the first $3.0 million of losses and LAE. Our reinsurance
        program included coverage purchased from the private market, which afforded
        optional Reinstatement Premium Protection that provides coverage beyond the
        first event, along with coverage from the FHCF. Coverage afforded by the
        FHCF
        totals approximately $167.0 million or 56% of the $310.0 million of aggregate
        catastrophic losses and LAE. The FHCF affords coverage for the entire season,
        subject to maximum payouts, without regard to any particular insurable event.
 
 15
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  For
        the
        2007-2008 hurricane season, the excess of loss and FHCF treaties insured
        us for
        approximately $403.0 million of aggregate catastrophic losses and LAE with
        a
        maximum single event coverage totaling approximately $320.0 million, with
        the
        Company retaining the first $3.0 million of losses and LAE. Our reinsurance
        program included coverage purchased from the private market, which afforded
        optional Reinstatement Premium Protection that provided coverage beyond the
        first event, along with coverage from the FHCF. Coverage afforded by the
        FHCF
        totaled approximately $261.0 million or 65% of the $403.0 million of aggregate
        catastrophic losses and LAE. The FHCF afforded coverage for the entire season,
        subject to maximum payouts, without regard to any particular insurable event.
 
 The
        cost
        to the Company for these reinsurance products for the 2008–2009 and
        2007–2008 hurricane seasons, including the prepaid automatic premium
        reinstatement protection totals approximately $31.3 million and $44.6 million,
        respectively.
 
 Our
        reinsurance structure has significant risks, including the fact that the
        FHCF
        may not be able to raise sufficient money to pay their claims or impair their
        ability to pay their claims in a timely manner. This could result in significant
        financial, legal and operational challenges to all companies, including ours.
        It
        is our understanding, based upon a memo from The Florida House of
        Representatives, Committee on Insurance, to House Speaker Marco Rubio, dated
        April 2, 2008, that it is probable, under the current FHCF structure, that
        hundreds of millions of dollars of FHCF claims in Florida will go unpaid
        for
        some time. The FHCF currently has limited cash available to pay claims in
        connection with a catastrophic event. The FHCF has the authority to raise
        additional cash to pay claims through the issuance of FHCF bonds. The retirement
        of these bonds would be funded by imposing additional assessments on future
        insurance premiums written in the state.
 
 The
        private reinsurance companies and their respective A. M. Best rating are
        listed
        in the table as follows:
 
 **Reinsurer**
                    **A.M.
                        Best Rating****UNITED
                        STATES**Everest
                        Reinsurance Company
                    
                    A+GMAC
                        Re/Motors Insurance Corporation
                    
                    A-Munich
                        Reinsurance America, Inc.
                    
                    A+QBE
                        Reinsurance Corporation
                    
                    A
                    ***BERMUDA**Actua
                        Re Limited
                    
                    NR
                    *
                    (1)Ariel
                        Reinsurance Company Limited
                    
                    A-
                    *DaVinci
                        Reinsurance Limited
                    
                    A
                    *Flagstone
                        Reinsurance Limited
                    
                    A-Hiscox
                        Insurance Company Limited
                    
                    A-Max
                        Bermuda Limited
                    
                    A-New
                        Castle Reinsurance Company Limited
                    
                    A-
                    *Renaissance
                        Reinsurance Limited
                    
                    A+
                    *Amlin
                        Bermuda Limited
                    
                    A**EUROPE**Lansforsakringar
                        Sak Forsakringsaktiebolag
                    
                    NR
                    
                    (2)SCOR
                        Switzerland AG
                    
                    A-
 *
        2008
        Reinstatement Premium Protection Program Participants
 
 (1)
        Participant has fully funded a trust agreement for their proportionate limit
        of
        risk for two events with approximately $10.0 million of cash, U.S. Government
        obligations, obligations of American institutions and preferred or guaranteed
        shares of American institutions at fair market value.
 
 (2)
        Standard & Poor's rated "A" (investment grade - economic situation can
        affect finance)


16
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
 
 To
        date,
        there have been no claims asserted against the reinsurers in connection with
        the
        2007-2008 excess of loss and FHCF treaties.
 
 We
        are
        selective in choosing reinsurers and consider numerous factors, the most
        important of which are the financial stability of the reinsurer, their history
        of responding to claims and their overall reputation. In an effort to minimize
        our exposure to the insolvency of a reinsurer, we evaluate the acceptability
        and
        review the financial condition of the reinsurer at least annually.
 
 In
        order
        to expand our commercial general liability business, we entered into a 100%
        quota-share reinsurance treaty with Republic on March 28, 2006. This
        agreement was in place for approximately one year until March 31, 2007, when
        it
        was cancelled at the request of Republic. Republic
        is domiciled in the State of Texas and licensed both directly and on a surplus
        lines basis in approximately 32 states. This arrangement would have facilitated
        the policyholder who requires their commercial general liability insurance
        policy to come from an insurance company with a satisfactory A.M. Best rating.
        We are currently in the process of replacing this arrangement with another
“A”
rated A.M. Best carrier.
 
 Our
        arrangement with Republic allowed for a 4.75% commission on net written premium
        and reimbursement for all other costs in connection with the treaty such
        as
        premium taxes and assessments. We also remitted a 1% commission to the
        intermediary broker on the same net written premium. Under this agreement,
        the
        Company assumed approximately $325,000 and $23,000 in premiums in connection
        with its operations in the State of Texas during the years ending December
        31,
        2007 and 2006, respectively. Our operations in Texas began in December 2006.
        During the three months ended March 31, 2007, this 100% quota-sharing
        reinsurance treaty with Republic was cancelled, on a run-off basis, at their
        request, effective June 30, 2007. All premiums in connection with this program
        have been fully earned, and $0.2 million of Loss and LAE remain
        unpaid.
 
 Our
        automobile quota-share reinsurance treaties for 2003 included loss corridors
        with varying layers of coverage based on ultimate incurred loss ratio results
        whereby the two insurance companies will retain 100% of the losses between
        incurred loss ratios of 66% and 86% for policies with an effective date of
        2003.
        Despite the loss corridor, the reinsurer assumes significant insurance risk
        under the reinsured portions of the underlying insurance contracts and it
        is
        reasonably possible that the reinsurer will realize a significant loss from
        the
        transaction. Our ultimate incurred loss ratios for these treaties as of
        September 30, 2008 are estimated to be 67.9% and 79.3% for Federated National
        and American Vehicle, respectively.
 
 **(7)
        Stock Compensation Plans**
 
 We
        implemented a stock option plan in September 1998, which expired in September
        2008, and provided for the granting of stock options to officers, key employees
        and consultants. The objectives of this plan included attracting and retaining
        the best personnel, providing for additional performance incentives, and
        promoting our success by providing employees the opportunity to acquire common
        stock. Options outstanding under this plan were granted at prices either
        equal
        to or above the market value of the stock on the date of grant, typically
        vest
        over a four-year or five-year period and expire six or ten years after the
        grant
        date. Under this plan, we were authorized to grant options to purchase up
        to
        900,000 common shares, and, as of September 30, 2008 and December 31, 2007,
        we
        had outstanding exercisable options to purchase 133,599 and 152,599 shares,
        respectively.
 
 In
        2001,
        we implemented a franchisee stock option plan that was terminated during
        September 2008, and provided for the granting of stock options to individuals
        purchasing Company owned agencies that were then converted to franchised
        agencies. The purpose of the plan was to advance our interests by providing
        an
        additional incentive to encourage managers of Company owned agencies to purchase
        the agencies and convert them to franchises. Options outstanding under the
        plan
        were granted at prices, which were above the market value of the stock on
        the
        date of grant, vested over a ten-year period, and expired ten years after
        the
        grant date. Under this plan, we were authorized to grant options to purchase
        up
        to 988,500 common shares, and, as of September 30, 2008, we had no outstanding
        exercisable options to purchase shares.
 17
 **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  In
        2002,
        we implemented the 2002 Stock 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 key employees, consultants, independent contractors, Officers and
        Directors. Our success is largely dependent upon their efforts and judgment
        therefore, by authorizing the grant of options to purchase common stock we
        encourage stock ownership. Options outstanding under the plan were granted
        at
        prices that 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, we are authorized to grant options to purchase up to 1,800,000 common
        shares, and, as of September 30, 2008 and December 31, 2007, we had outstanding
        exercisable options to purchase 614,151 and 660,309 shares,
        respectively.
 
 Activity
        in the Company’s stock option plans for the period from January 1, 2006 to
        September 30, 2008, 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, 2006
                  
                  
                  97,650
                  
                  $
                  6.67
                  
                  
                  15,000
                  
                  $
                  9.17
                  
                  
                  823,608
                  
                  $
                  12.35Granted
                  
                  
                  25,000
                  
                  $
                  27.79
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  86,000
                  
                  $
                  16.44Exercised
                  
                  
                  (77,900
                  )
                  $
                  6.67
                  
                  
                  (15,000
                  )
                  $
                  9.17
                  
                  
                  (212,350
                  )
                  $
                  8.98Cancelled
                  
                  
                  -
                  
                  
                  
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  (59,900
                  )
                  $
                  14.98Outstanding
                      at January 1, 2007
                  
                  
                  44,750
                  
                  $
                  18.47
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  637,358
                  
                  $
                  13.80Granted
                  
                  
                  109,849
                  
                  $
                  13.32
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  57,151
                  
                  $
                  13.18Exercised
                  
                  
                  (2,000
                  )
                  $
                  6.67
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  (16,300
                  )
                  $
                  10.02Cancelled
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  (17,900
                  )
                  $
                  15.82Outstanding
                      at January 1, 2008
                  
                  
                  152,599
                  
                  $
                  14.92
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  660,309
                  
                  $
                  13.78Granted
                  
                  
                  4,500
                  
                  $
                  8.67
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  113,500
                  
                  $
                  10.79Exercised
                  
                  
                  (13,500
                  )
                  $
                  6.67
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  (141,458
                  )
                  $
                  8.81Cancelled
                  
                  
                  (10,000
                  )
                  $
                  11.11
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  (18,200
                  )
                  $
                  13.27Outstanding
                      at September 30, 2008
                  
                  
                  133,599
                  
                  $
                  15.83
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  614,151
                  
                  $
                  14.39
  Options
          outstanding as of September 30, 2008 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, 2008
                  
                  
                  39,250
                  
                  $
                  15.83
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  259,299
                  
                  $
                  14.39December
                      31, 2008
                  
                  
                  9,969
                  
                  $
                  15.83
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  53,630
                  
                  $
                  14.39December
                      31, 2009
                  
                  
                  20,870
                  
                  $
                  15.83
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  112,154
                  
                  $
                  14.39December
                      31, 2010
                  
                  
                  20,870
                  
                  $
                  15.83
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  89,856
                  
                  $
                  14.39December
                      31, 2011
                  
                  
                  20,870
                  
                  $
                  15.83
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  45,756
                  
                  $
                  14.39December
                      31, 2012
                  
                  
                  20,870
                  
                  $
                  15.83
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  32,556
                  
                  $
                  14.39Thereafter
                  
                  
                  900
                  
                  $
                  15.83
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  20,900
                  
                  $
                  14.39Total
                      options exercisible
                  
                  
                  133,599
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  614,151
  During
        the nine months ended September 30, 2008, the Company had 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 Accounting
        Principles Board (“APB”) Opinion No. 25, *Accounting
        for Stock Issued to Employees,* and
        related Interpretations, as permitted by SFAS No. 123, *Accounting
        for Stock-Based Compensation.* Under
        these provisions, no stock-based employee compensation cost was recognized
        in
        the Statement of Operations 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.
 18
  **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
  Effective
        January 1, 2006, the Company adopted the fair value recognitions provisions
        of
        SFAS No. 123R using the modified-prospective-transition method. Under that
        transition method, compensation cost recognized during the nine months ended
        June 30, 2008 and 2007 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 not required to by the
                  pronouncement.
 
 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, 2008 and 2007, are lower by approximately
        $361,200 and $246,000, and $468,000 and $309,000, respectively, than if it
        had
        continued to account for share-base compensation under ABP Opinion No.
        25.
 
 Both
        basic and diluted earnings per share for the nine months ended September
        30,
        2008 would have been $0.07 if the Company had not adopted SFAS No. 123R,
        compared to reported $0.04.
 
 Basic
        and
        diluted earnings per share for the nine months ended September 30, 2007 would
        have been $1.70 and $1.68, respectively, if the Company had not adopted SFAS
        No.
        123R, compared to reported basic and diluted earnings per share of $1.66
        and
        $1.64, respectively.
 
 Both
        basic and diluted earnings per share for the three months ended September
        30,
        2008 would have been ($0.18) if the Company had not adopted SFAS No. 123R,
        compared to reported ($0.19).
 
 Both
        basic and diluted earnings per share for the three months ended September
        30,
        2007 would have been $0.25, respectively, if the Company had not adopted
        SFAS
        No. 123R, compared to reported $0.24.
 
 Because
        the change in income taxes payable includes the effect of excess tax benefits,
        those excess tax benefits also must be shown as a separate operating cash
        outflow so that operating cash flows exclude the effect of excess tax benefits.
        SFAS No. 123R requires the cash flows resulting from the tax benefits resulting
        from tax deductions in excess of the compensation cost recognized for those
        options (excess tax benefits) to be classified as financing cash
        flows.
 
 The
        weighted average fair value for the 54,500 new options granted during the
        three
        months ended September 30, 2008, the 17,500 new options granted during the
        three
        months ended June 30, 2008 and the 46,000 new options granted during the
        three
        months ended March 31, 2008, all estimated on the dates of grant using the
        Black-Scholes option-pricing model were $1.95, $3.09 and $3.45 per option,
        respectively.
 
 The
        weighted average fair value for the 20,000 new options granted during the
        three
        months ended September 30, 2007, the 35,000 new options granted during the
        three
        months ended June 30, 2007 and the 5,000 new options granted during the three
        months ended March 31, 2007, all estimated on the dates of grant using the
        Black-Scholes option-pricing model were $3.27, $2.92 and $5.36 per option,
        respectively.
 19
  **21** **st** **Century Holding Company**
 **Notes
          to Consolidated Financial Statements**
 The
        fair
        value of options granted is estimated on the date of grant using the following
        assumptions:
 
 September
                  30, 2008
              
              September
                  30, 2007Dividend
                  yield
              5.50% - 13.00%
              
              3.20%
                  - 6.70%Expected
                  volatility
              54.65% - 58.20%
              
              42.87%
                  - 54.77%Risk-free
                  interest rate
              1.60% - 2.95%
              
              4.79%
                  - 4.86%Expected
                  life (in years)
              2.69 - 3.19
              
              2.58
                  - 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. 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 as of September 30,
        2008:
 
 Weighted Average
              
              WeightedRange of
              
              Outstanding at
              
              Contractual
              
              Average
              
              Exercisable atExercise Price
              
              September 30, 2008
              
              Periods in Years
              
              Exercise Price
              
              September 30, 20081998
                  Plan
              
              
              $6.67
                      - $27.79
              
              
              133,599
              
              
              4.51
              
              $
              15.83
              
              
              39,2502001
                  Franchise Plan
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -2002
                  Plan
              
              
              $8.32
                      - $18.21
              
              
              614,151
              
              
              3.32
              
              $
              14.39
              
              
              259,299
 
 **(8)
        Subordinated Debt**
 
 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”) .
        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.
 
 On
        September 30, 2007, we made the final principal payment of $1,041,667 on
        the
        September 2004 notes and the September 2004 warrants expired. Of the 1,019,608
        shares that could have been issued in connection with the September 2004
        warrants, 911,270 were exercised and 108,338 were unexercised. The unexercised
        warrants were cancelled as of September 30, 2007.
 
 During
        2007, we paid, pursuant to the terms of the September 2004 Notes and in
        accordance with the contractual computations, our first and second quarterly
        regularly scheduled payments of principal and interest due in shares of our
        common stock. Common stock issued in connection with the first and second
        quarter of 2007 payments totaled 54,211 and 63,114 shares, respectively.
        Our
        third and fourth regularly scheduled payments of principal and interest during
        2007 were paid in cash and totaled $1.1 million per payment. The last
        installment was paid on September 30, 2007.
 
 **(9)
        Stockholder’s Equity**
 
 **Capital
        Stock**
 
 The
        Company’s authorized capital consists of 1,000,000 shares of preferred stock,
        par value $0.01 per share, and 37,500,000 shares of common stock, par value
        $0.01 per share. As of September 30, 2008, there were no preferred shares
        issued
        or outstanding and there were 8,013,894 shares of common stock outstanding.
        We
        do not reserve for common stock shares in connection with the exercise of
        issued
        and unissued common stock options.
 
 **(10)
        Subsequent Event**
 
 None
  20
  **21** **st** **Century Holding Company**
 Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations
 
 *General
        information about 21* *st* *Century Holding Company can be found at* *www.21stcenturyholding.com* *however, the information that can be accessed through our web site is not
        part
        of our report. We make our annual report on Form 10-K, quarterly reports
        on Form
        10-Q, current reports on Form 8-K and amendments to these reports filed or
        furnished pursuant to Section 13 or 15(d) of the Securities and Exchange
        Act of
        1934 available free of charge on our web site, as soon as reasonably practicable
        after they are electronically filed with the SEC.*
 
 **Item
        2**
 
 **Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 **Forward-Looking
        Statements**
  Statements
        in this Quarterly Report on Form 10-Q for the nine months ended September
        30,
        2008 (“Form 10-Q”) or in documents that are incorporated by reference that are
        not historical fact are forward-looking statements that are subject to certain
        risks and uncertainties that could cause actual events and results to differ
        materially from those discussed herein. Without limiting the generality of
        the
        foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”
“intend,” “could,” “would,” “estimate,” or “continue” or the negative other
        variations thereof or comparable terminology are intended to identify
        forward-looking statements. The risks and uncertainties include, without
        limitation, uncertainties related to estimates, assumptions and projections
        relating to unpaid losses and loss adjustment expenses and other accounting
        policies, losses from the nine hurricanes that occurred in fiscal years 2005
        and
        2004 and in other estimates, assumptions and projections contained in this
        Form
        10-Q; inflation and other changes in economic conditions (including changes
        in
        interest rates and financial markets); the impact of new regulations adopted
        in
        Florida which affect the property and casualty insurance market; the costs
        of
        reinsurance, assessments charged by various governmental agencies; pricing
        competition and other initiatives by competitors; our 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, including the Company’s Annual Report on Form 10-K for the
        year ended December 31, 2007.
  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.
 
 The
        unaudited consolidated financial statements of 21 st Century
        Holding Company have been prepared in accordance with 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, 2007. The December 31, 2007 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. ****
 
 **Overview**
 
 We
        are an
        insurance holding company, which, through our subsidiaries and our contractual
        relationships with our independent agents and general agents, control
        substantially all aspects of the insurance underwriting, distribution and
        claims
        processes. We are authorized to underwrite homeowners’ property and casualty
        insurance, commercial general liability insurance, and personal automobile
        insurance and commercial automobile insurance in various states with various
        lines of authority through our wholly owned subsidiaries, Federated National
        and
        American Vehicle. We internally process claims made by our own and third-party
        insureds through our wholly owned claims adjusting company, Superior 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.
 21
 **21** **st** **Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations
  Federated
        National is authorized to underwrite homeowners’ property and casualty insurance
        in Florida as an admitted carrier. American Vehicle is authorized in several
        states to underwrite commercial general liability coverage as either an admitted
        or non-admitted carrier. A n
        admitted carrier is an insurance company that has received a license from
        the
        state department of insurance giving the company the authority to write specific
        lines of insurance in that state. These companies are also bound by rate
        and
        form regulations, and are strictly regulated to protect policyholders from
        a
        variety of illegal and unethical practices, including fraud. Admitted carriers
        are also required to financially contribute to the state guarantee fund,
        which
        is used to pay for losses if an insurance carrier becomes insolvent or unable
        to
        pay the losses due their policyholders. A non-admitted carrier is not licensed
        by the state, but is allowed to do business in that state and is strictly
        regulated to protect policyholders from a variety of illegal and unethical
        practices, including fraud. Sometimes, non-admitted carriers are referred
        to as
“excess and surplus” lines carriers. Non-admitted carriers are subject to
        considerably less regulation with respect to policy rates and forms. Additionally,
        both Federated National and American Vehicle are authorized to underwrite
        personal and commercial automobile insurance in Florida as an admitted carrier.
 
 During
        the nine months ended September 30, 2008, 72.1%, 27.4% and 0.5% 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, 2007, 75.2%, 23.3% and 1.5% of
        the
        premiums we underwrote were for homeowners’ property and casualty insurance,
        commercial general liability insurance and personal automobile insurance,
        respectively. 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. In addition, if
        our
        estimated liabilities for unpaid losses and LAE are less than actual losses
        and
        LAE, we will be required to increase reserves with a corresponding reduction
        in
        our net income in the period in which the deficiency is identified.
 
 We
        operate in highly competitive markets and face competition from national,
        regional and residual market insurance companies in the property and casualty,
        commercial general liability and automobile markets, many of whom are larger
        and
        have greater financial and other resources, have better ratings and offer
        more
        diversified insurance coverage. Our competitors include companies that market
        their products through agents, as well as companies that 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. Competition
        is having a material adverse effect on our business, results of operations
        and
        financial condition.
 
 Significant
        competition has emerged as a result of the January 2007 emergency Florida
        legislation session wherein it passed, and the Governor signed into law,
        a bill
        known as “CS/HB-1A.”. This law made fundamental changes to the property and
        casualty insurance business in Florida and undertook a multi-pronged approach
        to
        address the cost of residential property insurance in Florida. First, the
        law
        increased the capacity of reinsurance that stabilized the reinsurance market
        to
        the benefit of the insurance companies writing properties lines in the state
        of
        Florida. Secondly, the law provided for rate relief to all
        policyholders.
 
 The
        law
        also authorized the state-owned insurance company, Citizens, which is free
        of
        many of the restraints on private carriers such as surplus, ratios, income
        taxes
        and reinsurance expense, to reduce its premium rates and begin competing
        against
        private insurers in the residential property insurance market and expands
        the
        authority of Citizens to write commercial insurance.
 
 Additionally,
        in an effort to foster competition in the Florida homeowners’ property insurance
        market, the State of Florida created a Capital Build-Up incentive program
        in
        response to the catastrophic events that occurred during 2004 and 2005. This
        program provides matching statutory capital to any new or existing carrier
        licensed to write homeowners insurance in the state of Florida. This Capital
        Build-Up incentive program has certain default covenants that require
        participating carriers to maintain minimum net written premium ratios.
 22
 **21** **st** **Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations
  Finally,
        during 2007 and 2008, approximately one dozen new homeowner insurance companies
        have received authority by the Florida OIR to commence business as admitted
        carriers in the state of Florida.
 
 We
        believe that these aggressive marketplace changes have forced some carriers
        to
        pursue market share based on “best case” pricing models that may ultimately
        prove unprofitable from an underwriting perspective.
 
 We
        have
        not participated in the Capital Build-Up incentive program and therefore
        have
        been able to remain committed to the discipline of writing business that
        is
        profitable from an underwriting perspective. This commitment has resulted
        in a
        significant erosion of our homeowners’ property insurance market share. Although
        our pricing is inevitably influenced to some degree by that of our competitors,
        we believe that it is generally not in our shareholders’ best interest to
        compete solely on price. We compete on the basis of underwriting criteria,
        our
        distribution network and superior service to our agents and
        insureds.
 
 In
        Florida, more than 200 companies are authorized to underwrite homeowners’
insurance. National and regional companies that compete with us in the
        homeowners’ market include Allstate Insurance Company, State Farm Insurance
        Company and First Floridian Insurance Company. In addition to these nationally
        recognized names, we also compete with several Florida domestic property
        and
        casualty companies such as Universal Insurance Company of North America,
        Universal Property and Casualty Insurance Company, Royal Palm Insurance Company,
        Coral Insurance Company, Edison Insurance Company, Olympus Insurance Company,
        St. Johns Insurance Company, Cypress Property and Casualty Insurance Company,
        Tower Hill Insurance Company, Florida Family Insurance Company and American
        Strategic Insurance Company.
 
 The
        table
        below denotes American Vehicle’s authority, by state.
  
  In
        January 2008, the Florida OIR granted American Vehicle licenses to underwrite
        commercial multiple peril, inland marine and surety lines of business as
        an
        admitted carrier.
 
 Comparable
        companies which compete with us in the commercial general liability insurance
        market include Century Surety Insurance Company, Atlantic Casualty Insurance
        Company, Colony Insurance Company and Burlington/First Financial Insurance
        Companies. We also face new competition in Florida from such companies as
        Seminole Property and Casualty Insurance Company and U.S. Security Insurance
        Company.
 23
 **21** **st** **Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations
  Assurance
        MGA, a wholly owned subsidiary, acts as Federated National’s and American
        Vehicle’s exclusive managing general agent in the state of Florida. As
        American Vehicle continues its expansion into other states, we intend to
        retain
        other general agents to market our commercial general liability insurance
        products. During
        the nine months ended September 30, 2008, Assurance MGA became licensed in
        the
        states of Georgia, Illinois, Mississippi, North Carolina, Texas and
        Virginia . 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. For the
        above-mentioned services, 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. 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.
 
 Insure-Link
        was formed in March 2008. Insure-Link was created to serve as an independent
        insurance agency. The insurance agency markets to the general public to serve
        all of their insurance needs. Insure-Link will acquire new business through
        marketing and acquisition.
 
 With
        respect to automobile insurance in Florida, we intentionally market only
        to our
        existing policyholders by offering to renew the existing policy. Temporarily,
        we
        have chosen not to compete with the more than 100 companies, which underwrite
        personal automobile insurance in Florida. Comparable companies 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.
 
 Our
        executive offices are located at 3661 West Oakland Park Boulevard, Suite
        300,
        Lauderdale Lakes, Florida, 33311 and our telephone number is (954)
        581-9993.
 
 **Critical
        Accounting Policies**
 
 **** See
        Note
        2, “Summary of Significant Accounting Policies” in the Notes to the Company’s
        consolidated financial statements for the quarter ended September 30, 2008
        included in Item I of this Report on 10-Q for a discussion of the Company’s
        critical accounting policies.
 
 **New
        Accounting Pronouncements**
 
 See
        Note
        2, “Summary of Significant Accounting Policies” in the Notes to the Company’s
        consolidated financial statements for the quarter ended September 30, 2008
        included in Item I of this Report on 10-Q for a discussion of recent accounting
        pronouncements and their effect, if any, on the Company.
 
 **Analysis
        of Financial Condition**
 **As
        of September 30, 2008 Compared to December 31, 2007**
 
 **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 No. 115 requires that these securities be classified into
        one
        of three categories: (i) held-to-maturity, (ii) trading securities or (iii)
        available-for-sale.
 
 Investments
        classified as held-to-maturity include debt securities wherein the Company’s
        intent and ability are to hold the investment until maturity. The accounting
        treatment for held-to-maturity investments is to carry them at amortized
        cost
        without consideration to unrealized gains or losses. Investments classified
        as
        trading securities include debt and equity securities bought and held primarily
        for the sale in the near term. The accounting treatment for trading securities
        is to carry them at fair value with unrealized holding gains and losses included
        in current period operations. Investments classified as available-for-sale
        include debt and equity securities that are not classified as held-to-maturity
        or as trading security investments. The accounting treatment for
        available-for-sale securities is to carry them at fair value with unrealized
        holding gains and losses excluded from earnings and reported as a separate
        component of shareholders’ equity, namely “Other Comprehensive
        Income”.
 24
 **21** **st** **Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations
 Total
        Investments decreased $48.2 million,
        or 35.4%, to $88.0 million as of September 30, 2008, compared to $136.2 million
        as of December 31, 2007. Our fixed income portfolio contained callable features
        exercised during the nine months ended September 30, 2008. The proceeds from
        these called securities are currently in cash and short-term investments.
        We are
        currently evaluating long and short-term investment options for best yields
        that
        match our liquidity needs.
 
 The
        fixed
        maturities and the equity securities that are available for sale and carried
        at
        fair value represent 83% of total investments as of September 30, 2008, compared
        to 85% as of December 31, 2007.
 
 We
        did
        not hold any non-trading investment securities during 2008 or 2007.
 
 Below
        is
        a summary of net unrealized gains and (losses) at September 30, 2008 and
        December 31, 2007 by category.
 
 Unrealized Gains and (Losses)September 30, 2008
              
              December 31, 2007Fixed
                  maturities:U.S.
                  government obligations
              
              $
              20,485
              
              $
              (68,974
              )Obligations
                  of states and political subdivisions
              
              
              (85,746
              )
              
              (1,706
              )(65,261
              )
              
              (70,680
              )Corporate
                  securities:Communications
              
              
              (150,222
              )
              
              (3,481
              )Financial
              
              
              (58,799
              )
              
              (16,984
              )Other
              
              
              (1,286,877
              )
              
              (25,852
              )(1,495,898
              )
              
              (46,317
              )Equity
                  securities:Common
                  stocks
              
              
              (1,276,937
              )
              
              (3,989,319
              )Total
                  fixed, corporate and equity securities
              
              $
              (2,838,096
              )
              $
              (4,106,316
              )
 
 Pursuant
        to FASB SFAS No. 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 either is other than temporary or permanently
        impaired. Factors used in such consideration include, but are not limited
        to,
        the extent and length of time over which the market value has been less than
        cost, the financial condition and near-term prospects of the issuer and our
        ability and intent to keep the investment for a period sufficient to allow
        for
        an anticipated recovery in market value.
 
 In
        reaching a conclusion that a security is either other than temporary or
        permanently impaired we consider such factors as the timeliness and completeness
        of expected dividends, principal and interest payments, ratings from nationally
        recognized statistical rating organizations such as Standard and Poor’s and
        Moody’s, as well as information released via the general media channels. During
        the nine months ended September 30, 2008, in connection with this process,
        we
        have charged to operations a net realized investment loss totaling approximately
        $9.2 million with an estimated provisional tax effect of approximately $3.0
        million. The charge relates to short-term investments in connection with
        the
        common stocks of financial and pharmaceutical industries.
 
 The
        investments held at September 30, 2008 and December 31, 2007 were comprised
        mainly of United States government and agency bonds, as well as municipal
        bonds
        which are viewed by the Company as conservative and less risky holdings, though
        sensitive to interest rate changes. There is a smaller concentration of
        corporate bonds, predominantly held in the financial and conglomerate
        industries. At September 30, 2008, approximately 70% of the equity holdings
        are
        in mutual funds and 30% are in equities related to the financial industry
        and
        insurance industry.
 
 All
        of
        our securities, except as noted above, are in good standing and are not impaired
        as defined by FASB SFAS No. 115.
  25





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


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





During
      the three months ended June 30, 2008, we reclassified $7.2 million of our bond
      portfolio as held-to-maturity because we decided that we had the ability to
      hold
      them until maturity.





During
      the three months ended September 30, 2008, we reclassified $7.5 million to
      available-for-sale because a collateralized requirement was
      reduced.





**Cash
      and Short Term Investments**





Cash
      and
      short-term investments, which include cash, certificates of deposits, and money
      market accounts, increased $46.9 million, or 208.4%, to $69.5 million as of
      September 30, 2008, compared to $22.5 million as of December 31, 2007. Our
      excess cash and cash equivalents are invested in accordance with our long-term
      liquidity requirements.





Our
      fixed
      income portfolio contained callable features exercised during the nine months
      ended September 30, 2008. The proceeds from these called securities are
      currently in cash and short-term investments. We are currently evaluating long
      and short- term investment options for best yields that match our liquidity
      needs.





**Receivable
      for Investments Sold**





Receivable
      for investments sold decreased $5.4 million, or 83.8%, to $1.0 million as of
      September 30, 2008, compared to $6.4 million as of December 31, 2007. The
      decrease is a result of investment trading activity that occurred in late
      December and settled during early January 2008.





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





Finance
      contracts receivable, net of allowance for credit losses, decreased $0.2
      million, or 52.6%, to $0.2 million as of September 30, 2008, compared to $0.4
      million as of December 31, 2007. The decrease is primarily due to our sale
      in
      December 2004 of our assets related to our non-standard automobile insurance
      agency business in Florida and the associated financed contracts. We anticipate
      a continued decline in the financed contracts receivable, net over the future
      short term and its related conversion to cash, cash equivalents and
      investments.





**Prepaid
      Reinsurance Premiums**





Prepaid
      reinsurance premiums decreased $7.2 million, or 84.9%, to $1.3 million as of
      September 30, 2008, compared to $8.5 million as of December 31, 2007. The
      decrease is due to our payments and amortization of prepaid reinsurance premiums
      associated with our homeowners’ book of business.





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





Premiums
      receivable, net of allowance for credit losses, decreased $0.3 million, or
      8.7%,
      to $3.5 million as of September 30, 2008, compared to $3.8 million as of
      December 31, 2007. Our homeowners’ insurance premiums receivable increased $0.6
      million, or 52.0%, to $1.8 million as of September 30, 2008, compared to $1.2
      million as of December 31, 2007. Our commercial general liability insurance
      premiums receivable decreased $0.8 million, or 30.9%, to $1.8 million as of
      September 30, 2008, compared to $2.6 million as of December 31, 2007. Premiums
      receivable in connection with our automobile line of business decreased $0.3
      million, or 72.0%, to $0.1 million as of September 30, 2008, compared to $0.4
      million as of December 31, 2007. These changes are attributed to the seasonality
      of the purchasing patterns of our policyholders and our insurance policy
      marketing efforts.




**Reinsurance
      Recoverable, net**





Reinsurance
      recoverable, net, decreased $8.6 million, or 37.5%, to $14.3 million as of
      September 30, 2008, compared to $22.9 million as of December 31, 2007. The
      decrease is due to payment patterns by our reinsurers. All amounts are current
      and deemed collectable. We have not recorded a valuation allowance in connection
      with our reinsurance recoverable, net.




26




**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 decreased $2.1 million, or 23.8%, to $6.8 million
      as of
      September 30, 2008, compared to $9.0 million as of December 31, 2007. The recent
      decreased production volume for both the homeowners’ and commercial general
      liability product lines is the reason for the decrease in this
      asset.





**Deferred
      Income Taxes, net**





Deferred
      income taxes, net, increased $1.9 million, or 34.5%, to $7.6 million as of
      September 30, 2008, compared to $5.6 million as of December 31, 2007. Deferred
      income taxes, net is comprised of approximately $10.0 million and $8.9 million
      of deferred tax assets, net of approximately $2.4 million and $3.2 million
      of
      deferred tax liabilities as of September 30, 2008 and December 31, 2007,
      respectively.





**Income
      Taxes Receivable**





Income
      taxes receivable increased $3.1 million as of September 30, 2008, compared
      to
      nothing as of December 31, 2007. The change is due to tax payment patterns
      in
      connection with our tax liabilities. See income taxes payable,
      below.





**Property,
      Plant and Equipment, net**





Property,
      plant and equipment, net, decreased $0.2 million, or 14.5%, to less than $1.0
      million as of September 30, 2008 compared to more than $1.0 million as of
      December 31, 2007. The decrease is primarily due to depreciation and
      amortization of our existing property, plant and equipment.





**Other
      Assets**





Other
      assets decreased $0.7 million, or 25.4%, to $2.2 million as of September 30,
      2008, compared to $2.9 million as of December 31, 2007. Major components of
      other assets are as follows:





September 30, 2008
            
            December 31, 2007Accrued
                interest income receivable
            
            $
            617,860
            
            $
            1,429,844Notes
                receivable
            
            
            694,671
            
            
            807,275Prepaid
                expenses
            
            
            677,085
            
            
            547,542Insurance
                receivables
            
            
            141,000
            
            
            -Other
            
            
            45,483
            
            
            133,639Total
            
            $
            2,176,099
            
            $
            2,918,300




**Unpaid
      Losses and LAE**





Unpaid
      losses and LAE decreased $0.5 million, or 0.8%, to $59.2 million as of September
      30, 2008, compared to $59.7 million as of December 31, 2007. The
      composition of unpaid losses and LAE by product line is as follows:





September 30, 2008
            
            December 31, 2007Case
            
            Bulk
            
            Total
            
            Case
            
            Bulk
            
            TotalHomeowners'
            
            $
            9,477,761
            
            $
            17,712,459
            
            $
            27,190,220
            
            $
            7,775,769
            
            $
            24,599,143
            
            $
            32,374,912Commercial
                General Liability
            
            
            7,305,147
            
            
            21,994,966
            
            
            29,300,113
            
            
            5,414,633
            
            
            17,870,404
            
            
            23,285,037Automobile
            
            
            633,718
            
            
            2,078,247
            
            
            2,711,965
            
            
            530,308
            
            
            3,494,533
            
            
            4,024,841$
            17,416,626
            
            $
            41,785,672
            
            $
            59,202,298
            
            $
            13,720,710
            
            $
            45,964,080
            
            $
            59,684,790





Factors
      that affect unpaid losses and LAE include the estimates made on a claim-by-claim
      basis known as “case reserves” coupled with bulk estimates known as incurred but
      not yet reported (“IBNR”). Periodic estimates by management of the ultimate
      costs required to settle all claim files are based on the Company’s analysis of
      historical data and estimations of the impact of numerous factors such as (i)
      per claim information; (ii) company and industry historical loss experience;
      (iii) legislative enactments, judicial decisions, legal developments in the
      awarding of damages, and changes in political attitudes; and (iv) trends in
      general economic conditions, including the effects of inflation.




27




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


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





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. Because
      of
      our process, reserves were decreased by approximately $0.5 million during the
      nine months ended September 30, 2008.





**Unearned
      Premium**





Unearned
      premiums decreased $11.7 million, or 20.8%, to $44.7 million as of September
      30,
      2008, compared to $56.4 million as of December 31, 2007. The decrease was due
      to
      a $9.2 million decrease in unearned homeowners’ insurance premiums, a $2.1
      million decrease in unearned commercial general liability premiums, and a $0.4
      million decrease in unearned automobile premiums. Generally, as is in this
      case,
      a decrease in unearned premium directly relates to a decrease in written premium
      on a rolling twelve-month basis. Competition could continue to negatively affect
      our unearned premium.





**Premium
      Deposits and Customer Credit Balances**





Premium
      deposits and customer credit balances decreased $1.2 million, or 41.8%, to
      $1.6
      million as of September 30, 2008, compared to $2.8 million as of December 31,
      2007. Premium deposits are monies received on policies not yet in force as
      of
      September 30, 2008.





**Bank
      Overdraft**





Bank
      overdraft increased $0.2 million, or 2.5%, to $8.9 million as of September
      30,
      2008, compared to $8.7 million as of December 31, 2007. The bank overdraft
      relates primarily to losses and LAE disbursements paid but not yet presented
      for
      payment by the policyholder or vendor. The increase relates to our payment
      patterns in relationship to the rate at which those cash disbursements are
      presented to the bank for payment.




**Income
      Taxes Payable**





Income
      taxes payable was nothing as of September 30, 2008, compared to $4.2 million
      as
      of December 31, 2007. The change is due to tax payment patterns in connection
      with our tax liabilities. See income taxes receivable, above.





**Deferred
      Gain from Sale of Property**





Deferred
      gain from sale of property decreased $0.4 million, or 19.2%, to $1.6 million
      as
      of September 30, 2008, compared to $2.0 million as of December 31, 2007. In
      accordance with the provisions of SFAS No. 13, we are amortizing the deferred
      gain over the term of the leaseback, which is scheduled to end in December
      2011.




**Accounts
      Payable and Accrued Expenses**





Accounts
      payable and accrued expenses decreased $1.6 million, or 37.9%, to $2.7 million
      as of September 30, 2008, compared to $4.3 million as of December 31, 2007.
      This
      decrease is due to our cash management efforts and timing of payments with
      our
      trade vendors.




28




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


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





**Results
      of Operations**


**Three
      Months Ended September 30, 2008 Compared to Three Months Ended September 30,
      2007**





**Gross
      Premiums Written**





Gross
      premiums written decreased $0.2 million, or 1.3%, to $15.9 million for the
      three
      months ended September 30, 2008, compared to $16.1 million for the three months
      ended September 30, 2007. The following table denotes gross premiums written
      by
      major product line:





Three months ended September 30,2008
            
            2007Amount
            
            Percentage
            
            Amount
            
            PercentageHomeowners'
            
            $
            8,399,503
            
            
            52.99
            %
            $
            8,512,741
            
            
            53.00
            %Federal
                Flood
            
            
            2,614,590
            
            
            16.50
            %
            
            -
            
            
            -Commercial
                General Liability
            
            
            4,795,336
            
            
            30.25
            %
            
            7,376,856
            
            
            45.92
            %Automobile
            
            
            41,136
            
            
            0.26
            %
            
            174,036
            
            
            1.08
            %Gross
                written premiums
            
            $
            15,850,565
            
            
            100.00
            %
            $
            16,063,633
            
            
            100.00
            %




The
      Company’s sale of homeowners’ policies decreased $0.1 million, or 1.3%, to $8.4
      million for the three months ended September 30, 2008, compared to $8.5 million
      for the three months ended September 30, 2007.





Pursuant
      to the Florida OIR regulations, we are required to report write-your-own-flood
      premiums on a direct and ceded basis for 2008 and forward. Prior to 2008, we
      reported only the commissions income associated with this program.





Federated
      National and American Vehicle are currently rated by Demotech as "A"
      ("Exceptional"), which is the third of seven ratings, and defined as “Regardless
      of the severity of a general economic downturn or deterioration in the insurance
      cycle, insurers earning a Financial Stability Rating of “A” possess
“Exceptional” financial stability related to maintaining surplus as regards to
      policyholders”. Demotech’s ratings are based upon factors of concern to agents,
      reinsurers and policyholders and are not primarily directed toward the
      protection of investors.





The
      Company’s sale of commercial general liability policies decreased by $2.6
      million to $4.8 million for the three months ended September 30, 2008, compared
      to $7.4 million for the three months ended September 30, 2007. This decrease
      is
      due to increased competition in the commercial general liability market. 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 30,2008
            
            2007Amount
            
            Percentage
            
            Amount
            
            Percentage(Dollars
                in Thousands)StateAlabama
            
            $
            27
            
            
            0.55
            %
            $
            -
            
            
            -Arkansas
            
            
            -
            
            
            -
            
            
            -
            
            
            -California
            
            
            51
            
            
            1.06
            %
            
            -
            
            
            -Florida
            
            
            3,497
            
            
            72.94
            %
            
            4,563
            
            
            61.85
            %Georgia
            
            
            141
            
            
            2.94
            %
            
            208
            
            
            2.82
            %Kentucky
            
            
            -
            
            
            -
            
            
            -
            
            
            -Louisiana
            
            
            986
            
            
            20.57
            %
            
            1,365
            
            
            18.50
            %Maryland
            
            
            2
            
            
            0.05
            %
            
            -
            
            
            -South
                Carolina
            
            
            7
            
            
            0.14
            %
            
            47
            
            
            0.64
            %Texas
            
            
            84
            
            
            1.76
            %
            
            1,194
            
            
            16.19
            %Virginia
            
            
            -
            
            
            -
            
            
            -
            
            
            -0.01
            %Total
            
            $
            4,795
            
            
            100.0
            %
            $
            7,377
            
            
            100.0
            %




29




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


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





The
      Company’s sale of auto insurance policies decreased by $0.1 million, or 76.4%,
      to nearly nothing for the three months ended September 30, 2008, compared to
      $0.2 million for the three months ended September 30, 2007. With respect to
      automobile insurance in Florida, we intentionally market only to our existing
      policyholders by offering to renew the existing policy. Temporarily, we have
      chosen not to compete with the more than 100 companies, which underwrite
      personal automobile insurance in Florida.




**Gross
      Premiums Ceded**





Gross
      premiums ceded decreased $5.0 million, or 16.4%, to $25.7 million for the three
      months ended September 30, 2008, compared to $30.7 million for the three months
      ended September 30, 2007.





**Increase
      in Prepaid Reinsurance Premiums**





The
      increase in prepaid reinsurance premiums was $15.4 million for the three months
      ended September 30, 2008, compared to $19.3 million for the three months ended
      September 30, 2007. The decreased charge 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 $10.7 million for the three months ended
      September 30, 2008, compared to $22.5 million for the three months ended
      September 30, 2007. The change was due to an $8.4 million decrease in unearned
      homeowners’ insurance premiums, a $2.2 million decrease in unearned commercial
      general liability premiums and a $0.1 million decrease in unearned automobile
      premiums. These changes are a result of our decreased premium volume during
      this
      period. See Gross Premiums Written.





**Net
      Premiums Earned**





Net
      premiums earned decreased $10.9 million, or 40.2%, to $16.2 million for the
      three months ended September 30, 2008, compared to $27.2 million for the three
      months ended September 30, 2007. These changes are a result of our decreased
      premium volume. The following table denotes net premiums earned by product
      line:





Three Months Ended September 30,2008
            
            2007Amount
            
            Percentage
            
            Amount
            
            PercentageHomeowners'
            
            $
            9,116,342
            
            
            56.10
            %
            $
            18,325,278
            
            
            67.42
            %Commercial
                General Liability
            
            
            7,063,622
            
            
            43.47
            %
            
            8,595,979
            
            
            31.62
            %Automobile
            
            
            69,362
            
            
            0.43
            %
            
            259,995
            
            
            0.96
            %Net
                premiums earned
            
            $
            16,249,326
            
            
            100.00
            %
            $
            27,181,252
            
            
            100.00
            %





**Commission
      Income**




Commission
      income decreased $0.3 million, or 69.0%, to $0.1 million for the three months
      ended September 30, 2008, compared to $0.4 million for the three months ended
      September 30, 2007. The 2008 commission income is in connection with our
      reinsurance treaties. The primary component of our 2007 commission income was
      from our participation in a Citizens take out program in May through July 2004,
      wherein the commissions were earned upon the successful retention of the
      policyholders for thirty-six months.





**Finance
      Revenue**





Finance
      revenue remained unchanged at $0.1 million for the three months ended September
      30, 2008, compared to the three months ended September 30, 2007. This is
      primarily due to the Company’s decreased emphasis on automobile insurance and
      the finance revenue derived there-from.




30




**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 increased nearly $0.2 million, or 94.4%, to more than $0.3
      million for the three months ended September 30, 2008, compared to less than
      $0.2 million for the three months ended September 30, 2007, which was net of
      a
      $0.2 million adjustment.





**Net
      Investment Income**





Net
      investment income decreased $0.8 million, or 33.8%, to $1.5 million for the
      three months ended September 30, 2008, compared to $2.3 million for the three
      months ended September 30, 2007.





Net
      investment income on corporate bonds, which generally provide a higher yield
      than U.S. government bonds, increased $0.6 million, to $0.8 million for the
      three months ended September 30, 2008, compared to less than $0.2 million for
      the three months ended September 30, 2007. Net investment income on U.S.
      government bonds decreased $1.1 million, to less than $0.2 million for the
      three
      months ended September 30, 2008, compared to $1.3 million for the three months
      ended September 30, 2007.





Affecting
      our net investment income was a decrease in funds available for investment
      and a
      decrease in the overall yield to 3.79% for the three months ended September
      30,
      2008 compared to a yield of 5.62% for the three months ended September 30,
      2007.





**Net
      Realized Investment (Losses)**





Net
      realized investment losses were $3.0 million for the three months ended
      September 30, 2008, compared to $1.4 million for the three months ended
      September 30, 2007. The table below depicts the net realized investment losses
      by investment category for the three months ended September 30, 2008 as compared
      to the same period during 2007. During the quarter ended September 30, 2008,
      we
      marked certain equity investments to market value pursuant to guidelines
      prescribed in SFAS no. 115. In reaching a conclusion that a security is either
      other than temporary or permanently impaired we consider such factors as the
      timeliness and completeness of expected dividends, principal and interest
      payments, ratings from nationally recognized statistical rating organizations
      such as Standard and Poor’s and Moody’s, as well as information released via the
      general media channels. The pretax charge to operations was approximately $2.7
      million in connection with our estimates of the net realizable value of these
      investments.





Net Realized (Losses) GainsThree Months Ended September 30,2008
            
            2007Fixed
                maturities:U.S.
                government obligations and agencies
            
            $
            -
            
            $
            17,588Obligations
                of states and political subdivisions
            
            
            -
            
            
            (437,184
            )Corporate
            
            
            (523,444
            )
            
            -Equity
                securities:Common
                stocks
            
            
            (2,471,907
            )
            
            (1,021,586
            )Total
                net realized (losses)
            
            $
            (2,995,351
            )
            $
            (1,441,182
            )





**Regulatory
      Assessments Recovered**





Regulatory
      assessments recovered decreased $0.2 million, or 33.6%, to $0.4 million for
      the
      three months ended September 30, 2008, compared to $0.6 million for the three
      months ended September 30, 2007.





**Other
      Income**





Other
      income remained unchanged at $0.2 million for the three months ended September
      30, 2008, compared to the three months ended September 30, 2007.




31




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


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





Major
      components of other income for the three months ended September 30, 2008
      included approximately $0.1 million in partial recognition of our gain on the
      sale of our Lauderdale Lakes property and $0.1 million in connection with rental
      income, interest income and miscellaneous income.





**Losses
      and LAE**





Losses
      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.





Losses
      and LAE decreased by $5.0 million, or 33.4%, to $9.9 million for the three
      months ended September 30, 2008, compared to $14.8 million for the three months
      ended September 30, 2007. The overall change includes a $3.1 million increase
      in
      our homeowners’ program, a $4.2 million decrease in our commercial general
      liability program and a $3.9 million decrease in connection with our automobile
      program.





We
      continue to revise our estimates of the ultimate financial impact of past
      storms. The revisions to our estimates are based on our analysis of subsequent
      information that we receive regarding various factors, including: (i) per claim
      information; (ii) company and industry historical loss experience; (iii)
      legislative enactments, judicial decisions, legal developments in the awarding
      of damages, and (iv) trends in general economic conditions, including the
      effects of inflation.





The
      composition of unpaid losses and LAE by product line is as follows:





September 30, 2008
            
            June 30, 2007Case
            
            Bulk
            
            Total
            
            Case
            
            Bulk
            
            TotalHomeowners'
            
            $
            9,477,761
            
            $
            17,712,459
            
            $
            27,190,220
            
            $
            7,923,980
            
            $
            19,608,725
            
            $
            27,532,705Commercial
                General Liability
            
            
            7,305,147
            
            
            21,994,966
            
            
            29,300,113
            
            
            6,346,703
            
            
            21,818,145
            
            
            28,164,848Automobile
            
            
            633,718
            
            
            2,078,247
            
            
            2,711,965
            
            
            269,341
            
            
            2,380,451
            
            
            2,649,792$
            17,416,626
            
            $
            41,785,672
            
            $
            59,202,298
            
            $
            14,540,024
            
            $
            43,807,321
            
            $
            58,347,345





Factors
      that affect unpaid losses and LAE include the estimates made on a claim-by-claim
      basis known as “case reserves” coupled with bulk estimates known as incurred but
      not yet reported (“IBNR”). Periodic estimates by management of the ultimate
      costs required to settle all claim files are based on the Company’s analysis of
      historical data and estimations of the impact of numerous factors such as (i)
      per claim information; (ii) company and industry historical loss experience;
      (iii) legislative enactments, judicial decisions, legal developments in the
      awarding of damages, and changes in political attitudes; and (iv) trends in
      general economic conditions, including the effects of inflation.





Management
      revises its estimates based on the results of its analysis. This process assumes
      that past experience, adjusted for the effects of current developments and
      anticipated trends, is an appropriate basis for estimating the ultimate
      settlement of all claims. There is no precise method for subsequently evaluating
      the impact of any specific factor on the adequacy of the reserves, because
      the
      eventual redundancy or deficiency is affected by multiple factors. Because
      of
      our process, reserves were increased by approximately $0.9 million during the
      quarter ended September 30, 2008.





In
      accordance with GAAP, our loss ratio is computed as losses and LAE divided
      by
      net premiums earned. A lower loss ratio generally results in higher operating
      income. Our loss ratio for the three-month period ended September 30, 2008
      was
      60.9% compared with 54.7% for the same period in 2007. The table below reflects
      the loss ratios by product line.




32




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


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





Three Months Ended September 30,2008
            
            2007Homeowners'
            
            
            65.1
            %
            
            28.7
            %Commercial
                General Liability
            
            
            51.2
            %
            
            95.5
            %Automobile
            
            
            210.9
            %
            
            262.1
            %All
                lines
            
            
            60.9
            %
            
            54.7
            %




**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses decreased $2.2 million, or 57.0%, to $1.7 million
      for
      the three months ended September 30, 2008, compared to $3.9 million for the
      three months ended September 30, 2007. The change is primarily due to a $2.8
      million decrease in Boards, Bureaus and Association expense resulting from
      decreased assessments.





**Salaries
      and Wages**





Salaries
      and wages increased $0.3 million, or 17.5%, to $2.1 million for the three months
      ended September 30, 2008, compared to $1.8 million for the three months ended
      September 30, 2007. The three months ended September 30, 2008 included a $0.3
      million severance payment. The charge to operations for stock based
      compensation, in accordance with the provisions of SFAS No. 123R, was
      approximately $100,000 during the three months ended September 30, 2008 compared
      to approximately $262,000 for the three months ended September 30,
      2007.




**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, decreased $1.2 million, or 22.5%, to
      $4.2 million for the three months ended September 30, 2008, compared to $5.4
      million for the three months ended September 30, 2007. 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.  The recent decreased production volume for
      both the homeowners’ and commercial general liability product lines is the
      reason for the decrease in this asset.




**Provision
      for Income Tax (Benefit) Expense**





The
      provision for income tax benefit was $0.3 million for the three months ended
      September 30, 2008, compared to an income tax expense of $1.8 million for the
      three months ended September 30, 2007. The effective rate for income taxes
      was
      18.2% for the three months ended September 30, 2008, compared to 48.9% for
      the
      same three-month period in 2007. The unusual provision for the three months
      ended September 30, 2008 is due to a $2.7 million investment impairment
      adjustment and the related deferred tax asset.




**Net
      (Loss) Income**





As
      a
      result of the foregoing, the Company’s net loss income for the three months
      ended September 30, 2008, was $1.5 million compared to net income of $1.9
      million for the three months ended September 30, 2007.




33




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


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





**Results
      of Operations**


**Nine
      Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
      2007**





**Gross
      Premiums Written**





Gross
      premiums written decreased $39.0 million, or 35.6%, to $70.7 million for the
      nine months ended September 30, 2008, compared to $109.7 million for the nine
      months ended September 30, 2007. The following table denotes gross premiums
      written by major product line:





Nine months ended September 30,2008
            
            2007Amount
            
            Percentage
            
            Amount
            
            PercentageHomeowners'
            
            $
            48,319,949
            
            
            68.35
            %
            $
            82,471,900
            
            
            75.17
            %Federal
                Flood
            
            
            2,614,590
            
            
            3.70
            %
            
            -
            
            
            -Commercial
                General Liability
            
            
            19,385,265
            
            
            27.42
            %
            
            25,601,473
            
            
            23.33
            %Automobile
            
            
            375,070
            
            
            0.53
            %
            
            1,642,493
            
            
            1.50
            %Gross
                written premiums
            
            $
            70,694,874
            
            
            100.00
            %
            $
            109,715,866
            
            
            100.00
            %







The
      Company’s sale of homeowners’ policies decreased $34.2 million, or 41.4% to
      $48.3 million for the nine months ended September 30, 2008, compared to $82.5
      million for the nine months ended September 30, 2007. The significant erosion
      is
      primarily due to the soft market conditions prevailing in the state of Florida.
      The soft market conditions are lead by Citizens, the state run insurance
      company. We believe that these marketplace conditions have forced some carriers
      to pursue market share based on “best case” pricing models that may ultimately
      prove unprofitable from an underwriting perspective. We do not intend to compete
      with others solely based on pricing mechanisms. We will continue to market
      our
      property insurance product in territories in Florida where our rates are
      competitive.





Pursuant
      to the Florida OIR regulations, we are required to report write-your-own-flood
      premiums on a direct and ceded basis for 2008 and forward. Prior to 2008, we
      reported only the commissions income associated with this program.





Federated
      National and American Vehicle are currently rated by Demotech as "A"
      ("Exceptional"), which is the third of seven ratings, and defined as “Regardless
      of the severity of a general economic downturn or deterioration in the insurance
      cycle, insurers earning a Financial Stability Rating of “A” possess
“Exceptional” financial stability related to maintaining surplus as regards to
      policyholders”. Demotech’s ratings are based upon factors of concern to agents,
      reinsurers and policyholders and are not primarily directed toward the
      protection of investors.





The
      Company’s sale of commercial general liability policies decreased by $6.6
      million to $19.4 million for the nine months ended September 30, 2008, compared
      to $25.6 million for the three months ended September 30, 2007. This decrease
      is
      due to increased competition in the commercial general liability market. The
      following table sets forth the amounts and percentages of our gross premiums
      written in connection with our commercial general liability program by state:




34




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


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





Nine Months Ended September 30,2008
            
            2007Amount
            
            Percentage
            
            Amount
            
            Percentage(Dollars in Thousands)StateAlabama
            
            $
            98
            
            
            0.51
            %
            $
            -
            
            
            -Arkansas
            
            
            12
            
            
            0.06
            %
            
            -
            
            
            -California
            
            
            251
            
            
            1.29
            %
            
            -
            
            
            -Florida
            
            
            12,891
            
            
            66.51
            %
            
            17,067
            
            
            66.69
            %Georgia
            
            
            471
            
            
            2.43
            %
            
            800
            
            
            3.12
            %Kentucky
            
            
            1
            
            
            -
            
            
            5
            
            
            0.02
            %Louisiana
            
            
            3,501
            
            
            18.06
            %
            
            4,047
            
            
            15.80
            %Maryland
            
            
            2
            
            
            0.01
            %
            
            -
            
            
            -South
                Carolina
            
            
            66
            
            
            0.34
            %
            
            134
            
            
            0.52
            %Texas
            
            
            2,084
            
            
            10.75
            %
            
            3,516
            
            
            13.73
            %Virginia
            
            
            8
            
            
            0.04
            %
            
            32
            
            
            0.12
            %Total
            
            $
            19,385
            
            
            100.0
            %
            $
            25,601
            
            
            100.0
            %





The
      Company’s sale of auto insurance policies decreased by $1.3 million, or 77.2%,
      to $0.4 million for the nine months ended September 30, 2008, compared to $1.6
      million for the nine months ended September 30, 2007. With respect to automobile
      insurance in Florida, we intentionally market only to our existing policyholders
      by offering to renew the existing policy. Temporarily, we have chosen not to
      compete with the more than 100 companies, which underwrite personal automobile
      insurance in Florida.





**Gross
      Premiums Ceded**





Gross
      premiums ceded decreased $12.6 million, or 27.1%, to $33.9 million for the
      nine
      months ended September 30, 2008, compared to $46.5 million for the nine months
      ended September 30, 2007.





**Increase
      in Prepaid Reinsurance Premiums**





The
      increase in prepaid reinsurance premiums was $1.8 million for the nine months
      ended September 30, 2008, compared to $1.5 million for the nine months ended
      September 30, 2007. The increased charge to written premium is primarily
      associated with the timing of our reinsurance payments measured against the
      term
      of the underlying reinsurance policies.





**Decrease
      in Unearned Premiums**





The
      decrease in unearned premiums was $11.7 million for the nine months ended
      September 30, 2008, compared to $9.7 million for the nine months ended September
      30, 2007. The 2008 amount was due to a $9.2 million decrease in unearned
      homeowners’ insurance premiums, a $2.1 million decrease in unearned commercial
      general liability premiums and a $0.4 million decrease in unearned automobile
      premiums. These changes are a result of our decreased premium volume during
      this
      period. See Gross Premiums Written.





**Net
      Premiums Earned**





Net
      premiums earned decreased $24.1 million, or 32.3%, to $50.3 million for the
      nine
      months ended September 30, 2008, compared to $74.4 million for the nine months
      ended September 30, 2007. The following table denotes net premiums earned by
      product line:




35




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


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





Nine Months Ended September 30,2008
            
            2007Amount
            
            Percentage
            
            Amount
            
            PercentageHomeowners'
            
            $
            28,063,006
            
            
            55.77
            %
            $
            46,677,098
            
            
            62.77
            %Commercial
                General Liability
            
            
            21,795,548
            
            
            43.32
            %
            
            25,845,914
            
            
            34.75
            %Automobile
            
            
            455,348
            
            
            0.91
            %
            
            1,844,971
            
            
            2.48
            %Net
                premiums earned
            
            $
            50,313,902
            
            
            100.00
            %
            $
            74,367,983
            
            
            100.00
            %





**Commission
      Income**





Commission
      income decreased $5.8 million, or 83.2%, to $1.2 million for the nine months
      ended September 30, 2008, compared to $6.9 million for the nine months ended
      September 30, 2007. The 2008 commission income is in connection with our
      reinsurance treaties. The
      primary components of our 2007 commission income were non-reoccurring operating
      events stemming from two separate events. First and pursuant to provisions
      contained in our three-year reinsurance treaties, we were afforded the right
      to
      cancel the remaining two years and be entitled to receive a no loss experience
      commission. In connection with this treaty, we reported approximately $2.8
      million during the nine months ended September 30, 2007. The second
      non-reoccurring operating event was in connection with commission income
      totaling approximately $2.8 million in connection with our participation in
      a
      Citizens take out program in 2004, wherein the commission was earned by us
      upon
      the successful retention of the policyholder for thirty-six months.





**Finance
      Revenue**





Finance
      revenue decreased $0.2 million, or 42.0%, to $0.3 million for the nine months
      ended September 30, 2008, compared to $0.5 million for the nine months ended
      September 30, 2007. The change is primarily due to the Company’s decreased
      emphasis on automobile insurance and the finance revenue derived there-from.




**Managing
      General Agent Fees**





Managing
      general agent fees decreased $0.2 million, or 14.0%, to $1.4 million for the
      nine months ended September 30, 2008, compared to $1.6 million for the nine
      months ended September 30, 2007, which was net of a $0.2 million adjustment.
      The
      recent decreased production volume for both the homeowners’ and commercial
      general liability product lines is the reason for the decrease in this
      account.





**Net
      Investment Income**





Net
      investment income decreased $0.7 million, or 11.8%, to $5.3 million for the
      nine
      months ended September 30, 2008, compared to $6.0 million for the nine months
      ended September 30, 2007.





Net
      investment income on corporate bonds, which generally provide a higher yield
      than U.S. government bonds, increased $2.2 million, to $2.5 million for the
      nine
      months ended September 30, 2008, compared to $0.3 million for the nine months
      ended September 30, 2007. Net investment income on U.S. government bonds
      decreased $2.9 million, to $0.8 million for the nine months ended September
      30,
      2008, compared to $3.7 million for the nine months ended September 30, 2007.





Affecting
      our net investment income was a decrease in funds available for investment
      and a
      decrease in the overall yield to 4.47% for the nine months ended September
      30,
      2008 compared to a yield of 5.27% for the nine months ended September 30,
      2007.





**Net
      Realized Investment (Losses)**





Net
      realized investment losses were $9.3 million for the nine months ended September
      30, 2008, compared to $1.5 million for the nine months ended September 30,
      2007.
      The table below depicts the net realized investment (losses) gains by investment
      category for the nine months ended September 30, 2008 as compared to the same
      period during 2007. During the nine months ended September 30, 2008, we marked
      certain equity investments to market value pursuant to guidelines prescribed
      in
      SFAS No. 115. In reaching a conclusion that a security is either other than
      temporary or permanently impaired we consider such factors as the timeliness
      and
      completeness of expected dividends, principal and interest payments, ratings
      from nationally recognized statistical rating organizations such as Standard
      and
      Poor’s and Moody’s, as well as information released via the general media
      channels. The pretax charge to operations was approximately $9.2 million in
      connection with our estimates of the net realizable value of these
      investments.




36




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


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





Net Realized (Losses) GainsNine Months Ended September 30,2008
            
            2007Fixed
                maturities:U.S.
                government obligations and agencies
            
            $
            16,277
            
            $
            17,589Obligations
                of states and political subdivisions
            
            
            (3,575
            )
            
            (437,247
            )Corporate
            
            
            (523,442
            )
            
            -Equity
                securities:Common
                stocks
            
            
            (8,797,900
            )
            
            (1,069,569
            )Total
                net realized (losses) gains
            
            $
            (9,308,640
            )
            $
            (1,489,227
            )





**Regulatory
      Assessments Recovered**





Regulatory
      assessments recovered increased $0.4 million, or 28.4%, to $1.6 million for
      the
      nine months ended September 30, 2008, compared to $1.3 million for the nine
      months ended September 30, 2007.




**Other
      Income**





Other
      income increased $0.2 million, or 39.0%, to $0.7 million for the nine months
      ended September 30, 2008, compared to $0.5 million for the nine months ended
      September 30, 2007.





Major
      components of other income for the nine months ended September 30, 2008 included
      approximately $0.4 million in partial recognition of our gain on the sale of
      our
      Lauderdale Lakes property and $0.3 million in connection with rental income,
      interest income and miscellaneous income.





**Losses
      and LAE**





Losses
      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.





Losses
      and LAE decreased by $8.4 million, or 21.6%, to $30.3 million for the nine
      months ended September 30, 2008, compared to $38.6 million for the nine months
      ended September 30, 2007. The overall change includes a $1.3 million decrease
      in
      our homeowners’ program and a $7.1 million decrease in connection with our
      automobile program.





We
      continue to revise our estimates of the ultimate financial impact of past
      storms. The revisions to our estimates are based on our analysis of subsequent
      information that we receive regarding various factors, including: (i) per claim
      information; (ii) company and industry historical loss experience; (iii)
      legislative enactments, judicial decisions, legal developments in the awarding
      of damages, and (iv) trends in general economic conditions, including the
      effects of inflation.




37




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


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





The
      composition of unpaid losses and LAE by product line is as follows:





September 30, 2008
            
            December 31, 2007Case
            
            Bulk
            
            Total
            
            Case
            
            Bulk
            
            TotalHomeowners'
            
            $
            9,477,761
            
            $
            17,712,459
            
            $
            27,190,220
            
            $
            7,775,769
            
            $
            24,599,143
            
            $
            32,374,912Commercial
                General Liability
            
            
            7,305,147
            
            
            21,994,966
            
            
            29,300,113
            
            
            5,414,633
            
            
            17,870,404
            
            
            23,285,037Automobile
            
            
            633,718
            
            
            2,078,247
            
            
            2,711,965
            
            
            530,308
            
            
            3,494,533
            
            
            4,024,841$
            17,416,626
            
            $
            41,785,672
            
            $
            59,202,298
            
            $
            13,720,710
            
            $
            45,964,080
            
            $
            59,684,790





Factors
      that affect unpaid losses and LAE include the estimates made on a claim-by-claim
      basis known as “case reserves” coupled with bulk estimates known as incurred but
      not yet reported (“IBNR”). Periodic estimates by management of the ultimate
      costs required to settle all claim files are based on the Company’s analysis of
      historical data and estimations of the impact of numerous factors such as (i)
      per claim information; (ii) company and industry historical loss experience;
      (iii) legislative enactments, judicial decisions, legal developments in the
      awarding of damages, and changes in political attitudes; and (iv) trends in
      general economic conditions, including the effects of inflation.





Management
      revises its estimates based on the results of its analysis. This process assumes
      that past experience, adjusted for the effects of current developments and
      anticipated trends, is an appropriate basis for estimating the ultimate
      settlement of all claims. There is no precise method for subsequently evaluating
      the impact of any specific factor on the adequacy of the reserves, because
      the
      eventual redundancy or deficiency is affected by multiple factors. Because
      of
      our process, reserves were decreased by approximately $0.5 million during the
      nine months ended September 30, 2008.





In
      accordance with GAAP, our loss ratio is computed as losses and LAE divided
      by
      net premiums earned. A lower loss ratio generally results in higher operating
      income. Our loss ratio for the nine month period ended September 30, 2008 was
      60.1% compared with 52.0% for the same period in 2007. The table below reflects
      the loss ratios by product line.





Nine Months Ended September 30,2008
            
            2007Homeowners'
            
            
            58.3
            %
            
            43.0
            %Commercial
                General Liability
            
            
            64.2
            %
            
            55.7
            %Automobile
            
            
            16.0
            %
            
            166.2
            %All
                lines
            
            
            60.1
            %
            
            52.0
            %





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses decreased $6.2 million, or 57.1%, to $4.74 million
      for
      the nine months ended September 30, 2008, compared to $10.9 million for the
      nine
      months ended September 30, 2007. The change is primarily due to a $2.8 million
      decrease in Boards, Bureaus and Association expense resulting from decreased
      assessments and a $2.3 million decrease in premium tax expense, a result of
      decreased written premium. Also contributing to the change is a $1.0 million
      decrease in bad debts expense and a $0.1 million decrease in licenses and
      fees.





**Salaries
      and Wages**





Salaries
      and wages increased $0.5 million, or 10.7%, to $5.6 million for the nine months
      ended September 30, 2008, compared to $5.1 million for the nine months ended
      September 30, 2007. The
      nine
      months ended September 30, 2008 included a $0.3 million severance
      payment. The
      charge to operations for stock-based compensation, in accordance with the
      provisions of SFAS No. 123R, was approximately $0.4 million during the nine
      months ended September 30, 2008 compared to approximately $0.5 million for
      the
      nine months ended September 30, 2007.




38




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


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





**Interest
      Expense**





Interest
      expense decreased to nothing for the nine months ended September 30, 2008,
      compared to $0.2 million for the nine months ended September 30, 2007. The
      decrease is in correlation to our subordinated debt that was satisfied during
      2007.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, decreased $3.1 million, or 20.8%, to
      $11.8 million for the nine months ended September 30, 2008, compared to $14.9
      million for the nine months ended September 30, 2007. 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. The recent decreased production volume for both
      the homeowners’ and commercial general liability product lines is the reason for
      the decrease in this asset.





**Provision
      for Income Tax (Benefit) Expense**





The
      provision for income tax benefit was $1.2 million for the nine months ended
      September 30, 2008, compared to an expense of $6.8 million for the nine months
      ended September 30, 2007. The effective rate for income taxes was 132.1% for
      the
      nine months ended September 30, 2008, compared to 33.9% for the same –nine month
      period in 2007. The
      unusual provision for the nine months ended September 30, 2008 is due to a
      $9.2
      million investment impairment adjustment and the related deferred tax asset.
      Also affecting the 2008 rate was a one-time $1.0 million benefit in connection
      with the estimation of the previous years’ income taxes.





A
      summary
      of the provision for income tax benefit for the nine months ended September
      30,
      2008 is as follows:




Nine
                Month Ended September 30, 2008Federal:Current
            
            $
            1,808,893Deferred
            
            
            (2,001,635
            )Provision
                for Federal income tax expense
            
            
            (192,742
            )State:Current
            
            
            275,920Deferred
            
            
            (333,948
            )Provision
                for state income tax expense
            
            
            (58,028
            )Subtotal
            
            
            (250,770
            )Prior
                year credit to provision
            
            
            (965,555
            )Provision
                for income tax (benefit)
            
            $
            (1,216,325
            )





The
      actual provision for income tax (benefit) differs from the "expected" provision
      for income tax expense (computed by applying the combined applicable effective
      federal and state tax rates to income before provision for income tax expense)
      as follows:




39




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


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





Nine
                Month Ended September 30, 2008Computed
                expected provision for income tax (benefit), at federal
                rate
            
            $
            (313,108
            )State
                tax, net of federal deduction benefit
            
            
            (33,429
            )Tax-exempt
                interest
            
            
            (165,279
            )Dividend
                received deduction
            
            
            (167,160
            )Stock
                option expense and other permanent differences
            
            
            106,232Rate
                differential
            
            
            313,282Subtotal
            
            $
            (259,462
            )Prior
                year credit to provision
            
            
            (956,863
            )Provision
                for income tax (benefit)
            
            $
            (1,216,325
            )





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of our net
      deferred tax asset are as follows:





Deferred
                tax assets:Unpaid
                losses and LAE
            
            $
            1,990,953Unearned
                premiums
            
            
            1,611,511Unrealized
                loss on investment securities
            
            
            1,067,976Allowance
                for credit losses
            
            
            78,841Allowance
                for impairments
            
            
            2,138,773Regulatory
                assessments
            
            
            1,495,141Capital
                loss carryback
            
            
            961,644Discount
                on advance premiums
            
            
            (52,251
            )Deferred
                gain on sale and leaseback
            
            
            497,981Stock
                option expense per FASB 123R
            
            
            219,455Total
                deferred tax assets
            
            
            10,010,024Deferred
                tax liabilities:Deferred
                acquisition costs, net
            
            
            (2,568,187
            )Depreciation
            
            
            146,192Total
                deferred tax liabilities
            
            
            (2,421,995
            )Net
                deferred tax asset
            
            $
            7,588,029





**Net
      Income**





As
      a
      result of the foregoing, the Company’s net income for the nine months ended
      September 30, 2008, was $.03 million compared to net income of $13.2 million
      for
      the nine months ended September 30, 2007.





**Liquidity
      and Capital Resources**





For
      the
      nine months ended September 30, 2008 ,
      our
      primary sources of capital were revenues generated from operations, including
      decreased reinsurance recoverable, net, decreased prepaid reinsurance premiums,
      decreased policy acquisition costs, net of amortization, decreased other assets,
      non-cash compensation, decreased premiums receivable, depreciation and
      amortization, decreased finance contracts receivable, increased bank overdraft,
      and an increase in the provision for uncollectible premiums receivable. Also
      contributing to our liquidity were proceeds from the sale of investments,
      exercised stock options and the 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, 2008, operations used net operating cash flow
      of
      $13.9 million, compared to provided $24.0 million for the nine months ended
      September 30, 2007.




40




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


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





For
      the
      nine months ended September 30, 2008, operations generated $19.9 million of
      gross cash flow due to an $8.6 million decrease in reinsurance recoverable,
      net,
      a $7.2 million decrease in prepaid reinsurance premiums, a $2.1 million decrease
      in policy acquisition costs, net of amortization, a $0.4 million decrease in
      other assets, $0.3 million in non-cash compensation. To a much less significant
      extent, operations generated additional sources of cash via a $0.2 million
      increase in bank overdraft, a $0.2 million decrease in finance contracts
      receivable, $0.2 million in depreciation and amortization, a $0.2 million
      decrease in premiums receivable and a $0.1 million increase in the provision
      for
      uncollectible premiums receivable, all in conjunction with net income of $0.3
      million.





For
      the
      nine months ended September 30, 2008, operations used $33.8 million of gross
      cash flow primarily due to a $11.7 million decrease in unearned premiums, $9.3
      million in net realized investment losses, a $4.2 million decrease in income
      taxes payable, a $3.1 million increase in income taxes recoverable, a $1.9
      million increase in deferred income tax expense, a $1.6 million decrease in
      accounts payable and accrued expenses, a $1.2 million decrease in premium
      deposits and customer credit balances, a $0.5 million decrease in unpaid losses
      and LAE and $0.2 million in amortization of investment discount,
      net.





For
      the
      nine months ended September 30, 2008, net investing activities provided $63.8
      million, compared to having used $21.7 million for the nine months ended
      September 30, 2007. Our available for sale investment portfolio is highly liquid
      as it consists entirely of readily marketable securities.





For
      the
      nine months ended September 30, 2008, investing activities generated $99.5
      million and used $35.6 million from the maturity several times over of our
      very
      short municipal portfolio. Our fixed income portfolio contained callable
      features exercised during the nine months ended September 30, 2008. The proceeds
      from these called securities are currently in cash and short-term investments.
      We are currently evaluating long and short- term investment options for best
      yields that match our liquidity needs.





For
      the
      nine months ended September 30, 2008, net financing activities used $2.9
      million, compared to used $6.1 million for the nine months ended September
      30,
      2007. For the nine months ended September 30, 2008, the sources of cash in
      connection with financing activities included $1.3 million from the exercise
      of
      stock options and $0.1 million in connection with the tax benefit related to
      non-cash compensation. The uses of cash in connection with financing activities
      included $4.3 million in dividends paid and $0.1 million for the acquisition
      of
      treasury stock.





We
      offer
      direct billing in connection with our automobile and homeowner programs. Direct
      billing is an agreement in which 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 at policy inception, 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 a credit facility, but
      remain able to charge and collect interest from the policyholder.





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





As
      of
      September 30, 2008, we did not have any relationships with unconsolidated
      entities or financial partnerships, such as entities often referred to as
“structured finance” or “special purpose” entities, which were established for
      the purpose of facilitating off-balance-sheet arrangements or other
      contractually narrow or limited purposes. As such, management believes that
      we
      currently are not exposed to any financing, liquidity, market or credit risks
      that could arise if we had engaged in transactions of that type requiring
      disclosure herein.





**Impact
      of Inflation and Changing Prices**





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




41




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


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





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




42


21stCentury
      Holding Company




**Item
      3**





**Quantitative
      and Qualitative Disclosures about Market Risk**





Information
      related to quantitative and qualitative disclosures about market risk was
      included under Item 7A, “Quantitative and Qualitative Disclosures about Market
      Risk”, in our Annual Report on Form 10-K for the year ended December 31, 2007.
      No material changes have occurred in market risk since this information was
      disclosed except as discussed below.





Our
      investment portfolio is available for sale and carried at fair value, except
      for
      that portion deemed as held to maturity. Gains that represent securities with
      a
      fair value in excess of amortized cost, and losses (amortized cost is in excess
      of fair value) that are deemed temporary by management are recorded in
      shareholders’ equity in accumulated other comprehensive income. Losses deemed
      other than temporary by management are recorded as net realized losses in the
      consolidated statement of operations. A summary of the investment portfolio
      as
      of September 30, 2008 follows:





Book Value
            
            Fair / Amortized Value
            
            Unrealized
              Gain (Loss)Fixed
                maturities:U.S.
                government obligations and agencies available for sale
            
            $
            5,786,412
            
            
            6.37
            %
            $
            5,806,896
            
            
            6.60
            %
            $
            20,484U.S.
                government obligations and agencies held to maturity
            
            
            8,605,696
            
            
            9.47
            %
            
            8,605,696
            
            
            9.78
            %
            
            -Obligations
                of states and political subdivisions available for sale
            
            
            16,064,747
            
            
            17.68
            %
            
            15,979,001
            
            
            18.14
            %
            
            (85,746
            )30,456,855
            
            
            33.52
            %
            
            30,391,593
            
            
            34.52
            %
            
            (65,262
            )Corporate
                securities:Communications
                available for sale
            
            
            741,282
            
            
            0.82
            %
            
            591,060
            
            
            0.67
            %
            
            (150,222
            )Financial
                available for sale
            
            
            2,637,637
            
            
            2.90
            %
            
            2,578,839
            
            
            2.93
            %
            
            (58,798
            )Other
                available for sale
            
            
            43,570,362
            
            
            47.95
            %
            
            42,283,485
            
            
            48.03
            %
            
            (1,286,877
            )Other
                held to maturity
            
            
            5,941,665
            
            
            6.55
            %
            
            5,941,664
            
            
            6.75
            %
            
            (1
            )52,890,946
            
            
            58.22
            %
            
            51,395,048
            
            
            58.38
            %
            
            (1,495,898
            )Equity
                securities:Common
                stocks available for sale
            
            
            7,517,367
            
            
            8.26
            %
            
            6,240,431
            
            
            7.10
            %
            
            (1,276,936
            )Total
                fixed, corporate and equity securities
            
            $
            90,865,168
            
            
            100.00
            %
            $
            88,027,072
            
            
            100.00
            %
            $
            (2,838,096
            )





For
      our
      held to maturity portfolio as of September 30, 2008, the unrealized gain totaled
      approximately $118,000 and was almost entirely in connection with our U.S.
      government obligations and agencies.





As
      of
      September 30, 2008, there were no concentrations greater than 5% of total
      investments in any single investment other than United States government and
      agency obligations and obligations of states and political
      subdivisions.





**Item
      4**





**Controls
      and Procedures**




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





Our
      management, with the participation of its Chief Executive Officer and Chief
      Financial Officer, has evaluated the effectiveness of our disclosure controls
      and procedures as defined in Rules 13a-15(e) under the Securities Exchange
      Act
      of 1934, as of September 30, 2008.  Based upon their evaluation, the Chief
      Executive Officer and Chief Financial Officer concluded that the Company’s
      disclosure controls and procedures, as of September 30, 2008, were effective
      to
      provide reasonable assurance that information required to be disclosed by the
      Company in the reports filed or submitted by it under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms, and to provide reasonable assurance that
      information required to be disclosed by the Company in such reports is
      accumulated and communicated to our management, including its Chief Executive
      Officer and Chief Financial Officer, as appropriate to allow timely decisions
      regarding required disclosure. Except for our ongoing efforts, there were no
      changes during the quarter that have materially affected, or are reasonably
      likely to materially affect, our internal controls over financial
      reporting.





43




21stCentury
      Holding Company


**Part
      II: OTHER INFORMATION**





**Item
      1**





**Legal
      Proceedings**





See
      Item
      1 of Part I, “Financial Statements – Note 3 – Commitments and
      Contingencies.”





**Item
      1A**





**Risk
      Factors**





Except
      as
      disclosed below, there have been no material changes from the risk factors
      previously disclosed in Item 1, Risk Factors, in the Company’s Form 10-K for the
      fiscal year ended December 31, 2007.





**We
      have filed for a petition for hearing in connection with a notice from the
      OIR
      stating that on a preliminary basis excessive profits of $1.8 million have
      been
      realized for private passenger automobile business during prior periods. We
      face
      the possible risk of having to restate our audited financial statements for
      fiscal years 2005, 2006 and 2007 if we are unsuccessful in our petition for
      hearing.**





On
      April
      22, 2008, Federated received a notice from the OIR stating that on a preliminary
      basis excessive profits of $1.8 million have been realized for private passenger
      automobile business for the statutory review period covering calendar / accident
      years 2004, 2005 and 2006, valued at March 31, 2007 pursuant to Section 627.066
      of the Florida Statutes. We are disputing the preliminary findings and have
      filed for a petition for hearing in connection with this matter. Specifically,
      Section 627.066 of the Florida Statutes calls for the consolidation of the
      individual insurers of the group. Federated and its affiliate American Vehicle
      form an insurer group. Both Federated and American Vehicle incorrectly filed
      unconsolidated reports last year. The examination of a consolidated filing
      of
      the same data for the same periods clearly demonstrates that the group did
      not
      realize excess profit during the period in question and accordingly we have
      requested that the agency rescind and/or vacate its notice.





If
      we are
      unsuccessful in our petition for hearing, we face the possible risk of having
      to
      restate our audited financial statements for fiscal years 2005, 2006 and 2007
      and filing amended Annual Reports on Form 10-K and Quarterly Reports on Form
      10-Q for these periods.





**We
      are named as a Defendant in a securities class action lawsuit and a derivative
      lawsuit and it may have an adverse impact on our business.**





We
      are
      named as a Defendant in a securities class action lawsuit and a shareholder’s
      derivative lawsuit. For more information about the status of these lawsuits,
      see
“Part II, Item 1. Legal Proceedings.” An unfavorable resolution of this pending
      litigation could have a material adverse effect on our financial condition. Litigation
      may result in substantial costs and expenses and significantly divert the
      attention of the Company's management regardless of the outcome. There can
      be no
      assurance that the Company will be able to achieve a favorable settlement of
      pending litigation or obtain a favorable resolution of litigation if it is
      not
      settled. In addition, current litigation could lead to increased costs or
      interruptions of normal business operations of the Company.





**We
      face a risk of non-collectibility of reinsurance, which could materially and
      adversely affect our business, results of operations and/or financial
      condition** .





As
      is
      common practice within the insurance industry, we transfer a portion of the
      risks insured under our policies to other companies through the purchase of
      reinsurance. This reinsurance is maintained to protect our insurance subsidiary
      against the severity of losses on individual claims, unusually serious
      occurrences in which a number of claims produce an aggregate extraordinary
      loss
      and catastrophic events. Although reinsurance does not discharge our insurance
      subsidiary from its primary obligation to pay for losses insured under the
      policies it issues, reinsurance does make the assuming reinsurer liable to
      the
      insurance subsidiary for the reinsured portion of the risk. A credit exposure
      exists with respect to ceded losses to the extent that any reinsurer is unable
      or unwilling to meet the obligations assumed under the reinsurance contracts.
      The collectibility of reinsurance is subject to the solvency of the reinsurers,
      interpretation of contract language and other factors. A reinsurer's insolvency
      or inability to make payments under the terms of a reinsurance contract could
      have a material adverse effect on our results of operations and financial
      condition.




44


21stCentury
        Holding Company


We
      also
      obtain a significant portion of our reinsurance through the FHCF program. For
      the 2008-2009 hurricane season, coverage afforded by FHCF totals approximately
      $167.0 million, or 56% of the $310.0 million of aggregate catastrophic losses
      and LAE. For the 2007-2008 hurricane season, coverage afforded by the FHCF
      totaled approximately $261.0 million or 65% of the $403.0 of aggregate
      catastrophic losses and LAE.





Therefore,
      in the event of a catastrophic loss, we may become dependent upon the FHCF's
      ability to pay, which may, in turn, be dependent upon the FHCF's ability to
      issue bonds in amounts that would be required to meet its reinsurance
      obligations in the event of such a catastrophic loss. There is no assurance
      that
      the FHCF will be able to do this. The Florida Senate Banking and Insurance
      Committee recently published an insurance-related Interim Report entitled *Status
      of the Florida Hurricane Catastrophe Fund* .
      Notable
      findings in the report include:





·
            The
                total liability of the FHCF could be up to $28.0 billion for a single
                season storm


·
            The
                FHCF has approximately $10.3 billion in liquidity, which includes
                the $4.0
                billion “put” option. The “putt” option is the guarantee arrangement with
                Berkshire Hathaway approved by the State Board of Administration
                this
                summer


·
            The
                FHCF has “potential obligations that it can not pay of approximately $14.5
                billion in the event of a major
                storm”





Additionally,
      the FHCF treaty contains an exclusion that specifically states “Losses in excess
      of the sum of the Balance of the Fund as of December 31 of the Contract Year
      and
      the amount the SBA is able to raise through the issuance of revenue bonds or
      by
      the use of other financing mechanisms, up to the limit pursuant to Section
      215.555(4)(c), Florida Statutes.”





**Additional
      Risk Factors**





The
      risks
      described in this Quarterly Report on Form 10-Q and in our Annual Report on
      Form
      10-K for the fiscal year ended December 31, 2007 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.





**Item
      2**





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





During
      the three months ended September 30, 2008, we have issued an aggregate of 54,500
      options to certain executive and non-executive employees of the Company under
      our 2002 and 1998 stock option plans. The options have an exercise price between
      $8.32 and $8.67 per share, vest over five years at 20% per year and expire
      six
      years from the grant date.





**(b)
      None**





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




On
      May
      14, 2007, the Company’s Board of Directors authorized the repurchase of up to
      $5.0 million of its common stock (the “Plan”).
      During the
      three months ended September 30, 2008, the Company did not repurchase any shares
      of it common stock under the Plan.




During
      the period between May 14, 2007 and March 31, 2008, the Company has repurchased
      an aggregate of $3.9 million of its common stock under the Plan. In November
      2008, the Company terminated the Plan.





45


21stCentury
        Holding Company


**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
      Trust Agreement dated as of July 1, 2008 among Federated National Insurance
      Company, Actua re Limited and Wells Fargo Bank, National
      Association*





10.2
      Interests and Liabilities Agreement of Actua Re Ltd with respect to Excess
      Catastrophe Reinsurance Contract, effective as of July 1, 2008 issued to
      Federated national Insurance Company*




10.3
      Reinstatement Premium Protection Reinsurance Contract, effective as of July
      1,
      2008 with Actua Re Ltd*




10.4
      Reinstatement Premium Protection Reinsurance Contract, effective as of July
      1,
      2008, issued to Federated National Insurance Company*





10.5
      Excess Catastrophe Reinsurance Contract, effective July 1, 2008 issued to
      Federated National Insurance Company*





10.6
      Reinstatement Premium Protection Additional Layer Reinsurance Contract,
      effective August 29, 2008 issued to Federated National Insurance Company
      *





10.7
      Additional Layer Excess Catastrophe Reinsurance Contract, effective August
      29,
      2008 issued to Federated National Insurance Company*





10.8
      Amended and Restated Employment Agreement dated
      July 01, 2008 between 21 st Century
      Holding Company and Peter Prygelski*





10.9
      Agreement dated as of July 2, 2008 between 21st Century Holding Company and
      Michele Lawson.*





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





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





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





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




*Filed
      herewith




46




21stCentury
      Holding Company


**Signatures**





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


**21****st****CENTURY HOLDING COMPANY**By:
              */s/
                  Michael H. Braun*Michael
                  H. Braun, Chief Executive Officer*/s/
                  Peter J. Prygelski, III*Peter
                  J. Prygelski, III, Chief Financial
                  Officer





Date:
      November 10, 2008





47


21stCentury
        Holding Company


**EXHIBIT
      INDEX**





10.1
      Trust Agreement dated as of July 1, 2008 among Federated National Insurance
      Company, Actua re Limited and Wells Fargo Bank, National
      Association





10.2
      Interests and Liabilities Agreement of Actua Re Ltd with respect to Excess
      Catastrophe Reinsurance Contract, effective as of July 1, 2008 issued to
      Federated national Insurance Company




10.3
      Reinstatement Premium Protection Reinsurance
      Contract, effective as of July 1, 2008 with Actua Re Ltd




10.4
      Reinstatement Premium Protection Reinsurance Contract, effective as of July
      1,
      2008, issued to Federated National Insurance Company





10.5
      Excess Catastrophe Reinsurance Contract, effective July 1, 2008 issued to
      Federated National Insurance Company





10.6
      Reinstatement Premium Protection Additional Layer Reinsurance Contract,
      effective August 29, 2008 issued to Federated National Insurance Company





10.7
      Additional Layer Excess Catastrophe Reinsurance Contract, effective August
      29,
      2008 issued to Federated National Insurance Company





10.8
      Amended and Restated Employment Agreement dated July 01, 2008 between
      21 st Century
      Holding Company and Peter Prygelski





10.9
      Agreement dated as of July 2, 2008 between 21st Century Holding Company and
      Michele Lawson.





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





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





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





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





48