**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




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


**EXCHANGE
      ACT OF 1934**





**FOR
      THE QUARTERLY PERIOD ENDED September 30, 2007**




**OR**





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


**EXCHANGE
      ACT OF 1934**





**FOR
      THE TRANSITION PERIOD FROM ___________________TO
      _______________________**




Commission
      File number 0-2500111




21 st Century
      Holding Company


(Exact
      name of registrant as specified in its charter)





Florida
            
            65-0248866(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            
            (IRS
                Employer
              Identification
                Number)








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


(Address
      of principal executive offices) (Zip Code)





954-581-9993


(Registrant's
      telephone number, including area code)




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





Yes
xNo
o




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





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





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





Yes
oNo
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
      - 8,185,315 outstanding as of November 08, 2007










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





**INDEX**





PAGE**PART
                I: FINANCIAL
                INFORMATION****ITEM
                1**
            Financial
                Statements and Supplementary Data
            3**ITEM
                2**
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            22**ITEM
                3**
            Quantitative
                and Qualitative Disclosures about Market Risk
            42******ITEM
                4**
            Controls
                and Procedures
            42**PART
                II: OTHER INFORMATION****ITEM
                1**
            Legal
                Proceedings
            44**ITEM
                1A**
            Risk
                Factors
            44**ITEM
                2**
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            45**ITEM
                3**
            Defaults
                upon Senior Securities
            45**ITEM
                4**
            Submission
                of Matters to a Vote of Security Holders
            45**ITEM
                5**
            Other
                Information
            46**ITEM
                6**
            Exhibits
            46**SIGNATURES**
            48


-
          2
          -


**PART
      I: FINANCIAL INFORMATION**


**Item
      1**




21 st CENTURY
      HOLDING COMPANY


CONSOLIDATED
      BALANCE SHEETS





Period
                EndingSeptember 30, 2007
            
            December 31, 2006(Dollars
                in Thousands)ASSETSInvestmentsFixed
                maturities, available for sale, at fair value
            
            $
            119,084
            
            $
            98,525Fixed
                maturities, held to maturity, at amoritized cost
            
            
            20,366
            
            
            19,667Equity
                securities, available for sale, at fair value
            
            
            8,409
            
            
            6,641Total
                investments
            
            
            147,859
            
            
            124,834Cash
                and short term investments
            
            
            14,151
            
            
            17,917Receivable
                for investments sold
            
            
            496
            
            
            -Finance
                contracts, net of allowance for credit losses of $60 in 2007 and
                $116 in
                2006, and net of unearned finance charges of $32 in 2007 and $90
                in
                2006
            
            
            830
            
            
            1,831Prepaid
                reinsurance premiums
            
            
            14,916
            
            
            14,460Premiums
                receivable, net of allowance for credit losses of $386 and $66,
                respectively
            
            
            3,141
            
            
            7,222Reinsurance
                recoverable, net
            
            
            16,798
            
            
            20,230Deferred
                policy acquisition costs
            
            
            10,467
            
            
            11,153Deferred
                income taxes, net
            
            
            4,813
            
            
            3,610Income
                taxes receivable
            
            
            1,200
            
            
            787Property,
                plant and equipment, net
            
            
            1,111
            
            
            1,296Other
                assets
            
            
            2,570
            
            
            4,556Total
                assets
            
            $
            218,351
            
            $
            207,897LIABILITIES
                AND SHAREHOLDERS' EQUITYUnpaid
                losses and LAE
            
            $
            50,320
            
            $
            39,615Unearned
                premiums
            
            
            68,136
            
            
            77,829Premiums
                deposits and customer credit balances
            
            
            2,049
            
            
            3,793Revolving
                credit outstanding
            
            
            10
            
            
            10Bank
                overdraft
            
            
            9,881
            
            
            8,107Subordinated
                debt
            
            
            -
            
            
            4,167Deferred
                gain from sale of property
            
            
            2,115
            
            
            2,467Accounts
                payable and accrued expenses
            
            
            6,688
            
            
            5,715Total
                liabilities
            
            
            139,198
            
            
            141,704Commitments
                and ContingenciesShareholders'
                equity:Common
                stock, $0.01 par value. Authorized 25,000,000 shares; issued and
                outstanding 7,999,311 and 7,896,919, respectively
            
            
            80
            
            
            79Additional
                paid-in capital
            
            
            51,004
            
            
            47,070Accumulated
                other comprehensive income (deficit)
            
            
            (817
            )
            
            (967
            )Retained
                earnings
            
            
            28,885
            
            
            20,011Total
                shareholders' equity
            
            
            79,152
            
            
            66,193Total
                liabilities and shareholders' equity
            
            $
            218,351
            
            $
            207,897





**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 30,2007
            
            2006
            
            2007
            
            2006(Dollars in Thousands except
              EPS and dividend data)
            
            (Dollars in Thousands except
              EPS and dividend data)Revenue:Gross
                premiums written
            
            $
            16,064
            
            $
            24,670
            
            $
            109,716
            
            $
            111,031Gross
                premiums ceded
            
            
            (30,736
            )
            
            (57,378
            )
            
            (46,545
            )
            
            (60,750
            )Net
                premiums written
            
            
            (14,673
            )
            
            (32,709
            )
            
            63,171
            
            
            50,281Increase
                in prepaid reinsurance premiums
            
            
            19,322
            
            
            42,060
            
            
            1,504
            
            
            32,795Decrease
                (Increase) in unearned premiums
            
            
            22,532
            
            
            12,356
            
            
            9,693
            
            
            (10,821
            )Net
                change in prepaid reinsurance premiums and unearned
                premiums
            
            
            41,854
            
            
            54,416
            
            
            11,197
            
            
            21,974Net
                premiums earned
            
            
            27,181
            
            
            21,707
            
            
            74,368
            
            
            72,255Commission
                income
            
            
            431
            
            
            460
            
            
            6,922
            
            
            618Finance
                revenue
            
            
            116
            
            
            335
            
            
            463
            
            
            1,467Managing
                general agent fees
            
            
            178
            
            
            602
            
            
            1,600
            
            
            1,983Net
                investment income
            
            
            2,329
            
            
            1,573
            
            
            6,029
            
            
            4,381Net
                realized investment gains (losses)
            
            
            (1,441
            )
            
            263
            
            
            (1,489
            )
            
            743Other
                income
            
            
            778
            
            
            (170
            )
            
            1,757
            
            
            780Total
                revenue
            
            
            29,571
            
            
            24,770
            
            
            89,649
            
            
            82,227Expenses:Loss
                and LAE
            
            
            14,850
            
            
            10,271
            
            
            38,610
            
            
            27,183Operating
                and underwriting expenses
            
            
            3,884
            
            
            3,780
            
            
            10,949
            
            
            8,392Salaries
                and wages
            
            
            1,775
            
            
            1,699
            
            
            5,065
            
            
            5,309Interest
                expense
            
            
            28
            
            
            135
            
            
            173
            
            
            545Policy
                acquisition costs, net of amortization
            
            
            5,379
            
            
            4,999
            
            
            14,896
            
            
            13,044Total
                expenses
            
            
            25,916
            
            
            20,884
            
            
            69,693
            
            
            54,474Income
                before provision for income tax expense
            
            
            3,656
            
            
            3,887
            
            
            19,956
            
            
            27,753Provision
                for income tax expense
            
            
            1,787
            
            
            857
            
            
            6,766
            
            
            9,806Net
                income
            
            $
            1,869
            
            $
            3,029
            
            $
            13,190
            
            $
            17,947Basic
                net income per share
            
            $
            0.24
            
            $
            0.40
            
            $
            1.66
            
            $
            2.41Fully
                diluted net income per share
            
            $
            0.24
            
            $
            0.40
            
            $
            1.64
            
            $
            2.27Weighted
                average number of common shares outstanding
            
            
            7,891,650
            
            
            7,560,872
            
            
            7,927,366
            
            
            7,433,953Weighted
                average number of common shares outstanding (assuming
                dilution)
            
            
            7,948,385
            
            
            7,562,563
            
            
            8,050,983
            
            
            7,912,077Dividends
                paid per share
            
            $
            0.18
            
            $
            0.12
            
            $
            0.54
            
            $
            0.36





**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




-
          4
          -




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine Months Ended September 30,2007
            
            2006(Dollars
                in Thousands)Cash
                flow from operating activities:Net
                income
            
            $
            13,190
            
            $
            17,947Adjustments
                to reconcile net income to net cash provided by operating
                activities:Amortization
                of investment discount, net
            
            
            (272
            )
            
            (221
            )Depreciation
                and amortization of property plant and equipment, net
            
            
            232
            
            
            251Net
                realized investment (gains) losses
            
            
            (352
            )
            
            743Gain
                on sale of assets
            
            
            -
            
            
            (463
            )Common
                Stock issued for interest on Notes
            
            
            109
            
            
            128(Recovery)
                provision for credit losses, net
            
            
            (48
            )
            
            119Provision
                (recovery)for uncollectible premiums receivable
            
            
            320
            
            
            (54
            )Non-cash
                compensation
            
            
            309
            
            
            395Changes
                in operating assets and liabilities:Premiums
                receivable
            
            
            3,762
            
            
            3,320Prepaid
                reinsurance premiums
            
            
            (456
            )
            
            (39,395
            )Reinsurance
                recoverable, net
            
            
            3,432
            
            
            155,684Income
                taxes recoverable
            
            
            (413
            )
            
            -Deferred
                income tax expense
            
            
            (1,203
            )
            
            (2,031
            )Deferred
                gain on sale of assets
            
            
            -
            
            
            (2,482
            )Policy
                acquisition costs, net of amortization
            
            
            686
            
            
            (1,605
            )Premium
                finance contracts receivable
            
            
            1,049
            
            
            4,943Other
                assets
            
            
            1,635
            
            
            4,260Unpaid
                losses and LAE
            
            
            10,704
            
            
            (122,811
            )Unearned
                premiums
            
            
            (9,693
            )
            
            10,821Premium
                deposits and customer credit balances
            
            
            (1,744
            )
            
            570Funds
                held under reinsurance treaties
            
            
            -
            
            
            3Income
                taxes payable
            
            
            -
            
            
            7,892Bank
                overdraft
            
            
            1,773
            
            
            (11,949
            )Accounts
                payable and accrued expenses
            
            
            973
            
            
            (1,792
            )Net
                cash provided by operating activities
            
            
            23,995
            
            
            24,272Cash
                flow used in investing activities:Proceeds
                from sale of investment securities available for sale
            
            
            159,573
            
            
            230,940Purchases
                of investment securities available for sale
            
            
            (181,182
            )
            
            (259,823
            )Purchases
                of property and equipment
            
            
            (47
            )
            
            (381
            )Proceeds
                from sale of assets
            
            
            -
            
            
            5,607Net
                cash used in investing activities
            
            
            (21,657
            )
            
            (23,657
            )Cash
                flow (used in) provided by financing activities:Subordinated
                debt
            
            
            (2,083
            )
            
            (3,333
            )Exercised
                stock options
            
            
            103
            
            
            1,637Dividends
                paid
            
            
            (4,316
            )
            
            (2,906
            )Exercised
                warrants, net
            
            
            2,035
            
            
            7,969Acquisition
                of Common Stock
            
            
            (2,000
            )
            
            (2,001
            )Tax
                benefit related to non-cash compensation
            
            
            159
            
            
            -Revolving
                credit outstanding
            
            
            0
            
            
            (187
            )Net
                cash (used in) provided by financing activities
            
            
            (6,104
            )
            
            1,179Net
                (decrease) increase in cash and short term investments
            
            
            (3,766
            )
            
            1,795Cash
                and short term investments at beginning of period
            
            
            17,917
            
            
            6,071Cash
                and short term investments at end of period
            
            $
            14,151
            
            $
            7,866





**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


-
          5
          -


21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)





(continued)
            
            2007
            
            2006Supplemental
                disclosure of cash flow information:Cash
                paid during the period for:Interest
            
            $
            44
            
            $
            160Income
                taxes
            
            $
            7,300
            
            $
            4,650Non-cash
                investing and finance activities:Accrued
                dividends payable
            
            $
            1,473
            
            $
            972Retirement
                of subordinated debt by common stock issuance
            
            $
            2,083
            
            $
            1,667Stock
                issued to pay interest on subordinated debt
            
            $
            109
            
            $
            128




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


-
          6
          -
 **21st
          Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


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





The
      accompanying unaudited consolidated financial statements of 21 st Century
      Holding Company have been prepared in accordance with generally accepted
      accounting principles (“GAAP”) for interim financial information and with the
      instructions for Form 10-Q and Rule 10-01 of Regulation S-X. These financial
      statements do not include all information and notes required by GAAP for
      complete financial statements, and should be read in conjunction with the
      audited consolidated financial statements and notes thereto included in the
      Company's annual report on Form 10-K for the year ended December 31, 2006.
      The
      December 31, 2006 year-end balance sheet data was derived from audited financial
      statements but does not include all disclosures required by GAAP. The financial
      information furnished reflects all adjustments, consisting only of normal
      recurring accruals, which are, in the opinion of management, necessary for
      a
      fair presentation of the financial position, results of operations and cash
      flows for the periods presented. The results of operations are not necessarily
      indicative of the results of operations that may be achieved in the
      future. ****





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





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





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.
      During the nine months ended September 30, 2006, 72.8%, 22.3% and 4.9% of the
      premiums we underwrote were for homeowners’ property and casualty insurance,
      commercial general liability insurance and personal automobile insurance,
      respectively. We internally process claims made by our own and third-party
      insureds through our wholly owned claims adjusting company, Superior Adjusting,
      Inc. (“Superior”). We also offer premium financing to our own and third-party
      insureds through our wholly owned subsidiary, Federated Premium Finance, Inc.
      (“Federated Premium”).





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





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


-
          7
          -
 **21st
          Century Holding Company**
 **Notes
          to Consolidated Financial Statements**





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





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





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





The
      most
      significant accounting estimates inherent in the preparation of our financial
      statements include estimates associated with management’s evaluation of the
      determination of liability for unpaid loss and loss adjustment expenses (“LAE”)
      and the amount and recoverability of amortization of deferred policy acquisition
      costs. In addition, significant estimates form the basis for our reserves with
      respect to finance contracts, premiums receivable and deferred income taxes.
      Various assumptions and other factors underlie the determination of these
      significant estimates, which are described in greater detail in Footnote 2
      of
      the Company’s audited financial statements for the fiscal year ended December
      31, 2006 filed with the Securities and Exchange Commission (“SEC”) on March 16,
      2007.





The
      process of determining significant estimates is fact-specific and takes into
      account factors such as historical experience, current and expected economic
      conditions, and in the case of unpaid loss and LAE, an actuarial valuation.
      Management regularly reevaluates these significant factors and makes adjustments
      where facts and circumstances dictate. In selecting the best estimate, we
      utilize various actuarial methodologies. Each of these methodologies is designed
      to forecast the number of claims we will be called upon to pay and the amounts
      we will pay on average to settle those claims. In arriving at our best estimate,
      our actuaries consider the likely predictive value of the various loss
      development methodologies employed in light of underwriting practices, premium
      rate changes and claim settlement practices that may have occurred, and weight
      the credibility of each methodology. Our actuarial methodologies take into
      account various factors, including, but not limited to, paid losses, liability
      estimates for reported losses, paid allocated LAE, salvage and other recoveries
      received, reported claim counts, open claim counts and counts for claims closed
      with and without payment of loss.





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





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


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





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





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





In
      June
      2006, FASB issued FIN 48, *Accounting
      for Uncertainty in Income Taxes* 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 evaluated and concluded that the impact of FIN 48 will be
      minimal and includes a policy of classifying interest and penalties related
      to
      income tax as elements of income tax expense in the consolidated financial
      statements. As required by FIN 48, this change was done prospectively.
      Previously, penalties and interest were classified as operating and underwriting
      expenses.





In
      December 2004, FASB revised SFAS No. 123, *Share-Based
      Payments* (“SFAS
      No. 123R”). This statement eliminates the option to apply the intrinsic value
      measurement provisions of the Accounting Principles Board (“APB”) No. 25 to
      stock compensation awards issued to employees. Rather, SFAS No. 123R requires
      companies to measure the cost of employee services received in exchange for
      an
      award of equity instruments based on the grant date fair value of the award.
      That cost will be recognized over the requisite service period (usually the
      vesting period) during which an employee is required to provide services in
      exchange for the award. SFAS No. 123R also requires companies to measure the
      cost of employee services received in exchange for employee stock purchase
      plan
      awards. SFAS No. 123R was effective for 21 st Century’s fiscal year beginning January 1, 2006 as subsequently extended by the
      SEC pursuant to its April 13, 2005 announcement.





In
      connection with the implementation of SFAS No. 123R, we have determined that
      the
      pretax charge to earnings for the year ending 2007 will total approximately
      $0.6
      million, of which approximately $0.5 million was charged to income from
      continuing operations before provision for income taxes for the nine months
      ended September 30, 2007. The effect on earnings per share for the nine months
      ended September 30, 2007 for both undiluted and fully diluted was less than
      $0.04 per share. For a more detailed discussion, please see Footnote 8, titled
      Stock Compensation Plans.





**(C)
      Stock Options**





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





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123R using the modified-prospective-transition method. Under that
      transition method, compensation cost recognized during the nine months ended
      September 30, 2007 includes compensation cost for all share-based payments
      granted subsequent to January 1, 2007, based on the grant date fair-value
      estimated in accordance with the provisions of SFAS No. 123R.





During
      the nine months ended September 30, 2007, we have granted 30,000 qualified
      stock
      options to employees and 10,000 non-qualified stock options to a director and
      20,000 to the Chief Financial Officer with an average option price of
      $12.28 per
      share. Like all other outstanding stock options, these stock options contain
      service conditions and do not contain any performance conditions. For a further
      discussion regarding the provisions of SFAS No. 123R and its effect on our
      operations, please refer to footnote 8, Stock Compensation Plans.


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





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





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





**(E)
      Reclassifications**





Certain
      amounts in 2006 financial statements have been reclassified to conform to the
      2007 presentation.





**(3)
      Revolving Credit Outstanding**





Federated
      Premium’s operations are funded by a revolving loan agreement (“Revolving
      Agreement”) with FlatIron Funding Company LLC (“FlatIron”). The Revolving
      Agreement is structured as a sale of contracts receivable under a sale and
      assignment agreement with Westchester Premium Acceptance Corporation (“WPAC”) (a
      wholly-owned subsidiary of FlatIron), which gives WPAC the right to sell or
      assign these contracts receivable. Federated Premium, which services these
      contracts, has recorded transactions under the Revolving Agreement as secured
      borrowings. Outstanding borrowings under the Revolving Agreement as of September
      30, 2007 and December 31, 2006 were unchanged at approximately $10,000. This
      credit facility was scheduled to terminate, at our request, on September 30,
      2007 and we are currently in the process of settling all aspects of this
      relationship.





The
      effective interest rate on this line of credit, based on our average outstanding
      borrowings under the Revolving Agreement, was 19.88% and 9.78% for the three
      months ended September 30, 2007 and 2006, respectively. Interest expense on
      this
      revolving credit line for the three months ended September 30, 2007 and 2006
      was
      unchanged at approximately $500. Interest expense on this revolving credit
      line
      for the nine months ended September 30, 2007 and 2006 totaled approximately
      $1,500 and $8,000, respectively.





**(4)
      Commitments and Contingencies**





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





We
      are
      involved in claims and legal actions arising in the ordinary course of business.
      Revisions to our estimates are based on our analysis of subsequent information
      that we receive regarding various factors, including: (i) per claim information;
      (ii) company and industry historical loss experience; (iii) legislative
      enactments, judicial decisions, legal developments in the awarding of damages,
      and (iv) trends in general economic conditions, including the effects of
      inflation. Management revises its estimates based on the results of its
      analysis. This process assumes that past experience, adjusted for the effects
      of
      current developments and anticipated trends, is an appropriate basis for
      estimating the ultimate settlement of all claims. There is no precise method
      for
      subsequently evaluating the impact of any specific factor on the adequacy of
      the
      reserves, because the eventual redundancy or deficiency is affected by multiple
      factors. In the opinion of management, the ultimate disposition of these matters
      will not have a material adverse effect on our consolidated financial position,
      results of operations, or liquidity.





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


-
          10
          -
 **21st
          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 (2%) percent 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. FIGA’s certification was approved by Florida’s Insurance
      Commissioner on October 29, 2007. We have estimated that our participation
      with
      this assessment will total approximately $2.8 million and is payable 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 nine months ended September 30,
      2007, we collected approximately $1.3 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.





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. Provisions contained in our excess of loss
      reinsurance policies provide for reinsurance participation totaling $1.5
      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. Through policyholder surcharges, as
      approved by the OIR, during the nine months ended September 30, 2007, we
      collected approximately $0.4 million in connection with the Citizens
      assessments.





The
      OIR
      issued Information Memorandum OIR-06-008M, titled *Notice
      of Anticipated Florida Hurricane Catastrophe Fund Assessment,* dated
      May
      4, 2006, to all property and casualty, surplus lines insurers, and surplus
      lines
      agents in the state of Florida placing them on notice of an anticipated FHCF
      assessment. Sighting the unprecedented hurricane seasons of 2004 and 2005,
      the
      FHCF 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 and therefore accounted for in
      a
      manner such that amounts collected or receivable are not recorded as revenues
      and amounts due or paid are not expensed.





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


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





Both
      Federated National and American Vehicle participate in an insurance
      apportionment plan under Section 627.351, Florida Statutes, which is referred
      to
      as a Joint Underwriting Plan (“JUA Plan”). The JUA Plan provides for the
      equitable apportionment of any profits realized, or losses and expenses
      incurred, among participating motor vehicle insurers. In the event of an
      underwriting deficit incurred by the JUA Plan, which is not recovered through
      the policyholders in the JUA Plan, such deficit shall be recovered from the
      companies participating in the JUA Plan in the proportion that the net direct
      written premiums of each such member during the preceding calendar year bear
      to
      the aggregate net direct premiums written in this state by all members of the
      JUA Plan. During the nine months ended September 30, 2007, Federated National
      and American Vehicle were not assessed by the JUA Plan based on their respective
      Cash Activity Reports. These assessments would be charged to operations as
      paid.
      Future assessments by this association are undeterminable at this
      time.





The
      2004,
      2003 and 2002 consolidated Federal Income Tax Returns filed by the Company
      have
      been examined by the Internal Revenue Service (“IRS”) during 2006 and 2005. We
      have concurred with certain IRS conclusions and have appealed other conclusions.
      Irrespective of the ongoing appellate process, we do not believe that a material
      adjustment will occur. Income taxes receivable are net of $160,000 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 payments2007
            
            $
            150,7222008
            
            
            612,9342009
            
            
            625,1932010
            
            
            637,6972011
            
            
            650,451Total
            
            $
            2,676,997





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 on behalf of all persons
      and
      entities who purchased the Company's securities during the various class periods
      specified in the complaints. While the specific factual allegations vary
      slightly in each case, the complaints allege that the defendants made false
      and
      misleading statements and failed to accurately project the Company's business
      and financial performance during the putative class period. The complaints
      seek
      an unspecified amount of damages and claim violations of Sections 10(b) and
      20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The Company expects
      that these two actions will be consolidated into one case in the United States
      District Court for the Southern District of Florida.





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


-
          12
          -
 **21st
          Century Holding Company**
 **Notes
          to Consolidated Financial Statements**





**(5)
      Comprehensive Income**





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





For the three months ended September 30,
            
            For the nine months ended September 30,2007
            
            2006
            
            2007
            
            2006Net
                income
            
            $
            1,868,802
            
            $
            3,029,285
            
            $
            13,190,036
            
            $
            17,947,156Change
                in net unrealized gains on investments available for sale
            
            
            1,444,212
            
            
            1,312,936
            
            
            241,086
            
            
            959,364Comprehensive
                income, before tax
            
            
            3,313,014
            
            
            4,342,221
            
            
            13,431,122
            
            
            18,906,520Income
                tax benefit (expense) related to items of other comprehensive
                income
            
            
            (620,872
            )
            
            (494,058
            )
            
            (90,721
            )
            
            (361,009
            )Comprehensive
                income
            
            $
            2,692,142
            
            $
            3,848,163
            
            $
            13,340,401
            
            $
            18,545,511





**(6)
      Segment Information**





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





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





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


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


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





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





Accordingly,
      we have discontinued our segment disclosures for the finance segment, as it
      did
      not exceed the 10% threshold for revenues, earnings or assets.





**(7)
      Reinsurance Agreements**





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


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


For
      the
      2007-2008 hurricane season, the excess of loss and FHCF treaties will insure
      us
      for approximately $403.0 million of aggregate loss and LAE with a maximum single
      event coverage totaling approximately $320.0 million, with the Company retaining
      the first $3.0 million of loss and LAE. Additionally, we purchased,
      Reinstatement Premium Protection from the private sector, which would reimburse
      the Company 100% of the cost of reinstatement premium for a second event. The
      FHCF affords coverage for the entire season, subject to maximum payouts, without
      regard to any particular insurable event. The cost to the Company for these
      reinsurance products for the 2007-2008 hurricane season, including the prepaid
      automatic premium reinstatement protection will be approximately $46.5 million.
      The 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+Folksamerica
                Reinsurance Company
            
            A-GMAC
                Re/Motors Insurance Corporation
            
            A-Munich
                Reinsurance America, Inc.
            
            AOdyssey
                America Reinsurance Corporation
            
            AQBE
                Reinsurance Corporation
            
            A**BERMUDA**ACE
                Tempest Reinsurance Limited, Bermuda
            
            A+Amlin
                Bermuda Limited
            
            A-Ariel
                Reinsurance Company Limited, Bermuda
            
            A-DaVinci
                Reinsurance Ltd, Bermuda
            
            AFlagstone
                Reinsurance Limited
            
            A-Max
                Bermuda Limited
            
            A-New
                Castle Reinsurance Company Limited
            
            A-Renaissance
                Reinsurance Ltd, Bermuda
            
            A**UNITED
                KINGDOM**Amlin
                Syndicate No. 2001 (AML)
            
            AAscot
                Underwriting Syndicate No. 1414 (RTH)
            
            AG.S.
                Christensen and Others Syndicate No. 958 (GSC)
            
            AMAP
                Underwriting Syndicate No. 2791 (MAP)
            
            ATalbot
                Underwriting Syndicate No. 1183 (TAL)
            
            A**EUROPE**Converium
                Limited, Switzerland
            
            B++





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


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




First Event Participation
            
            Reinstated Premium ProtectionAM Best
              Rating
            
            Reinsurer
            
            $20m in
              excess of
              $15m
            
            $40m in
              excess of
              $35m
            
            $72m in excess
              of $75m and FHCF
              participation
            
            $20m in
              excess of
              $15m
            
            $40m in
              excess of
              $35mA+
            
            
            Ace
                Tempest Reinsurance Ltd
            
            
            
            
            
            7.5%
            
            
            7.5%A
            
            
            Amlin
                2001 Syndicate
            
            
            5.0%
            
            
            5.0%
            
            
            5.0%
            
            
            5.0%A-
            
            
            Amlin
                Bermuda Ltd
            
            
            2.5%
            
            
            4.0%
            
            
            4.0%
            
            
            2.5%A
            
            
            American
                Reinsurance Company
            
            
            
            
            
            
            
            
            3.5%A
            
            
            Ascot
                1414 Syndicate
            
            
            
            
            
            
            
            
            6.5%A++
            
            
            National
                Liability and Fire Company
            
            
            
            
            
            33.8%
            
            
            6.6%
            
            
            
            
            
            77.6%B++
            
            
            Converium
                AG
            
            
            
            
            
            5.0%A+
            
            
            Everest
                Reinsurance Company
            
            
            
            
            
            22.0%
            
            
            4.3%
            
            
            
            
            
            12.0%NR
            
            
            Wentworth
                Insurance Company Ltd
            
            
            5.0%
            
            
            
            
            
            .
            
            
            5.0%A-
            
            
            Flagstone
                Reinsurance Ltd
            
            
            
            
            
            4.3%
            
            
            4.0%A
            
            
            MAP
                2791 Syndicate
            
            
            2.5%
            
            
            2.5%
            
            
            2.5%
            
            
            2.5%A-
            
            
            New
                Castle Reinsurance Company Ltd
            
            
            2.0%
            
            
            2.0%
            
            
            2.0%
            
            
            2.0%A
            
            
            QBE
                Reinsurance Corporation
            
            
            
            
            
            1.5%
            
            
            1.0%A
            
            
            Renaissance
                Reinsurance, Ltd
            
            
            
            
            
            12.5%
            
            
            12.5%A+
            
            
            XL
                Re Limited
            
            
            
            
            
            
            
            
            2.5%A
            
            
            Odyssey
            
            
            
            
            
            
            
            
            3.5%A
            
            
            Catlin
                Insurance Company Ltd
            
            
            25.0%
            
            
            
            
            
            
            
            
            25.0%NR
            
            
            Allianz
                Risk Transfer (Bermuda) Ltd
            
            
            33.0%
            
            
            
            
            
            
            
            
            33.0%A
            
            
            Liberty
                Mutual Insurance Company
            
            
            
            
            
            
            
            
            34.7%NR4
            
            
            American
                Vehicle Insurance Company (Affiliated)
            
            
            25.0%
            
            
            
            
            
            
            
            
            25.0%





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





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





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





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


-
          15
          -
 **21st
          Century Holding Company**
 **Notes
          to Consolidated Financial Statements**


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





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





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





The
      estimated cost to the Company in connection with this reinsurance structure
      was
      approximately $73.0 million, which for the most part was payable in quarterly
      installments that began July 1, 2006 and were amortized through earned premium
      in accordance with the provisions and terms contained in the respective
      treaties.





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




2004
                Hurricanes
            
            Claim
              Count
            
            Gross
              Losses
            
            Reinsurance
              Recoveries
            
            Net
              Losses(Dollars
                in millions)Charley
                (August 13)
            
            
            2,572
            
            $
            65.3
            
            $
            55.3
            
            $
            10.0Frances
                (September 3)
            
            
            3,809
            
            
            54.2
            
            
            44.1
            
            
            10.1Ivan
                (September 14)
            
            
            1,062
            
            
            26.5
            
            
            -
            
            
            26.5Jeanne
                (September 25)
            
            
            1,563
            
            
            13.9
            
            
            -
            
            
            13.9Total
                Loss Estimate
            
            
            9,006
            
            $
            159.9
            
            $
            99.4
            
            $
            60.5





-
          16
          -
 **21st
          Century Holding Company**
 **Notes
          to Consolidated Financial Statements**





2005
                Hurricanes
            
            Claim
              Count
            
            GrossLosses
            
            Reinsurance
              Recoveries
            
            Net
              Losses(Dollars
                in millions)Dennis
                (July 10)
            
            
            322
            
            $
            2.8
            
            $
            -
            
            $
            2.8Katrina
                (August 25)
            
            
            2,115
            
            
            14.6
            
            
            11.6
            
            
            3.0Rita
                (September 20)
            
            
            19
            
            
            0.1
            
            
            -
            
            
            0.1Wilma
                (October 24)
            
            
            11,733
            
            
            174.5
            
            
            171.5
            
            
            3.0Total
                Loss Estimate
            
            
            14,189
            
            $
            192.0
            
            $
            183.1
            
            $
            8.9





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





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





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





**(8)
      Stock Compensation Plans**





We
      implemented a stock option plan in November 1998 that provides for the granting
      of stock options to officers, directors, employees and consultants. The
      objectives of this plan include attracting and retaining the best personnel,
      providing for additional performance incentives, and promoting our success
      by
      providing employees the opportunity to acquire common stock. Options outstanding
      under this plan have been granted at prices that are either equal to or above
      the market value of the stock on the date of grant, typically vest over a four
      or five-year period, and expire six or ten years after the grant date. Under
      this plan, we are authorized to grant options to purchase up to 900,000 common
      shares, and, as of September 30, 2007 and December 31, 2006, we had outstanding
      exercisable options to purchase 102,750 and 44,750 shares,
      respectively.





In
      2001,
      we implemented a franchisee stock option plan that provided for the granting
      of
      stock options to individuals purchasing Company owned agencies 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 that were above the market
      value of the stock on the date of grant, vest over a ten-year period, and expire
      ten years after the grant date. Under this plan, we are authorized to grant
      options to purchase up to 988,500 common shares, and, as of September 30, 2007,
      we had no outstanding exercisable options to purchase shares.


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





In
      2002,
      we implemented the 2002 Option Plan. The purpose of this Plan is to advance
      our
      interests by providing an additional incentive to attract, retain and motivate
      highly qualified and competent persons who are key to the Company, including
      employees, consultants, independent contractors, and officers and directors,
      upon whose efforts and judgment our success is largely dependent, by authorizing
      the grant of options to purchase Common Stock to persons who are eligible to
      participate hereunder, thereby encouraging stock ownership by such persons,
      all
      upon and subject to the terms and conditions of the Plan. Options outstanding
      under the plan have been granted at prices 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, the Company is authorized to grant
      options to purchase up to 1,800,000 common shares, and, as of September 30,
      2007
      and December 31, 2006, we had outstanding exercisable options to purchase
      610,658 and 637,358 shares, respectively.





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


**1998
                Plan**
            
            **2001
                Franchisee Plan**
            
            **2002
                Plan**Number of
              Shares
            
            Weighted
              Average
              Option
              Exercise Price
            
            Number of
              Shares
            
            Weighted
              Average
              Option
              Exercise Price
            
            Number of
              Shares
            
            Weighted
              Average
              Option
              Exercise PriceOutstanding at January
                1, 2005
            
            
            198,275
            
            $
            6.67
            
            
            15,000
            
            $
            9.17
            
            
            906,300
            
            $
            10.80Granted
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -
            
            
            451,500
            
            $
            14.39Exercised
            
            
            (96,875
            )
            $
            6.67
            
            
            -
            
            $
            -
            
            
            (271,542
            )
            $
            8.96Cancelled
            
            
            (3,750
            )
            $
            6.67
            
            
            -
            
            $
            -
            
            
            (262,650
            )
            $
            14.00Outstanding
                at January 1, 2006
            
            
            97,650
            
            $
            6.67
            
            
            15,000
            
            $
            9.17
            
            
            823,608
            
            $
            12.35Granted
            
            
            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
            
            
            60,000
            
            $
            12.28
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -Exercised
            
            
            (2,000
            )
            $
            6.67
            
            
            -
            
            $
            -
            
            
            (8,800
            )
            $
            10.18Cancelled
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -
            
            
            (17,900
            )
            $
            15.82Outstanding
                at September 30, 2007
            
            
            102,750
            
            $
            15.08
            
            
            -
            
            $
            -
            
            
            610,658
            
            $
            13.79





Options
      outstanding as of September 30, 2007 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, 2007
            
            
            17,750
            
            $
            15.08
            
            
            -
            
            $
            -
            
            
            321,306
            
            $
            13.79December
                31, 2007
            
            
            25,000
            
            $
            15.08
            
            
            -
            
            $
            -
            
            
            44,700
            
            $
            13.79December
                31, 2008
            
            
            13,000
            
            $
            15.08
            
            
            -
            
            $
            -
            
            
            91,351
            
            $
            13.79December
                31, 2009
            
            
            13,000
            
            $
            15.08
            
            
            -
            
            $
            -
            
            
            80,699
            
            $
            13.79December
                31, 2010
            
            
            13,000
            
            $
            15.08
            
            
            -
            
            $
            -
            
            
            58,401
            
            $
            13.79December
                31, 2011
            
            
            13,000
            
            $
            15.08
            
            
            -
            
            $
            -
            
            
            14,201
            
            $
            13.79Thereafter
            
            
            8,000
            
            $
            15.08
            
            
            -
            
            $
            -
            
            
            -
            
            $
            13.79Total
                options exercisible
            
            
            102,750
            
            
            
            
            
            -
            
            
            
            
            
            610,658


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


At
      September 30, 2007, the Company has two stock-based employee compensation plans
      and one stock-based franchise compensation plan, which are described above.
      Prior to January 1, 2006, we accounted for those plans under the recognition
      and
      measurement provisions of stock-based compensation using the intrinsic value
      method prescribed by APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Under
      these provisions, no stock-based employee compensation cost was recognized
      in
      the Statement of Operations for the years ended December 31, 2005 or 2004 as
      all
      options granted under those plans had an exercise price equal to or less than
      the market value of the underlying common stock on the date of grant. Effective
      January 1, 2006, the Company adopted the fair value recognitions provisions
      of
      FASB Statement No. 123R using the modified-prospective-transition method. Under
      that transition method, compensation cost recognized during the nine months
      ended September 30, 2007 includes compensation cost for all share-based payments
      granted subsequent to January 1, 2007, based on the grant date fair-value
      estimated in accordance with the provisions of SFAS No. 123R. Results for prior
      periods have not been restated.





As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s income before
      provision for income taxes and net income for the nine months ended September
      30, 2007, are lower by approximately $468,000 and $306,000, respectively, than
      if it had continued to account for share-base compensation under ABP Opinion
      No.
      25.





Basic
      and
      diluted earnings per share for the nine-month period ended September 30, 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.





Basic
      and
      diluted earnings per share for the three-month period ended September 30, 2007
      would have been $0.25 and $0.25, respectively, if the Company had not adopted
      SFAS No. 123R, compared to reported basic and diluted earnings per share of
      $0.24 and $0.24, respectively.





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





The
      weighted average fair value for the 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, $2.92and $5.36 per option,
      respectively. The weighted average
      fair value for the 32,500 new options granted during the three months ended
      September 30, 2006 and the 48,500 new options granted during the three months
      ended June 30, 2006, estimated on the date of grant using the Black-Scholes
      option-pricing model was $4.31 and $4.67 per option, respectively.





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





September 30, 2007
            
            September 30, 2006Dividend
                yield
            
            
            3.20% to 6.70%
            
            
            2.10% to 3.70%Expected volatility
            
            
            42.87% to 54.77%
            
            
            43.06% to 44.30%Risk-free interest rate
            
            
            4.79% to 4.86%
            
            
            4.60% to 4.90%Expected life (in years)
            
            
            2.58 to 2.63
            
            
            2.04 to 2.86





Volatility
      of a share price is the standard deviation of the continuously compounded rates
      of return on the share over a specified period. 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.


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


Summary
      information about the Company’s stock options outstanding at September 30,
      2007:





Range of
              Exercise Price
            
            Outstanding at
              September 30, 2007
            
            Contractual
              Periods in Years
            
            Average
              Exercise Price
            
            Exercisable at
              September 30, 20071998
                Plan
            
            $6.67 - $27.79
            
            
            102,750
            
            
            4.99
            
            
            $15.08
            
            
            17,7502001 Franchise Plan
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -2002 Plan
            
            $8.33 - $18.21
            
            
            610,658
            
            
            2.88
            
            
            $13.79
            
            
            321,306





**(9)
      Subordinated Debt**





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





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





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





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





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





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





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


-
          20
          -
 **21st
          Century Holding Company**
 **Notes
          to Consolidated Financial Statements**





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 1,019,000
      shares that could have been issued in connection with the September 2004
      warrants, 751,000 were exercised prior to December 31, 2006 and 156,000 were
      exercised prior to September 30, 2007, none were reacquired in the open market
      by us and 108,000 were unexercised. The unexercised warrants were cancelled
      as
      of September 30, 2007.





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





For
      the
      quarterly payment due April 30, 2006 we paid, pursuant to the terms of the
      July
      2003 Notes and in accordance with the contractual computations 38,420 shares
      of
      our Common Stock for principal and interest. Our final payment in connection
      with the July 2003 Notes were paid in cash on July 31, 2006.





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





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





**(10)
      Stockholder’s Equity**





**Capital
      Stock**





The
      Company’s authorized capital consists of 1 million shares of preferred stock,
      par value $0.01 per share, and 25,000,000 shares of common stock, par value
      $0.01 per share. As of September 30, 2007, there were no preferred shares issued
      or outstanding and there were 7,999,311 shares of common stock outstanding,
      net
      of 185,704 shares pending cancellation in connection with the Company’s 2007
      common stock buy-back program. We do not reserve for common stock shares in
      connection with the exercise of issued and unissued common stock
      options.





**(11)
      Subsequent Event**





On
      October 11, 2007, FIGA’s Board certified the need to assess each member an
      amount equal to two (2%) percent 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. FIGA’s certification was approved by
      Florida’s Insurance Commissioner on October 29, 2007. We have estimated that our
      participation with this assessment will total approximately $2.8 million and
      is
      payable November 30, 2007. FIGA’s October 11, 2007 assessment was charged to
      operations during the period ended September 30, 2007.


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


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





**Item
      2**





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





**Forward-Looking
      Statements**





Statements
      in this Quarterly Report on Form 10-Q for the nine months ended September 30,
      2007 (“Form 10-Q”) or in documents that are incorporated by reference that are
      not historical fact are forward-looking statements that are subject to certain
      risks and uncertainties that could cause actual events and results to differ
      materially from those discussed herein. Without limiting the generality of
      the
      foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”
“intend,” “could,” “would,” “estimate,” or “continue” or the negative other
      variations thereof or comparable terminology are intended to identify
      forward-looking statements. The risks and uncertainties include, without
      limitation, uncertainties related to estimates, assumptions and projections
      relating to (i) unpaid losses and loss adjustment expenses and other accounting
      policies, (ii) 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.




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





**Overview**





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





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


-
          22
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations


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





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





Assurance
      MGA, a wholly owned subsidiary, acts as Federated National’s and American
      Vehicle’s exclusive managing general agent in the state of Florida. Assurance
      MGA is not licensed to do business elsewhere. As American Vehicle continues
      its
      expansion into other states, we intend on retaining other general agents to
      market our commercial general liability insurance product beyond the state
      of
      Florida. Assurance MGA currently provides underwriting policy administration,
      marketing, accounting and financial services to Federated National and American
      Vehicle, and participates in the negotiation of reinsurance contracts. Assurance
      MGA generates revenue through a 6% commission fee from the insurance companies’
gross written premium, policy fee income of $25 per policy and other
      administrative fees from the marketing of company products through the Company’s
      distribution network. The 6% commission fee from Federated National and American
      Vehicle was made effective January 1, 2005. Assurance MGA plans to establish
      relationships with additional carriers and add additional insurance products
      in
      the future.





Our
      business, results of operations and financial condition are subject to
      fluctuations due to a variety of factors. Abnormally high severity or frequency
      of claims in any period could have a material adverse effect on our business,
      results of operations and financial condition. 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, 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.
      Additionally, during an emergency session in January 2007, the Florida
      legislature passed and the Governor signed into law a bill known as “CS/HB-1A.”
This new law makes fundamental changes to the property and casualty insurance
      business in Florida and undertakes a multi-pronged approach to address the
      cost
      of residential property insurance in Florida. First, the new law requires
      insurance companies to lower their Florida premium rates for residential
      property insurance. The new law also authorizes the state-owned insurance
      company, Citizens, which is free of many of the restraints on private carriers
      such as surplus, ratios, income taxes and reinsurance expense, to reduce its
      premium rates and begin competing against private insurers in the residential
      property insurance market and expands the authority of Citizens to write
      commercial insurance. We may also face competition from new or temporary
      entrants in our niche markets. In some cases, such entrants may, because of
      inexperience, desire for new business or other reasons, price their insurance
      products below ours. Although our pricing is inevitably influenced to some
      degree by that of our competitors, we believe that it is generally not in our
      best interest to compete solely on price. We compete on the basis of
      underwriting criteria, our distribution network and superior service to our
      agents and insureds.





In
      Florida, more than 200 companies are authorized to underwrite homeowners’
insurance. National and regional companies that compete with us in the
      homeowners’ market include Allstate Insurance Company, State Farm Insurance
      Company, First Floridian Insurance Company, and Royal Palm Insurance Company.
      We
      also compete with several Florida domestic property and casualty companies
      such
      as Universal Insurance Company and Coral Insurance Company. During calendar
      year
      2006, the Florida OIR announced the take over of several of our major
      competitors due to the poor financial condition stemming from the effects of
      the
      2005 catastrophic hurricanes.





Comparable
      companies that 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.


-
          23
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations


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





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





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




**Critical
      Accounting Policies**




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





The
      most
      significant accounting estimates inherent in the preparation of our financial
      statements include estimates associated with management’s evaluation of the
      determination of liability for unpaid loss and LAE and the amount and
      recoverability of amortization of deferred policy acquisition costs. In
      addition, significant estimates form the basis for our reserves with respect
      to
      finance contracts, premiums receivable and deferred income taxes. Various
      assumptions and other factors underlie the determination of these significant
      estimates that are described in greater detail in Footnote 2 of the Company’s
      audited financial statements for the fiscal year ended December 31, 2006 filed
      with the SEC on March 16, 2007.





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





The
      process of determining significant estimates is fact specific and takes into
      account factors such as historical experience, current and expected economic
      conditions, and in the case of unpaid loss and LAE, an actuarial valuation.
      Management regularly reevaluates these significant factors and makes adjustments
      where facts and circumstances dictate. In selecting the best estimate, we
      utilize various actuarial methodologies. Each of these methodologies is designed
      to forecast the number of claims we will be called upon to pay and the amounts
      we will pay on average to settle those claims. In arriving at our best estimate,
      our actuaries consider the likely predictive value of the various loss
      development methodologies employed in light of underwriting practices, premium
      rate changes and claim settlement practices that may have occurred, and weight
      the credibility of each methodology. Our actuarial methodologies take into
      account various factors, including, but not limited to, paid losses, liability
      estimates for reported losses, paid allocated LAE, salvage and other recoveries
      received, reported claim counts, open claim counts and counts for claims closed
      with and without payment of loss.





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


-
          24
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations





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




**New
      Accounting Pronouncements**




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




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





In
      June
      2006, FASB issued FIN 48, *Accounting
      for Uncertainty in Income Taxes* 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.





**Analysis
      of Financial Condition**


**As
      of September 30, 2007 Compared to December 31, 2006**





**Total
      Investments**





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





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


-
          25
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations




Total
      Investments increased $23.0 million, or 18.4%, to $147.9 million as of September
      30, 2007, compared to $124.8 million as of December 31, 2006. The increase
      is
      primarily a result of our continued ability to invest proceeds from written
      insurance premiums coupled with more favorable ceded reinsurance
      requirements.





The
      fixed
      maturities and the equity securities that are available for sale and carried
      at
      fair value represent 86% of total investments as of September 30, 2007, compared
      to 84.2% as of December 31, 2006.





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





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





Unrealized
                (Losses) and GainsSeptember 30, 2007
            
            December 31, 2006Fixed
                maturities:U.S.
                government obligations and agency obligations
            
            $
            (306,118
            )
            $
            (688,190
            )Obligations
                of states and political subdivisions
            
            
            (83,979
            )
            
            (145,505
            )(390,097
            )
            
            (833,695
            )Corporate
                securities:Communications
            
            
            2,011
            
            
            6,842Financial
            
            
            (4,602
            )
            
            (18,790
            )Other
            
            
            (257,484
            )
            
            (73,983
            )(260,075
            )
            
            (85,931
            )Equity
                securities:Common
                stocks
            
            
            (659,367
            )
            
            (631,000
            )Total
                unrealized (losses) and gains, net
            
            $
            (1,309,539
            )
            $
            (1,550,626
            )




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





Pursuant
      to FASB 115, the Company records the unrealized losses, net of estimated income
      taxes that are associated with that part of our portfolio classified as
      available for sale through the shareholders' equity account titled “Other
      Comprehensive Income”. Management periodically reviews the individual
      investments that comprise our portfolio in order to determine whether a decline
      in fair value below our cost 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 three months ended September 30, 2007, in connection with this process
      we
      have charged to operations a net realized investment loss totaling approximately
      $797,000, net of an estimated provisional tax effect of approximately $481,000.
      The charge relates to a short-term investment in a company whose primary
      business involved the sub-prime mortgage market.


-
          26
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations


The
      investments held at September 30, 2007 and December 31, 2006 were comprised
      mainly of United States government and agency bonds as well as municipal bonds
      which are viewed by the Company as conservative and less risky holdings, though
      sensitive to interest rate changes. There is a smaller concentration of
      corporate bonds predominantly held in the financial and conglomerate industries.
      At September 30, 2007, approximately 80% of the equity holdings are in mutual
      funds and 20% 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 115. We determined that one of our securities qualified
      for
      other than temporary impairment status during the three months ended September
      30, 2007. Our rational for this determination and the determination that
      includes, but is not limited, to Standard and Poor’s rating of no less than
      BB++, no delinquent interest and dividend payments, near term maturity dates
      and
      our ability and intent to hold these securities for a period sufficient to
      allow
      for an anticipated recovery in market value.





**Cash
      and Short Term Investments**





Cash
      and
      short-term investments, which include cash, certificates of deposits, and money
      market accounts decreased $3.8 million, or 21.0%, to $14.2 million as of
      September 30, 2007, compared to $17.9 million as of December 31, 2006. These
      balances are held primarily in money market accounts at amounts deemed
      sufficient to meet short-term cash requirements. Our excess cash and cash
      equivalents are invested in accordance with our long-term liquidity
      requirements.





**Receivable
      for Investments Sold**





Receivable
      for investments sold increased to $0.5 million as of September 30, 2007,
      compared to nothing as of December 31, 2006. The increase is a result of
      investment trading activity that occurred in late September and did not settle
      until early October 2007.





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





Finance
      contracts receivable, net of allowance for credit losses, decreased $1.0
      million, or 54.7%, to $0.8 million as of September 30, 2007, compared to $1.8
      million as of December 31, 2006. The decrease is primarily due to our sale
      in
      December 2004 of our assets related to our non-standard automobile insurance
      agency business in Florida and the associated financed contracts. We anticipate
      a continued decline in the financed contracts receivable, net over the future
      short term and its related conversion to cash, cash equivalents and
      investments.





**Prepaid
      Reinsurance Premiums**





Prepaid
      reinsurance premiums increased $5.0 million, or 3.2%, to $14.9 million as of
      September 30, 2007, compared to $14.5 million as of December 31, 2006. The
      increase is primarily due to the decreased cost of property reinsurance for
      the
      2007 - 2008 hurricane season compared to the 2005 - 2006 hurricane season.





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





Premiums
      receivable, net of allowance for credit losses, decreased $4.1 million, or
      56.5%, to $3.1 million as of September 30, 2007, compared to $7.2 million as
      of
      December 31, 2006.





Our
      homeowners’ insurance premiums receivable decreased $3.9 million, or 91.9%, to
      $0.3 million as of September 30, 2007, compared to $4.2 million as of December
      31, 2006. The decrease can be attributed to the seasonality of the purchasing
      patterns of our policyholders and our insurance policy marketing efforts where
      we purposely restrict our homeowner written premiums during hurricane season.





Our
      commercial general liability insurance premiums receivable increased $0.7
      million, or 25.6%, to $3.4 million as of September 30, 2007, compared to $2.7
      million as of December 31, 2006.





Premiums
      receivable in connection with our automobile line of business decreased $0.6
      million, or 54.8%, to $0.5 million as of September 30, 2007, compared to $1.2
      million as of December 31, 2006.




-
          27
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations


**Reinsurance
      Recoverable, net**





Reinsurance
      Recoverable, net, decreased $3.4 million, or 17.0%, to $16.8 million as of
      September 30, 2007, compared to $20.2 million as of December 31, 2006. 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.





**Deferred
      Policy Acquisition Costs**





Deferred
      policy acquisition costs decreased $0.7 million, or 6.1%, to $10.5 million
      as of
      September 30, 2007, compared to $11.2 million as of December 31, 2006. 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 $1.2 million, or 33.3%, to $4.8 million as of
      September 30, 2007, compared to $3.6 million as of December 31, 2006. Deferred
      income taxes, net is comprised of approximately $8.6 million and $7.7 million
      of
      deferred tax assets, net of approximately $3.8 million and $4.1 million of
      deferred tax liabilities as of September 30, 2007 and December 31, 2006 ,
      respectively.





**Income
      Taxes Receivable**




Income
      taxes receivable increased $0.4 million, or 52.4%, to $1.2 million as of
      September 30, 2007, compared to $0.8 million as of December 31, 2006. The change
      is due to tax payment patterns in connection with our tax liabilities. The
      2004,
      2003 and 2002 consolidated Federal Income Tax Returns filed by the Company
      have
      been examined by the Internal Revenue Service (“IRS”) during 2006 and 2005. We
      have concurred with certain IRS conclusions and have appealed other conclusions.
      Irrespective of the ongoing appellate process, we do not believe that a material
      adjustment will occur. Income taxes receivable are net of $160,000 reserve
      established in conjunction with this process.





**Property,
      Plant and Equipment, net**





Property,
      plant and equipment, net, decreased $0.2 million, or 14.3%, to $1.1 million
      as
      of September 30, 2007, compared to $1.3 million as of December 31, 2006. The
      decrease is primarily due to depreciation and amortization of our existing
      property, plant and equipment.




**Other
      Assets**





Other
      assets decreased $2.0 million, or 43.6%, to $2.6 million as of September 30,
      2007, compared to $4.6 million as of December 31, 2006. Major components of
      other assets are as follows:





September 30, 2007
            
            December 31, 2006Accrued
                interest income
            
            $
            1,078,388
            
            $
            1,515,584Commissions
                and revenue sharing receivable
            
            
            214,164
            
            
            979,677Notes
                receivable
            
            
            797,588
            
            
            1,027,958Unamortized
                loan costs
            
            
            -
            
            
            61,572Compensating
                cash balances
            
            
            9,911
            
            
            9,911Due
                from sale of discontinued operations, net
            
            
            -
            
            
            320,000Prepaid
                expenses
            
            
            386,359
            
            
            531,008Other
            
            
            83,263
            
            
            110,641$
            2,569,673
            
            $
            4,556,351


-
          28
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations





**Unpaid
      Losses and LAE**





Unpaid
      losses and LAE increased $10.7 million, or 27.0%, to $50.3 million as of
      September 30, 2007, compared to $39.6 million as of December 31, 2006. The
      increase in unpaid losses and LAE relates primarily to our loss reserve
      strengthening relative to the commercial general liability and property lines
      of
      business. The composition of unpaid loss and LAE by product line is as follows:





September 30, 2007
            
            December 31, 2006Homeowners'
            
            $
            23,529,009
            
            $
            21,788,126Commercial
                General Liability
            
            
            19,137,989
            
            
            11,100,116Automobile
            
            
            7,652,566
            
            
            6,727,236$
            50,319,564
            
            $
            39,615,478





Factors
      that affect unpaid losses and LAE include the estimates made on a claim-by-claim
      basis known as “case reserves” coupled with bulk estimates known as incurred but
      not yet reported (“IBNR”). Periodic estimates by management of the ultimate
      costs required to settle all claim files are based on the Company’s analysis of
      historical data and estimations of the impact of numerous factors such as (i)
      per claim information; (ii) company and industry historical loss experience;
      (iii) legislative enactments, judicial decisions, legal developments in the
      awarding of damages, and changes in political attitudes; and (iv) trends in
      general economic conditions, including the effects of inflation. Management
      revises its estimates based on the results of its analysis. This process assumes
      that past experience, adjusted for the effects of current developments and
      anticipated trends, is an appropriate basis for estimating the ultimate
      settlement of all claims. There is no precise method for subsequently evaluating
      the impact of any specific factor on the adequacy of the reserves, because
      the
      eventual redundancy or deficiency is affected by multiple factors. As a result
      of our process, reserves were increased by approximately $6.7 million during
      the
      quarter ended September 30, 2007.





**Unearned
      Premium**





Unearned
      premiums decreased $9.7 million, or 12.5%, to $68.1 million as of September
      30,
      2007, compared to $77.8 million as of December 31, 2006. The decrease was due
      to
      a $9.2 million decrease in unearned homeowners’ insurance premiums, a $0.8
      million increase in unearned commercial general liability premiums, and a $1.2
      million decrease in unearned automobile premiums. Generally, as is in this
      case,
      a decrease in unearned premium directly relates to a decreased in written
      premium on a rolling twelve-month basis. Conversely, in periods of increased
      written premium on a rolling twelve-month basis, unearned premium generally
      would be expected to rise.





**Premium
      Deposits and Customer Credit Balances**





Premium
      deposits and customer credit balances decreased $1.7 million, or 46.0%, to
      $2.0
      million as of September 30, 2007, compared to $3.8 million as of December 31,
      2006. Premium deposits are monies received on policies not yet in force as
      of
      September 30, 2007.





**Revolving
      Credit Outstanding**





Revolving
      credit outstanding remained unchanged at nearly nothing as of September 30,
      2007, compared to December 31, 2006. The balance is due to our cash management
      efforts, our requested credit reduction, and sale in December 2004 of our assets
      related to our non-standard automobile insurance agency business in Florida
      and
      the derived finance contracts receivable.





**Bank
      Overdraft**





Bank
      overdraft increased $1.8 million, or 21.9%, to $9.9 million as of September
      30,
      2007, compared to $8.1 million as of December 31, 2006. The bank overdraft
      relates primarily to loss and LAE disbursements paid but not yet presented
      for
      payment by the policyholder or vendor. The increase relates to our payment
      patterns in relationship to the rate at which those cash disbursements are
      presented to the bank for payment.




**Subordinated
      Debt**





Subordinated
      debt decreased to nothing as of September 30, 2007, compared to $4.2 million
      as
      of December 31, 2006. The decrease is due to our final principal and interest
      payment on the September 2004 Notes on September 30, 2007.


-
          29
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations





**Deferred
      Gain from Sale of Property**





Deferred
      gain from sale of property decreased $0.4 million, or 14.3%, to $2.1 million
      as
      of September 30, 2007, compared to $2.5 million as of December 31, 2006. In
      accordance with the provisions of FASB No. 13, we are amortizing the deferred
      gain over the term of the leaseback, which is scheduled to end in December
      2011.




**Accounts
      Payable and Accrued Expenses**





Accounts
      payable and accrued expenses increased $1.0 million, or 17.0%, to $6.7 million
      as of September 30, 2007, compared to $5.7 million as of December 31, 2006.
      This
      increase is due to our cash management efforts and timing of payments with
      our
      trade vendors.





**Results
      of Operations**


**Three
      Months Ended September 30, 2007 Compared to Three Months Ended September 30,
      2006**





**Gross
      Premiums Written**





Gross
      premiums written decreased $8.6 million, or 34.9%, to $16.1 million for the
      three months ended September 30, 2007, compared to $24.7 million for the three
      months ended September 30, 2006. The following table denotes gross premiums
      written by major product line:





Three
                months ended September 30,2007
            
            2006Amount
            
            Percentage
            
            Amount
            
            PercentageHomeowners'
            
            $
            8,512,741
            
            
            53.0
            %
            $
            15,907,467
            
            
            64.5
            %Commercial
                General Liability
            
            
            7,376,856
            
            
            45.9
            %
            
            8,292,591
            
            
            33.6
            %Automobile
            
            
            174,036
            
            
            1.1
            %
            
            469,445
            
            
            1.9
            %Gross
                premiums written
            
            $
            16,063,633
            
            
            100.0
            %
            $
            24,669,503
            
            
            100.0
            %




The
      Company’s sale of homeowners’ policies decreased $7.4 million, or 46.5% to $8.5
      million for the three months ended September 30, 2007, compared to $15.9 million
      for the three months ended September 30, 2006. The decrease 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 the competition in this market is based primarily on pricing insurance
      products at rates that do not reflect current economic conditions. We do not
      intend to compete with others solely on the basis of pricing mechanisms. Where
      our rates are competitive (and there are territories in Florida that so exist)
      we will continue to market our property insurance product. We expect additional
      challenges in the near term in connection with our rating agency, Demotech,
      Inc.’s recent decision to remove our property insurer’s financial stability
      rating “A” “Exceptional”. We intend to discuss with Demotech, Inc.
      representatives corrective actions necessary to restore our rating.





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


Three
                  months ended September 30,2007
              
              2006(Dollars
                  in thousands)Amount
              
              Percentage
              
              Amount
              
              PercentageFlorida
              
              $
              4,563
              
              
              62.0
              %
              $
              5,428
              
              
              65.5
              %Georgia
              
              
              208
              
              
              2.8
              %
              
              660
              
              
              8.0
              %Louisiana
              
              
              1,365
              
              
              18.5
              %
              
              1,380
              
              
              16.6
              %South
                  Carolina
              
              
              47
              
              
              0.6
              %
              
              -
              
              
              0.0
              %Texas
              
              
              1,194
              
              
              16.2
              %
              
              825
              
              
              9.9
              %Gross
                  premiums written
              
              $
              7,377
              
              
              100.0
              %
              $
              8,293
              
              
              100.0
              %




-
          30
          -
 **21st
          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 $0.3 million, or 62.9%,
      to $0.2 million for the three months ended September 30, 2007, compared to
      $0.5
      million for the three months ended September 30, 2006.





**Gross
      Premiums Ceded**





Gross
      premiums ceded decreased $26.6 million, or 46.4%, to $30.7 million for the
      three
      months ended September 30, 2007, compared to $57.4 million for the three months
      ended September 30, 2006.





**Increase
      in Prepaid Reinsurance Premiums**





The
      increase in prepaid reinsurance premiums was $19.3 million for the three months
      ended September 30, 2007, compared to $42.1 million for the three months ended
      September 30, 2006. 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 $22.5 million for the three months ended
      September 30, 2007, compared to $12.4 million for the three months ended
      September 30, 2006. The change was due to a ($21.2) million decrease in unearned
      homeowners’ insurance premiums, a ($0.8) million decrease in unearned commercial
      general liability premiums and a $0.5 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 increased $5.5 million, or 25.2%, to $27.2 million for the
      three
      months ended September 30, 2007, compared to $21.7 million for the three months
      ended September 30, 2006. The following table denotes net premiums earned by
      product line:





Three
                months ended September 30,2007
            
            2006Amount
            
            Percentage
            
            Amount
            
            PercentageHomeowners'
            
            $
            18,325,279
            
            
            67.41
            %
            $
            11,040,823
            
            
            50.87
            %Commercial
                General Liability
            
            
            8,166,608
            
            
            30.05
            %
            
            7,743,852
            
            
            35.67
            %Automobile
            
            
            689,365
            
            
            2.54
            %
            
            2,922,730
            
            
            13.46
            %Net
                premiums earned
            
            $
            27,181,252
            
            
            100.00
            %
            $
            21,707,405
            
            
            100.00
            %





As
      noted
      above, the Company’s efforts to expand commercial general liability lines of
      insurance products are coming to fruition, as reflected by increased net
      premiums earned of $0.4 million, or 5.5 % to $8.2 million for the three months
      ended September 30, 2007, compared to $7.7 million for the three months ended
      September 30, 2006.




**Commission
      Income**





Commission
      income increased less than $0.1 million, to $0.4 million for the three months
      ended September 30, 2007, compared to $0.5 million for the three months ended
      September 30, 2006. The primary component of our commission income is 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 decreased $0.2 million, or 65.3%, to $0.1 million for the three months
      ended September 30, 2007, compared to $0.3 million for the three months ended
      September 30, 2006. The change is primarily due to the Company’s decreased
      emphasis on automobile insurance and the finance revenue derived there-from.


-
          31
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations





**Managing
      General Agent Fees**





Managing
      general agent fees decreased $0.4 million, or 70.4% to $0.2 million for the
      three months ended September 30, 2007, compared to $0.6 million for the three
      months ended September 30, 2006. The decrease is primarily in connection with
      acquiring new and renewal policies where we have noted approximately 350,000
      fewer policies sold compared to the same period last year. The most notable,
      and
      expected decline was in connection with the homeowners policies where
      approximately 341,000 policies were sold during the three months ended September
      30, 2007 compared to approximately 636,000 policies were sold in the same three
      month period last year.





**Net
      Investment Income**





Net
      investment income increased $0.8 million, or 48.1%, to $2.3 million for the
      three months ended September 30, 2007, compared to $1.6 million for the three
      months ended September 30, 2006. The increase in investment income is primarily
      a result of the additional amounts of invested assets. Also affecting our net
      investment income was an increase in the overall yield to 6.13 % for the three
      months ended September 30, 2007 compared to a yield of 4.77% for the three
      months ended September 30, 2006.





**Net
      Realized Investment Gains (Losses)**





Net
      realized investment losses of $1.4 million were recognized during the three
      months ended September 30, 2007, compared to net realized investment gains
      of
      $0.3 million during the three months ended September 30, 2006. The table below
      depicts gains (losses) by investment category. During the quarter ended
      September 30, 2007, we marked an equity investment to market value. The pretax
      charge to operations was approximately $1.3 million in connection with the
      devaluation of the investment.





Net
                Realized (Losses) GainsThree
                Months Ended September 30,2007
            
            2006Fixed
                maturities:U.S.
                government obligations and agencies
            
            $
            17,588
            
            $
            -Obligations
                of states and political subdivisions
            
            
            (437,184
            )
            
            -Equity
                  securities:Common
                stocks
            
            
            (1,021,586
            )
            
            263,072Total
                net realized (losses) gains
            
            $
            (1,441,182
            )
            $
            263,072




**Other
      Income**





Other
      income increased $0.9 million, or 558.1%, to $0.8 million for the three months
      ended September 30, 2007, compared to ($0.2) million for the three months ended
      September 30, 2006. Major components of other income for the three months ended
      September 30, 2007 included approximately $0.6 million in connection with FIGA
      recoupment, $0.1 million in partial recognition of our gain on the sale of
      our
      Lauderdale Lakes property and less than $0.1 million in connection with rental
      income, interest income and miscellaneous income. We anticipate future
      collections, in the form of surcharges as approved by the OIR, in connection
      with the 2006 FIGA assessments to total approximately $2.5 million over the
      next
      twelve months. We anticipate that collections in connection with FIGA’s October
      2007 assessment will begin during the first quarter of 2008 .
      We
      anticipate future collections, in the form of surcharges as approved by the
      OIR,
      in connection with the 2006 Citizens assessments to total approximately $0.7
      million.





**Loss
      and LAE**





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


-
          32
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations





Loss
      and
      LAE increased by $4.6 million, or 44.6%, to $14.8 million for the three months
      ended September 30, 2007, compared to $10.3 million for the three months ended
      September 30, 2006. The overall increase reflects a decrease of $1.7 million
      in
      our homeowners’ loss and LAE program, an increase of $6.4 million in our
      commercial general liability loss and LAE program netted against $0.1 million
      decrease in loss and LAE in connection with our automobile program.





We
      continue to revise our estimates of the ultimate financial impact of past
      storms. The revisions to our estimates are based on our analysis of subsequent
      information that we receive regarding various factors, including: (i) per claim
      information; (ii) company and industry historical loss experience; (iii)
      legislative enactments, judicial decisions, legal developments in the awarding
      of damages, and (iv) trends in general economic conditions, including the
      effects of inflation. Management revises its estimates based on the results
      of
      its analysis. This process assumes that past experience, adjusted for the
      effects of current developments and anticipated trends, is an appropriate basis
      for estimating the ultimate settlement of all claims. There is no precise method
      for subsequently evaluating the impact of any specific factor on the adequacy
      of
      the reserves, because the eventual redundancy or deficiency is affected by
      multiple factors. As a result of our process, reserves were increased by
      approximately $6.7 million during the quarter ended September 30,
      2007.





The
      table
      below reflects no charge to operations during the three months ended September
      30, 2007 from the four hurricanes that occurred in July, August, September
      and
      October of 2005.





Claim
            
            Gross
            
            Reinsurance
            
            Net2005
                Hurricanes
            
            Count
            
            Losses
            
            Recoveries
            
            Losses(Dollars
                in millions)Dennis
                (July 10)
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            -Katrina
                (August 25)
            
            
            3
            
            
            -
            
            
            -
            
            
            -Rita
                (September 20)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Wilma
                (October 24)
            
            
            37
            
            
            -
            
            
            -
            
            
            -Total
                Loss Estimate
            
            
            40
            
            $
            -
            
            $
            -
            
            $
            -








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





Claim
            
            Gross
            
            Reinsurance
            
            Net2004
                Hurricanes
            
            Count
            
            Losses
            
            Recoveries
            
            Losses(Dollars
                in millions)Charley
                (August 13)
            
            
            -
            
            $
            1.0
            
            $
            1.0
            
            $
            -Frances
                (September 3)
            
            
            -
            
            
            0.8
            
            
            0.8
            
            
            -Ivan
                (September 14)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Jeanne
                (September 25)
            
            
            1
            
            
            -
            
            
            -
            
            
            -Total
                Loss Estimate
            
            
            1
            
            $
            1.8
            
            $
            1.8
            
            $
            -





In
      accordance with GAAP, our loss ratio is computed as loss and LAE divided by
      net
      premiums earned. A lower loss ratio generally results in higher operating
      income. Our loss ratio for the three month period ended September 30, 2007
      was
      54.6% compared with 47.3% for the same period in 2006. The table below reflects
      the loss ratios by product line.


-
          33
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations





Three Months Ended September 30,2007
            
            2006Homeowners'
            
            
            28.78
            %
            
            63.40
            %Commercial
                General Liability
            
            
            95.30
            %
            
            18.01
            %Automobile
            
            
            260.11
            %
            
            64.18
            %All
                lines
            
            
            54.63
            %
            
            47.32
            %





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased $0.1 million, or 2.7%, to $3.9 million
      for
      the three months ended September 30, 2007, compared to $3.8 million for the
      three months ended September 30, 2006.





**Salaries
      and Wages**





Salaries
      and wages increased less than $0.1 million, or 4.5%, to $1.8 million for the
      three months ended September 30, 2007, compared to $1.7 million for the three
      months ended September 30, 2006.




**Interest
      Expense**


Interest
      expense decreased $0.1 million, or 79.4%, to nearly nothing for the three months
      ended September 30, 2007, compared to $0.1 million for the three months ended
      September 30, 2006. The decrease is in correlation to our decreased subordinated
      debt.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $0.4 million, or 7.6%, to
      $5.4
      million for the three months ended September 30, 2007, compared to $5.0 million
      for the three months ended September 30, 2006. Policy acquisition costs, net
      of
      amortization, consists of the actual policy acquisition costs, including
      commissions, payroll and premium taxes, less commissions earned on reinsurance
      ceded and policy fees earned.





**Provision
      for Income Tax Expense**





The
      provision for income tax expense increased $0.9 million, or 108.4%, to $1.8
      million for the three months ended September 30, 2007, compared to $0.9 million
      for the three months ended September 30, 2006. The effective rate for income
      tax
      expense was 48.9% for the three months ended September 30, 2007, compared to
      14.7% for the same three-month period in 2006.





**Net
      Income**





As
      a
      result of the foregoing, the Company’s net income for the three months ended
      September 30, 2007, was $1.9 million, compared to net income of $3.0 million
      for
      the three months ended September 30, 2006.


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


**Results
        of Operations**
 **Nine
        Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
        2006**









Gross
      premiums written decreased $1.3 million, or 1.2%, to $109.7 million for the
      nine
      months ended September 30, 2007, compared to $111.0 million for
      the
      nine months ended September 30, 2006. The
      following table denotes gross premiums written by major product
      line:





Nine
                months ended September 30,2007
            
            2006Amount
            
            Percentage
            
            Amount
            
            PercentageHomeowners'
            
            $
            82,471,900
            
            
            75.2
            %
            $
            80,865,442
            
            
            72.8
            %Commercial
                General Liability
            
            
            25,601,473
            
            
            23.3
            %
            
            24,749,710
            
            
            22.3
            %Automobile
            
            
            1,642,493
            
            
            1.5
            %
            
            5,416,096
            
            
            4.9
            %Gross
                premiums written
            
            $
            109,715,866
            
            
            100.0
            %
            $
            111,031,248
            
            
            100.0
            %




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





Nine
                months ended September 30,2007
            
            2006(Dollars
                in thousands)Amount
            
            Percentage
            
            Amount
            
            PercentageFlorida
            
            $
            17,067
            
            
            66.8
            %
            $
            18,169
            
            
            73.5
            %Georgia
            
            
            800
            
            
            3.1
            %
            
            1,230
            
            
            5.0
            %Kentucky
            
            
            5
            
            
            0.0
            %
            
            -
            
            
            0.0
            %Louisiana
            
            
            4,047
            
            
            15.8
            %
            
            4,234
            
            
            17.0
            %South
                Carolina
            
            
            134
            
            
            0.5
            %
            
            -
            
            
            0.0
            %Texas
            
            
            3,516
            
            
            13.7
            %
            
            1,117
            
            
            4.5
            %Virginia
            
            
            32
            
            
            0.1
            %
            
            -
            
            
            0.0
            %Gross
                premiums written
            
            $
            25,601
            
            
            100.0
            %
            $
            24,750
            
            
            100.0
            %





The
      Company’s sale of homeowners’ policies increased $1.6 million, or 2.0% to $82.5
      million for the nine months ended September 30, 2007, compared to $80.9 million
      for the nine months ended September 30, 2006. The modest increase is primarily
      due to the increased rates in effect on our homeowners’ policies. We believe
      that the competition in this market is based primarily on pricing insurance
      products at rates that do not reflect current economic conditions. We do not
      intend to compete with others solely on the basis of pricing mechanisms. Where
      our rates are competitive (and there are territories in Florida that so exist)
      we will continue to market our property insurance product. We expect additional
      challenges in the near term in connection with our rating agency, Demotech,
      Inc.’s recent decision to remove our property insurer’s financial stability
      rating “A” “Exceptional”. We intend to discuss with Demotech, Inc.
      representatives corrective actions necessary to restore our rating.





The
      Company’s sale of auto insurance policies decreased by $3.8 million, or 69.7%,
      to $1.6 million for the nine months ended September 30, 2007, compared to $5.4
      million for the nine months ended September 30, 2006.





**Gross
      Premiums Ceded**





Gross
      premiums ceded decreased $14.2 million, or 23.4%, to $46.5 million for the
      nine
      months ended September 30, 2007, compared to $60.8 million for the nine months
      ended September 30, 2006.





**Increase
      in Prepaid Reinsurance Premiums**





The
      increase in prepaid reinsurance premiums was $1.5 million for the nine months
      ended September 30, 2007, compared to $32.8 million for the nine months ended
      September 30, 2006. 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
      (Increase) in Unearned Premiums**





The
      decrease (increase) in unearned premiums was $9.7 million for the nine months
      ended September 30, 2007, compared to ($10.8) million for the nine months ended
      September 30, 2006. The change was due to a $9.2 million decrease in unearned
      homeowners’ insurance premiums, an ($0.8) million increase in unearned
      commercial general liability premiums and a $0.3 million decrease in unearned
      automobile premiums. The decreases reflect the soft market conditions that
      exist
      in connection with our homeowners’ and auto line of business.


-
          35
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations


**Net
      Premiums Earned**





Net
      premiums earned increased $2.1 million, or 2.9%, to $74.4 million for the nine
      months ended September 30, 2007, compared to $72.3 million for the nine months
      ended September 30, 2006. The following table denotes net premiums earned by
      product line:





Nine
                months ended September 30,2007
            
            2006Amount
            
            Percentage
            
            Amount
            
            PercentageHomeowners'
            
            $
            46,677,097
            
            
            62.76
            %
            $
            40,720,936
            
            
            56.36
            %Commercial
                General Liability
            
            
            24,835,348
            
            
            33.40
            %
            
            20,126,319
            
            
            27.85
            %Automobile
            
            
            2,855,538
            
            
            3.84
            %
            
            11,408,230
            
            
            15.79
            %Net
                premiums earned
            
            $
            74,367,983
            
            
            100.00
            %
            $
            72,255,485
            
            
            100.00
            %





As
      noted
      above, the Company’s efforts to expand commercial general liability lines of
      insurance products are coming to fruition, as reflected by increased net
      premiums earned of $4.7 million, or 23.4 %, to $24.8 million for the nine months
      ended September 30, 2007, compared to $20.1 million for the nine months ended
      September 30, 2006.





**Commissions
      Income**





Commission
      income increased $6.3 million, to $6.9 million for the nine months ended
      September 30, 2007, compared to $0.6 million for the nine months ended September
      30, 2006. The primary components of our commission income are non-reoccurring
      operating events stemming from two separate events. First and pursuant to
      provisions contained in our three-year reinsurance treaties, we were afforded
      the right to cancel the remaining two years and be entitled to receive a no
      loss
      experience commission. In connection with this treaty, we have reported
      approximately $2.8 million during the 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 $1.0 million, or 68.4%, to $0.5 million for the nine months
      ended September 30, 2007, compared to $1.5 million for the nine months ended
      September 30, 2006. The change is primarily due to the Company’s decreased
      emphasis on automobile insurance and the finance revenue derived there-from.




**Managing
      General Agent Fees**





Managing
      general agent fees decreased $0.4 million, or 19.3%, to $1.6 million for the
      nine months ended September 30, 2007, compared to $2.0 million for the nine
      months ended September 30, 2006.





**Net
      Investment Income**





Net
      investment income increased $1.6 million, or 37.6%, to $6.0 million for the
      nine
      months ended September 30, 2007, compared to $4.4 million for the nine months
      ended September 30, 2006. The increase in investment income is primarily a
      result of the additional amounts of invested assets. Also affecting our net
      investment income was an increase in overall yield to 4.42 % for the nine months
      ended September 30, 2007 compared to a yield of 3.82 % for the nine months
      ended
      September 30, 2006.





**Net
      Realized Investment (Losses) Gains**





Net
      realized investment (losses) gains were ($1.5) million for the nine months
      ended
      September 30, 2007, compared to $0.7 for the nine months ended September 30,
      2006. The table below depicts (losses) gains by investment category. During
      the
      quarter ended September 30, 2007, we marked an equity investment to market
      value. The pretax charge to operations was approximately $1.3 million in
      connection with the devaluation of the investment.


-
          36
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations





Net
                Realized (Losses) GainsNine
                Months Ended September 30,2007
            
            2006Fixed
                maturities:U.S.
                government obligations and agencies
            
            $
            17,589
            
            $
            (32,516
            )Obligations
                of states and political subdivisions
            
            
            (437,247
            )
            
            76(419,658
            )
            
            (32,440
            )Corporate
                securities:Other
            
            
            -
            
            
            (33,816
            )Equity
                securities:Common
                stocks
            
            
            (1,069,569
            )
            
            808,880Total
              net realized (losses) gains
            
            $
            (1,489,227
            )
            $
            742,624





**Other
      Income**





Other
      income increased $1.0 million, or 125.4%, to $1.8 million for the nine months
      ended September 30, 2007, compared to $0.8 million for the nine months ended
      September 30, 2006. Major components of other income for the nine months ended
      September 30, 2007 included approximately $1.3 million in connection with FIGA
      recoupment, $0.4 million in partial recognition of our gain on the sale of
      our
      Lauderdale Lakes property and $0.1 million of rental income, interest income
      and
      miscellaneous income. We anticipate future collections, in the form of
      surcharges as approved by the OIR, in connection with the 2006 FIGA assessments
      to total approximately $2.5 million. We anticipate that collections in
      connection with FIGA’s October 2007 assessment will begin during the first
      quarter of 2008 .
      We
      anticipate future collections, in the form of surcharges as approved by the
      OIR,
      in connection with the 2006 FIGA assessments to total approximately $2.5 million
      over the next twelve months. We anticipate that collections in connection with
      FIGA’s October 2007 assessment will begin during the first quarter of
      2008 .
      We
      anticipate future collections, in the form of surcharges as approved by the
      OIR,
      in connection with the 2006 Citizens assessments to total approximately $0.7
      million.





**Loss
      and LAE**





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





Loss
      and
      LAE increased by $11.4 million, or 42.0%, to $38.6 million for the nine months
      ended September 30, 2007, compared to $27.2 million for the nine months ended
      September 30, 2006. The overall increase reflects an increase of $5.4 million
      in
      our homeowners’ loss and LAE program (including $1.0 million charge for adverse
      development in connection with the 2004 hurricane season), an increase of $10.2
      million in our commercial general liability loss and LAE program netted against
      $4.2 million decrease in loss and LAE in connection with our automobile
      program.





We
      continue to revise our estimates of the ultimate financial impact of past
      storms. The revisions to our estimates are based on our analysis of subsequent
      information that we receive regarding various factors, including: (i) per claim
      information; (ii) company and industry historical loss experience; (iii)
      legislative enactments, judicial decisions, legal developments in the awarding
      of damages, and (iv) trends in general economic conditions, including the
      effects of inflation. Management revises its estimates based on the results
      of
      its analysis. This process assumes that past experience, adjusted for the
      effects of current developments and anticipated trends, is an appropriate basis
      for estimating the ultimate settlement of all claims. There is no precise method
      for subsequently evaluating the impact of any specific factor on the adequacy
      of
      the reserves, because the eventual redundancy or deficiency is affected by
      multiple factors. As a result of our process, reserves were increased by
      approximately $6.7 million during the quarter ended September 30,
      2007.


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





The
      table
      below reflects no charge to operations during the nine months ended September
      30, 2007 from the four hurricanes that occurred in July, August, September
      and
      October of 2005.





Claim
            
            Gross
            
            Reinsurance
            
            Net2005
                Hurricanes
            
            Count
            
            Losses
            
            Recoveries
            
            Losses(Dollars
                in millions)Dennis
                (July 10)
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            -Katrina
                (August 25)
            
            
            2
            
            
            0.1
            
            
            0.1
            
            
            -Rita
                (September 20)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Wilma
                (October 24)
            
            
            177
            
            
            10.5
            
            
            10.5
            
            
            -Total
                Loss Estimate
            
            
            179
            
            $
            10.6
            
            $
            10.6
            
            $
            -





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





Claim
            
            Gross
            
            Reinsurance
            
            Net2004
                Hurricanes
            
            Count
            
            Losses
            
            Recoveries
            
            Losses(Dollars
                in millions)Charley
                (August 13)
            
            
            1
            
            $
            2.3
            
            $
            2.3
            
            $
            -Frances
                (September 3)
            
            
            -
            
            
            0.8
            
            
            0.8
            
            
            -Ivan
                (September 14)
            
            
            -
            
            
            1.0
            
            
            -
            
            
            1.0Jeanne
                (September 25)
            
            
            1
            
            
            0.0
            
            
            -
            
            
            -Total
                Loss Estimate
            
            
            2
            
            $
            4.1
            
            $
            3.1
            
            $
            1.0




In
      accordance with GAAP, our loss ratio is computed as loss and LAE divided by
      net
      premiums earned. A lower loss ratio generally results in higher operating
      income. Our loss ratio for the nine month period ended September 30, 2007 was
      51.9% compared with 37.6% for the same period in 2006. The table below reflects
      the loss ratios by product line.





Nine
                Months Ended September 30,2007
            
            2006Homeowners'
            
            
            43.03
            %
            
            36.00
            %Commercial
                General Liability
            
            
            55.54
            %
            
            17.76
            %Automobile
            
            
            165.72
            %
            
            78.43
            %All
                lines
            
            
            51.92
            %
            
            37.62
            %





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased $2.6 million, or 30.5%, to $10.9 million
      for
      the nine months ended September 30, 2007, compared to $8.4 million for the
      nine
      months ended September 30, 2006. 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). On October 11, 2007, FIGA’s Board
      certified the need to assess each member an amount equal to two (2%) percent
      of
      the member’s Florida net direct written premiums for the calendar year 2006. We
      have estimated that our participation with this assessment will total
      approximately $2.8 million and is payable November 30, 2007. FIGA’s October 2007
      assessment was charged to operations during the period ended September 30,
      2007.


-
          38
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations


**Salaries
      and Wages**





Salaries
      and wages decreased $0.2 million, or 4.6%, to $5.1 million for the nine months
      ended September 30, 2007, compared to $5.3 million for the nine months ended
      September 30, 2006.




**Interest
      Expense**





Interest
      expense decreased $0.4 million, or 68.3%, to $0.2 million for the nine months
      ended September 30, 2007, compared to $0.5 million for the nine months ended
      September 30, 2006. The decrease is in correlation to our decreased subordinated
      debt.





**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $1.9 million, or 14.2%, to
      $14.9 million for the nine months ended September 30, 2007, compared to $13.0
      million for the nine months ended September 30, 2006. Policy acquisition costs,
      net of amortization, consists of the actual policy acquisition costs, including
      commissions, payroll and premium taxes, less commissions earned on reinsurance
      ceded and policy fees earned.





**Provision
      for Income Tax Expense**





The
      provision for income tax expense decreased $3.0 million, or 31.0%, to $6.8
      million for the nine months ended September 30, 2007, compared to $9.8 million
      for the nine months ended September 30, 2006. The effective rate for income
      tax
      expense was 33.9% for the nine months ended September 30, 2007, compared to
      32.9% the same nine month period in 2006.





**Net
      Income**





As
      a
      result of the foregoing, the Company’s net income for the nine months ended
      September 30, 2007 was $13.2 million, compared to net income of $17.9 million
      for the nine months ended September 30, 2006.





**Liquidity
      and Capital Resources**





For
      the
      nine months ended September 30, 2007, our primary sources of capital were
      revenues generated from operations, including increased unpaid losses and LAE,
      decreased premiums receivable, decreased reinsurance recoverable, net, increased
      bank overdraft, decreased other assets, decreased finance contracts receivable,
      increased accounts payable and accrued expenses and decreased policy acquisition
      costs, net of amortization. Also contributing to our liquidity were an increase
      in the provision for uncollectible premiums receivable, non-cash compensation,
      depreciation and amortization, the issuance of common stock for interest on
      notes, proceeds from the sale of investment securities, exercised warrants,
      exercised employee stock options and a tax benefit related to non-cash
      compensation. Because we are a holding company, we are largely dependent upon
      fees and commissions from our subsidiaries for cash flow.





For
      the
      nine months ended September 30, 2007, operations provided net operating cash
      flow of $24.0 million, compared to $24.3 million for the nine months ended
      September 30, 2006.





For
      the
      nine months ended September 30, 2007, operations generated $38.2 million of
      gross cash flow due to a $10.7 million increase in unpaid losses and LAE, a
      $3.8
      million decrease in premiums receivable, a $3.4 million decrease in reinsurance
      recoverable, net, a $1.8 million increase in bank overdraft, a $1.6 million
      decrease in other assets, a $1.0 million decrease in finance contracts
      receivable and a $1.0 million increase in accounts payable and accrued expenses.
      To a much less significant extent, operations generated additional sources
      of
      cash via a $0.7 million decrease in policy acquisition costs, net of
      amortization, a $0.3 million increase in the provision for uncollectible
      premiums receivable, $0.3 million in non-cash compensation, $0.2 million in
      depreciation and amortization and $0.1 million in the issuance of common stock
      for interest on notes, all in conjunction with net income of $13.2 million.





For
      the
      nine months ended September 30, 2007, operations used $14.2 million of gross
      cash flow primarily due to a $9.7 million decrease in unearned premiums, a
      $1.7
      million decrease in premium deposits and customer credit balances, a $1.2
      million increase in deferred income tax expense, a $0.5 million increase in
      prepaid reinsurance premiums, a $0.4 million increase in income taxes
      recoverable, $0.4 million in net realized investment losses, $0.3 million in
      amortization of investment discount, net, and less than a $0.1 million increase
      in the provision for credit losses, net.


-
          39
          -
 **21st
          Century Holding Company**
 Management’s
          Discussion and Analysis of Financial Condition and Results of
          Operations


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





For
      the
      nine months ended September 30, 2007, net investing activities used $21.7
      million, compared to $23.7 million for the nine months ended September 30,
      2006.
      Our available for sale investment portfolio is highly liquid as it consists
      entirely of readily marketable securities.





For
      the
      nine months ended September 30, 2007, investing activities generated $159.6
      million and used $181.2 million from the maturity several times over of our
      very
      short municipal portfolio.





For
      the
      nine months ended September 30, 2007, net financing activities used $6.1
      million, compared to providing $1.2 million for the nine months ended September
      30, 2006. For the nine months ended September 30, 2007, the sources of cash
      in
      connection with financing activities included $2.0 million from the exercise
      of
      warrants, $0.1 million from the exercise of stock options and $0.2 million
      from
      the tax benefit related to non-cash compensation. The uses of cash in connection
      with financing activities included $4.3 million in dividends paid, $2.1 million
      in connection with subordinated debt and $2.0 million for the purchase of
      treasury stock.





Federated
      Premium’s operations were partially funded by the revolving loan agreement with
      FlatIron. Outstanding borrowings under the revolving loan agreement were
      approximately $10,000 as of both September 30, 2007 and December 31, 2006.
      The
      effective interest rate on this line of credit, based on our average outstanding
      borrowings under the revolving loan agreement, was 19.88% and 9.78% for the
      nine
      months ended September 30, 2007 and 2006, respectively. Interest expense
      including minimum fees on this revolving credit line totaled approximately
      $1,500 and $7,600 for the nine months ended September 30, 2007 and 2006,
      respectively. This credit facility was schedule to terminate, at our request,
      on
      September 30, 2007 and we are currently in the process of settling all aspects
      of this relationship.





As
      an
      alternative to premium finance, we offer direct billing in connection with
      our
      automobile and homeowner programs, where the insurance company accepts from
      the
      insured, as a receivable, a promise to pay the premium, as opposed to requiring
      the full amount of the policy 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 our credit
      facility, but remain able to charge and collect interest from the policyholder.





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





As
      of
      September 30, 2007, we did not have any relationships with unconsolidated
      entities or financial partnerships, such as entities often referred to as
“structured finance” or “special purpose” entities, which were established for
      the purpose of facilitating off-balance-sheet arrangements or other
      contractually narrow or limited purposes. As such, management believes that
      we
      currently are not exposed to any financing, liquidity, market or credit risks
      that could arise if we had engaged in transactions of that type requiring
      disclosure herein.





**Impact
      of Inflation and Changing Prices**





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





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


-
          40
          -
 **21st
          Century Holding Company**


**Item
      3**





**Quantitative
      and Qualitative Disclosures about Market Risk**





Information
      related to quantitative and qualitative disclosures about market risk was
      included under Item 7a, “Quantitative and Qualitative Disclosures about Market
      Risk”, in our Annual Report on Form 10-K for the year ended December 31, 2006.
      No material changes have occurred in market risk since this information was
      disclosed except as discussed below.





Our
      investment portfolio is available for sale and 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, 2007 follows:





Book Value
            
            Fair / Amortized Value
            
            Unrealized
              Gain (Loss)Fixed
                maturities:U.S.
                government obligations and agencies available for sale
            
            $
            72,049,375
            
            
            48.30
            %
            $
            71,743,256
            
            
            48.52
            %
            $
            (306,119
            )U.S.
                government obligations and agencies held to maturity
            
            
            19,365,007
            
            
            12.98
            %
            
            19,365,005
            
            
            13.10
            %
            
            (2
            )Obligations
                of states and political subdivisions available for sale
            
            
            26,079,064
            
            
            17.48
            %
            
            25,995,085
            
            
            17.58
            %
            
            (83,979
            )Obligations
                of states and political subdivisions held to maturity
            
            
            501,295
            
            
            0.34
            %
            
            501,295
            
            
            0.34
            %
            
            -117,994,741
            
            
            79.10
            %
            
            117,604,641
            
            
            79.54
            %
            
            (390,100
            )Corporate
                securities:Communications
                available for sale
            
            
            994,127
            
            
            0.67
            %
            
            1,000,058
            
            
            0.67
            %
            
            5,931Financial
                available for sale
            
            
            4,121,492
            
            
            2.76
            %
            
            4,112,972
            
            
            2.78
            %
            
            (8,520
            )Other
                available for sale
            
            
            16,490,292
            
            
            11.05
            %
            
            16,232,807
            
            
            10.98
            %
            
            (257,485
            )Other
                held to maturity
            
            
            500,000
            
            
            0.34
            %
            
            500,000
            
            
            0.34
            %
            
            -22,105,911
            
            
            14.82
            %
            
            21,845,837
            
            
            14.77
            %
            
            (260,074
            )Equity
                securities:Common
                stocks available for sale
            
            
            9,067,950
            
            
            6.08
            %
            
            8,408,585
            
            
            5.69
            %
            
            (659,365
            )Total
                fixed, corporate and equity securities
            
            $
            149,168,602
            
            
            100.00
            %
            $
            147,859,063
            
            
            100.00
            %
            $
            (1,309,539
            )





For
      our
      held to maturity portfolio as of September 30, 2007, the unrealized loss totaled
      approximately $106,000 and was almost entirely in connection with our U.S.
      government obligations and agencies.





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





**Item
      4**




Controls
      and Procedures




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


-
          41
          -
 **21st
          Century Holding Company**


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, 2007.  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, 2007, were effective
      to
      provide reasonable assurance that information required to be disclosed by the
      Company in the reports filed or submitted by it under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms, and to provide reasonable assurance that
      information required to be disclosed by the Company in such reports is
      accumulated and communicated to our management, including its Chief Executive
      Officer and Chief Financial Officer, as appropriate to allow timely decisions
      regarding required disclosure.





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





In
      our
      Form 10-K for the fiscal year ended December 31, 2006, the Company had two
      “material weaknesses” in our internal control over financial reporting with
      respect to (i) the recognition and accounting of unrecorded premium transactions
      and (ii) an income tax issue relating to computing our income tax liability
      where we failed to consider a prior year tax refund applied to our fiscal year
      ended December 31, 2006. We continue our efforts to remediate these material
      weaknesses through ongoing process improvements and the implementation of
      enhanced policies and controls over the timely recognition of unreported premium
      transactions and tax accounting in fiscal 2007, and such remediation will
      continue during the remaining part of fiscal 2007. Accordingly, these material
      weaknesses have yet to be fully remediated and tested.




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




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


-
          42
          -
 **21st
          Century Holding Company**


**Part
      II: OTHER INFORMATION**





**Item
      1**





**Legal
      Proceedings**





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





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 on behalf of all persons
      and
      entities who purchased the Company's securities during the various class periods
      specified in the complaints. While the specific factual allegations vary
      slightly in each case, the complaints allege that the defendants made false
      and
      misleading statements and failed to accurately project the Company's business
      and financial performance during the putative class period. The complaints
      seek
      an unspecified amount of damages and claim violations of Sections 10(b) and
      20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The Company expects
      that these two actions will be consolidated into one case in the United States
      District Court for the Southern District of Florida.





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





**Item
      1A**





**Risk
      Factors**





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





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





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 on behalf of all persons
      and
      entities who purchased the Company's securities during the various class periods
      specified in the complaints. While the specific factual allegations vary
      slightly in each case, the complaints allege that the defendants made false
      and
      misleading statements and failed to accurately project the Company's business
      and financial performance during the putative class period. The complaints
      seek
      an unspecified amount of damages and claim violations of Sections 10(b) and
      20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The Company expects
      that these two actions will be consolidated into one case in the United States
      District Court for the Southern District of Florida.





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





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


-
          43
          -
 **21st
          Century Holding Company**


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





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





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





**Item
      2**





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





During
      the three months ended September 30, 2007, certain non-executive employees
      exercised options to acquire an aggregate of 1,500 shares of the Company's
      common stock with proceeds to the Company aggregating to approximately $7,500.
      All of the option holders paid cash for these shares. The shares underlying
      the
      options were registered on registration statements on Form S-8 and the shares
      issued to these persons do not contain any restrictive legends.





During
      May, June, August and September 2007, we have issued an aggregate 60,000 options
      to employees, an officer and a director of the Company under our 1998 stock
      option plan. The options have an exercise price between $11.11 and $20.44 per
      share, vest over five years at 20% per year and expire six years from the grant
      date.





**(b)
      None**





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





On
      May
      14, 2007, the Company’s Board of Directors authorized, pursuant to Section 12 of
      the Securities Exchange Act, the repurchase of up to $5.0 million of its common
      stock. Acting upon the Board’s authorization, the Company repurchased, for
      approximately $2.0 million, 47,433 shares for an average price of $10.14 between
      July 12, 2007 and July 18, 2007and 138,261 shares for an average price of $10.99
      between May 16, 2007 and May 21, 2007. The table below provides, in tabular
      format, information about our purchase of equity securities that are registered
      by the Company.





Period
            
            Total Number
              of Shares
              Purchased
            
            Average
              Price Paid
              per Share
            
            Total Number of Shares
              Purchased as Part of
              Publicly AnnouncedPlans
              or Programs
            
            Approximate Dollar
              Value of Shares that
              May Yet Be Purchased
              Under the PlanApril-07
            
            
            None
            
            
            None
            
            
            None
            
            
            NoneMay-07
            
            
            138,261
            
            
            $ 10.99
            
            
            138,261
            
            
            $3.5 millionJune-07
            
            
            None
            
            
            None
            
            
            None
            
            
            $3.5 millionJuly-07
            
            
            47,433
            
            
            $10.14
            
            
            47,433
            
            
            $3.0 million





**Item
      3**





**Defaults
      upon Senior Securities**





None


-
          44
          -
 **21st
          Century Holding Company**


**Item
      4**




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





None


**Item
      5**





**Other
      Information**





None





**Item
      6**





**Exhibits**





10.1
      Excess Catastrophe Reinsurance Contract, Effective July 1, 2007 issued to
      Federated National Insurance Company.*





10.2
      Reinstatement Premium Protection Reinsurance Contract, Effective July 1, 2007
      issued to Federated National Insurance Company.*





10.3
      Additional Layer Excess Catastrophe Reinsurance Contract, Effective August
      17,
      2007 issued
      to Federated National Insurance Company .
      *





31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act. *31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act. *32.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act. *32.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act. **
                filed herewith


-
          45
          -
 **21st
          Century Holding Company**


**Signatures**





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





21st
                CENTURY HOLDING COMPANYBy:
            */s/
                Edward J. Lawson*Edward J. Lawson, Chief Executive Officer and Chairman of
                the Board*/s/
                Peter J. Prygelski, III*Peter J. Prygelski, III, Chief Financial Officer




Date:
      November 09, 2007




-
          46
          -
 **21st
          Century Holding Company**


**EXHIBIT
        INDEX**
 
 10.1
              Excess
                  Catastrophe Reinsurance Contract, Effective July 1, 2007 issued
                  to
                  Federated National Insurance Company.*10.2
              Reinstatement
                  Premium Protection Reinsurance Contract, Effective July 1, 2007
                  issued to
                  Federated National Insurance Company.*10.3
              Additional
                  Layer Excess Catastrophe Reinsurance Contract, Effective August
                  17, 2007
                  issued to Federated National Insurance Company. *31.1
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act. *31.3
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act. *32.2
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act. *32.2
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act. ******filed
                  herewith
  -
            47
            -