**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-Q**




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


**EXCHANGE
      ACT OF 1934**





**FOR
      THE QUARTERLY PERIOD ENDED MARCH 31, 2006**




**OR**





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


**EXCHANGE
      ACT OF 1934**





**FOR
      THE TRANSITION PERIOD FROM ___________________ TO
      _______________________.**




Commission
      file number 0-2500111




21 st Century Holding Company


(Exact
      name of registrant as specified in its charter)




**Florida**
            
            
            
            **65-0248866**(State or Other Jurisdiction of
                Incorporation or Organization)
            
            
            
            (IRS Employer Identification
                No.)








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


(Address
      of principal executive offices) (Zip Code)




954-581-9993


(Registrant's
      telephone number, including area code)




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





Yes
x
      No o





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





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





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





Yes
o
      No x





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





Common
      Stock, $. 0 1 par
      value
      - 7,420,819 outstanding as of May 10, 2006.










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





**INDEX**





**PART
                I: FINANCIAL INFORMATION**
            
            **PAGE****ITEM
                1**
            Financial
                Statements and Supplementary Data
            
            3**ITEM
                2**
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            
            18**ITEM
                3**
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            33**ITEM
                4**
            Controls
                and Procedures
            
            33**PART
                II: OTHER INFORMATION****ITEM
                1**
            Legal
                Proceedings
            
            34**ITEM
                1A**
            Risk
                Factors
            
            34**ITEM
                2******
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            34**ITEM
                3**
            Defaults
                Upon Senior Securities
            
            35**ITEM
                4**
            Submission
                of Matters to a Vote of Security Holders
            
            35**ITEM
                5**
            Other
                Information
            
            35**ITEM
                6**
            Exhibits
            
            35**Signatures**
            
            
            36





**PART
      I: FINANCIAL INFORMATION**


**Item
      1**





21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      BALANCE SHEETS


**March
                  31, 2006**
              
              **December
                  31, 2005**ASSETSInvestmentsFixed
                  maturities, available for sale, at fair value
              
              $
              79,345,703
              
              $
              69,787,809Fixed
                  maturities, held to maturity, at amoritized cost
              
              
              19,685,847
              
              
              19,691,937Equity
                  securities, available for sale, at fair value
              
              
              8,578,837
              
              
              10,606,663Total
                  investments
              
              
              107,610,387
              
              
              100,086,409Cash
                  and cash equivalents
              
              
              28,367,811
              
              
              6,071,460Finance
                  contracts, net of allowance for credit losses of $282,484 in 2006
                  and
                  $419,445in
                  2005, and net of unearned finance charges of $217,663 in 2006 and
                  $379,212
                  in 2005
              
              
              4,839,079
              
              
              7,312,736Prepaid
                  reinsurance premiums
              
              
              3,462,162
              
              
              12,133,734Premiums
                  receivable, net of allowance for credit losses of $173,151 and
                  $158,151,
                  respectively
              
              
              10,284,594
              
              
              7,505,631Reinsurance
                  recoverable, net
              
              
              51,874,304
              
              
              136,675,703Deferred
                  policy acquisition costs
              
              
              9,827,913
              
              
              9,183,654Deferred
                  income taxes, net
              
              
              4,310,424
              
              
              2,703,978Property,
                  plant and equipment, net
              
              
              1,391,745
              
              
              3,901,385Other
                  assets
              
              
              5,111,466
              
              
              4,580,063Total
                  assets
              
              $
              227,079,885
              
              $
              290,154,753LIABILITIES
                  AND SHAREHOLDERS' EQUITYUnpaid
                  losses and LAE
              
              $
              53,797,413
              
              $
              154,038,543Unearned
                  premiums
              
              
              66,969,112
              
              
              61,839,051Premiums
                  deposits
              
              
              2,535,176
              
              
              2,144,863Revolving
                  credit outstanding
              
              
              57,376
              
              
              196,943Bank
                  overdraft
              
              
              30,714,130
              
              
              12,237,735Funds
                  held under reinsurance treaties
              
              
              1,544,544
              
              
              1,544,544Income
                  taxes payable
              
              
              4,211,950
              
              
              3,019,696Subordinated
                  debt
              
              
              8,541,666
              
              
              10,208,333Deferred
                  gain from sale of property
              
              
              2,789,379
              
              
              —Accounts
                  payable and accrued expenses
              
              
              2,705,869
              
              
              4,157,675Total
                  liabilities
              
              
              173,866,615
              
              
              249,387,383Shareholders'
                  equity:Common
                  stock, $0.01 par value. Authorized 37,500,000 shares; issued 7,364,838
                  and7,468,713
                  shares, respectively; Outstanding 7,364,838 and 6,771,864,
                  respectively
              
              
              73,650
              
              
              74,688Additional
                  paid-in capital
              
              
              38,872,092
              
              
              31,825,053Accumulated
                  other comprehensive (deficit)
              
              
              (1,266,875
              )
              
              (1,537,243
              )Retained
                  earnings
              
              
              15,534,403
              
              
              10,404,872Total
                  shareholders' equity
              
              
              53,213,270
              
              
              40,767,370Total
                  liabilities and shareholders' equity
              
              $
              227,079,885
              
              $
              290,154,753


**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS**


3




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(UNAUDITED)




**Three
                    Months Ended******
                ****
                **March
                    31, 2006**
                ****
                **March
                    31, 2005**Revenue:Gross
                    premiums written
                
                $
                35,609,073
                
                $
                30,097,044Gross
                    premiums ceded
                
                
                —
                
                
                (2,901,291
                )Net
                    premiums written
                
                
                35,609,073
                
                
                27,195,753Decrease
                    in prepaid reinsurance premiums
                
                
                (8,671,572
                )
                
                (2,675,295
                )(Increase)
                    in unearned premiums
                
                
                (5,130,061
                )
                
                (5,685,560
                )Net
                    change in prepaid reinsurance premiums and unearned
                    premiums
                
                
                (13,801,633
                )
                
                (8,360,855
                )Net
                    premiums earned
                
                
                21,807,440
                
                
                18,834,898Finance
                    revenue
                
                
                636,026
                
                
                1,104,530Managing
                    general agent fees
                
                
                657,968
                
                
                632,315Net
                    investment income
                
                
                1,196,265
                
                
                892,871Net
                    realized investment gains
                
                
                196,211
                
                
                159,523Other
                    income
                
                
                620,799
                
                
                242,469Total
                    revenue
                
                
                25,114,709
                
                
                21,866,606Expenses:Loss
                    and loss adjustment expense
                
                
                7,568,843
                
                
                6,909,997Operating
                    and underwriting expenses
                
                
                2,304,245
                
                
                1,582,531Salaries
                    and wages
                
                
                1,837,961
                
                
                1,578,581Interest
                    expense
                
                
                228,884
                
                
                430,144Policy
                    acquisition costs, net of amortization
                
                
                3,918,052
                
                
                3,825,601Total
                    expenses
                
                
                15,857,985
                
                
                14,326,854Income
                    from continuing operations before provision for income tax expense
                
                
                9,256,724
                
                
                7,539,752Provision
                    for income tax expense
                
                
                3,243,412
                
                
                2,754,076Net
                    income from continuing operations
                
                
                6,013,312
                
                
                4,785,676Discontinued
                    operations:Income
                    from discontinued operations (including gain on disposal of $0
                    and
                    $1,630,000, respectively)
                
                
                —
                
                
                1,630,000Provision
                    for income tax expense
                
                
                —
                
                
                595,396Income
                    from discontinued operations
                
                
                —
                
                
                1,034,604Net
                    income
                
                $
                6,013,312
                
                $
                5,820,280Basic
                    net income per share from continuing operations
                
                $
                0.88
                
                $
                0.78Basic
                    net income per share from discontinued operations
                
                $
                —
                
                $
                0.17Basic
                    net income per share
                
                $
                0.88
                
                $
                0.95Fully
                    diluted net income per share from continuing operations
                
                $
                0.83
                
                $
                0.73Fully
                    diluted net income per share from discontinued operations
                
                $
                —
                
                $
                0.16Fully
                    diluted net income per share
                
                $
                0.83
                
                $
                0.89Weighted
                    average number of common shares outstanding
                
                
                6,844,859
                
                
                6,152,548Weighted
                    average number of common shares outstanding (assuming
                    dilution)
                
                
                7,238,311
                
                
                6,532,023Dividends
                    declared per share
                
                $
                0.12
                
                $
                0.08
  SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS


4




21 ST CENTURY
      HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)


**Three
                    months ended March 31**
                ********
                ****
                ****
                **2006**
                ****
                ****
                **2005**Cash
                    flow from operating activities:
                
                
                
                
                Restated
                  - See note 10Net
                    income
                
                $
                6,013,312
                
                $
                4,785,676Adjustments
                    to reconcile net income to net cash provided by (used for) operating
                    activities:Amortization
                    of investment discount, net
                
                
                (67,385
                )
                
                (53,210
                )Depreciation
                    and amortization of property plant and equipment, net
                
                
                90,846
                
                
                120,725Net
                    realized investment gains
                
                
                196,211
                
                
                213,756Common
                    Stock issued for interest on Notes
                
                
                —
                
                
                315,625Provision
                    for credit losses, net
                
                
                30,524
                
                
                393,762Provision
                    (recovery) for uncollectible premiums receivable
                
                
                15,000
                
                
                (374,470
                )Non-cash
                    compensation
                
                
                156,694
                
                
                —Tax
                    benefit related to non-cash compensation
                
                
                (58,964
                )
                
                —Changes
                    in operating assets and liabilities:Premiums
                    receivable
                
                
                (2,793,963
                )
                
                (1,745,075
                )Prepaid
                    reinsurance premiums
                
                
                8,671,572
                
                
                2,675,295Due
                    from reinsurers, net
                
                
                84,801,399
                
                
                2,224,287Income
                    taxes recoverable
                
                
                —
                
                
                4,066,684Deferred
                    income tax expense
                
                
                (1,606,446
                )
                
                726,008Policy
                    acquisition costs, net of amortization
                
                
                (644,259
                )
                
                (742,237
                )Finance
                    contracts receivable
                
                
                2,443,133
                
                
                (1,831,904
                )Other
                    assets
                
                
                2,257,976
                
                
                297,067Unpaid
                    losses and loss adjustment expenses
                
                
                (100,241,130
                )
                
                (19,804,284
                )Unearned
                    premiums
                
                
                5,130,061
                
                
                5,685,560Premium
                    deposits
                
                
                390,313
                
                
                1,006,983Income
                    taxes payable
                
                
                1,192,254
                
                
                —Bank
                    overdraft
                
                
                18,476,396
                
                
                (3,691,368
                )Accounts
                    payable and accrued expenses
                
                
                (1,451,807
                )
                
                (1,088,794
                )Net
                    cash provided by (used for) operating activities - continuing
                    operations
                
                
                23,001,737
                
                
                (6,819,914
                )Net
                    cash provided by (used for) operating activities - discontinued
                    operations
                
                
                —
                
                
                (1,380,265
                )Net
                    cash provided by (used for) operating activities
                
                
                23,001,737
                
                
                (8,200,179
                )Cash
                    flow (used in) provided by investing activities:Proceeds
                    from sale of investment securities available for
                    sale
                
                
                103,867,819
                
                
                81,245,978Purchases
                    of investment securities available for sale
                
                
                (111,406,949
                )
                
                (77,438,691
                )Purchases
                    of property and equipment
                
                
                (244,136
                )
                
                (104,749
                )Proceeds
                    from sale of assets
                
                
                2,662,930
                
                
                —Net
                    cash (used in) provided by investing activities - continuing
                    operations
                
                
                (5,120,336
                )
                
                3,702,538Net
                    cash (used in) provided by investing activities - discontinued
                    operations
                
                
                —
                
                
                1,689,129Net
                    cash (used in) provided by investing activities
                
                
                (5,120,336
                )
                
                5,391,667Cash
                    flow provided by financing activities:Subordinated
                    debt repaid
                
                
                (1,666,667
                )
                
                —Exercised
                    stock options
                
                
                1,081,815
                
                
                994,078Dividends
                    paid
                
                
                (883,781
                )
                
                (506,749
                )Exercised
                    warrants, net
                
                
                5,964,186
                
                
                —Tax
                    benefit related to non-cash compensation
                
                
                58,964
                
                
                —Revolving
                    credit outstanding
                
                
                (139,567
                )
                
                (125,301
                )Net
                    cash provided by financing activities - continuing
                    operations
                
                
                4,414,950
                
                
                362,028Net
                    increase (decrease) in cash and cash equivalents
                
                
                22,296,351
                
                
                (2,446,484
                )Cash
                    and cash equivalents at beginning of period
                
                
                6,071,460
                
                
                6,127,706Cash
                    and cash equivalents at end of period
                
                $
                28,367,811
                
                $
                3,681,222




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


5


21ST
      CENTURY HOLDING COMPANY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)




(continued)
                
                
                Three
                    months ended March 31,Supplemental
                    disclosure of cash flow information:
                
                
                **2006**
                
                
                **2005**Cash
                    paid during the period for:Interest
                
                $
                156,824
                
                $
                36,188Non-cash
                    investing and finance activities:Accrued
                    dividends payable
                
                $
                761,809
                
                $
                445,103Retirement
                    of subordinated debt by Common Stock issuance
                
                $
                —
                
                $
                1,666,667Stock
                    issued to pay interest on subordinated debt
                
                $
                —
                
                $
                315,625




**SEE
      ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





6




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


**(1)
      Organization and Business**





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





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





Federated
      National is authorized to underwrite personal automobile insurance, homeowners’
property and casualty insurance and mobile home property and casualty insurance
      in Florida as an admitted carrier. American Vehicle is authorized to underwrite
      personal and commercial automobile insurance and commercial general liability
      insurance in Florida as an admitted carrier. In addition, American Vehicle
      is
      authorized to underwrite commercial general liability insurance in Georgia,
      Kentucky, South Carolina and Virginia as a surplus lines carrier and in Texas,
      Louisiana and Alabama as an admitted carrier. American Vehicle operations in
      Florida, Georgia and Louisiana are on-going. American Vehicle operations in
      Texas, Alabama, Kentucky, South Carolina and Virginia are expected to begin
      this
      year. American Vehicle has pending applications, in various stages of approval,
      to be authorized as a surplus lines carrier in the states of Connecticut,
      Illinois, Missouri, Nevada, New Mexico, West Virginia, California and
      Arkansas.





During
      the three months ended March 31, 2006, 64.9%, 23.1% and 12.0% of the premiums
      we
      underwrote were for homeowners’ property and casualty insurance, commercial
      general liability insurance and personal automobile insurance, respectively.
      During the three months ended March 31, 2005, 52.9%, 17.1% and 30.0% of the
      premiums we underwrote were for homeowners’ property and casualty insurance,
      commercial general liability insurance and personal automobile insurance,
      respectively. We internally process claims made by our own and third-party
      insureds through our wholly owned claims adjusting company, Superior Adjusting,
      Inc. (“Superior). We also offer premium financing to our own and third-party
      insureds through our wholly owned subsidiary, Federated Premium.





We
      market
      and distribute our own and third-party insurers’ products and our other services
      primarily in Central and South 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 expect to contract with other managing general agents to market our
      commercial general liability insurance product beyond the state of Florida.
      Assurance MGA currently provides all 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 company’s
      net written premium, policy fee income of $25 per policy and other
      administrative fees from the marketing of companies’ products through the
      Company’s distribution network. The 6% commission fee from Federated National
      and American Vehicle was made effective January 1, 2005. Assurance MGA plans
      to
      establish relationships with additional carriers and add additional insurance
      products in the future.


7




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


Notes
      to
      Consolidated Financial Statements




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





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





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





The
      most
      significant accounting estimates inherent in the preparation of our financial
      statements include estimates associated with management’s evaluation of the
      determination of liability for unpaid loss and loss adjustment expense (“LAE’),
      the amount and recoverability of amortization of deferred policy acquisition
      costs. In addition, significant estimates form the bases for our reserves with
      respect to finance contracts, premiums receivable and deferred income taxes.
      Various assumptions and other factors underlie the determination of these
      significant estimates. The process of determining significant estimates is
      fact
      specific and takes into account factors such as historical experience, current
      and expected economic conditions, and in the case of unpaid loss and LAE, an
      actuarial valuation. Management regularly reevaluates these significant factors
      and makes adjustments where facts and circumstances dictate. In selecting the
      best estimate, we utilize up to 6 different actuarial methodologies. Each of
      these methodologies is designed to forecast the number of claims we will be
      called upon to pay and the amounts we will pay on average to settle those
      claims. In arriving at our best estimate, our actuaries consider the likely
      predictive value of the various loss development methodologies employed in
      light
      of underwriting practices, premium rate changes and claim settlement practices
      that may have occurred, and weight the credibility of each methodology. Our
      actuarial methodologies take into account various factors, including, but not
      limited to, paid losses, liability estimates for reported losses, paid allocated
      loss adjustment expenses, salvage and other recoveries received, reported claim
      counts, open claim counts and counts for claims closed with and without payment
      of loss.





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





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





In
      December 2004, the Financial Accounting Standards Board (“FASB”) revised SFAS
      No. 123, Share-Based Payments (“SFAS No. 123R”). This statement eliminates the
      option to apply the intrinsic value measurement provisions of the Accounting
      Principles Board (“APB”) No. 25 to stock compensation awards issued to
      employees. Rather, SFAS No. 123R requires companies to measure the cost of
      employee services received in exchange for an award of equity instruments based
      on the grant date fair value of the award. That cost will be recognized over
      the
      period during which an employee is required to provide services in exchange
      for
      the award the requisite service period (usually the vesting period). SFAS No.
      123R will also require companies to measure the cost of employee services
      received in exchange for employee stock purchase plan awards. SFAS No. 123R
      was
      effective for 21 st Century’s fiscal year beginning January 1, 2006 as subsequently extended by the
      SEC pursuant to its April 13, 2005 announcement. We have determined that the
      pretax charge to earnings for the year ending 2006 will total approximately
      $0.6
      million, of which approximately $0.2 million was charged to income from
      continuing operations before provision for income taxes for the three months
      ending March 31, 2006. The effect on earnings per share for the period ended
      March 31, 2006 for both undiluted and fully diluted was approximately $0.01
      per
      share. For a more detailed discussion, please see Footnote 8, titled Stock
      Compensation Plans.


8


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


**(C)
      Stock Options**





At
      March
      31, 2006, the Company has three stock-based employee compensation plans, which
      are described later in footnote 8, Stock Compensation Plans. Prior to January
      1,
      2006, we accounted for those plans under the recognition and measurement
      provisions of stock-based compensation using the intrinsic value method
      prescribed by APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Under
      these provisions, no stock-based employee compensation cost was recognized
      in
      the Statement of Operations for the year ended December 31, 2005 as all options
      granted under those plans had an exercise price equal to or less than the market
      value of the underlying common stock on the date of grant. Effective January
      1,
      2006, the Company adopted the fair value recognition provisions of SFAS
      No.
      123R using
      the modified-prospective-transition method. Under that transition method,
      compensation cost recognized in the first quarter of 2006 includes: (a)
      compensation cost for all share-based payments granted prior to, but not yet
      vested as of January 1, 2006, based on the grant date fair value estimated
      in
      accordance with the original provisions of Statement 123, and (b) compensation
      cost for all share-based payments granted subsequent to January 1, 2006, based
      on the grant-date fair-value estimated in accordance with the provisions of SFAS
      No.
      123R .
      Results
      for prior periods have not been restated. There were no stock options granted
      during the three months ended March 31, 2006 and a dditional
      stock option awards are not anticipated in future years. For
      a
      further discussion regarding the provisions of SFAS
      No.
      123R and its
      effect on our operations, please refer to footnote 8, Stock Compensation
      Plans.





**(D)** **E** **arnings
      Per Share**





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





**(E)
      Reclassifications**





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





**(3)
      Revolving Credit Outstanding**





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





The
      amounts of WPAC’s advances are subject to availability under a borrowing base
      calculation, with maximum advances outstanding not to exceed the maximum credit
      commitment. The annual interest rate on advances under the Revolving Agreement
      equals the prime rate plus additional interest varying from 1.25% to 3.25%
      based
      on the prior month’s ratio of contracts receivable related to insurance
      companies with an A. M. Best rating of B or lower, to total contracts
      receivable. The effective interest rate on this line of credit, based on our
      average outstanding borrowings under the Revolving Agreement, was 11.64%
      and  6.94%  for
      the
      three months ended March 31, 2006 and 2005, respectively.





Outstanding
      borrowings under the Revolving Agreement as of March 31, 2006 were approximately
      $57,000. Outstanding borrowings as of December 31, 2005 were approximately
      $197,000. Interest expense on this revolving credit line for the three months
      ended March 31, 2006 and March 31, 2005 totaled approximately $3,700 and
      $36,000, respectively.


9




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


Notes
      to
      Consolidated Financial Statements




**(4)
      Commitments and Contingencies**





We
      are
      involved in other 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.





As
      a
      direct premium writer in the State of Florida, we are required to participate
      in
      certain insurer solvency association under Florida Statutes 631.57(3) (a).
      Participation in these pools is based on our written premium by line of business
      to total premiums written statewide by all insurers. Participation may result
      in
      assessments against us. There was no assessment made for the year ended December
      31, 2005 or through the date of this report.





Federated
      National and American Vehicle are also required to participate in an insurance
      apportionment plan under Florida Statutes Section 627.351, which is referred
      to
      as a JUA Plan. The JUA Plan provides for the equitable apportionment of any
      profits realized, or losses and expenses incurred, among participating motor
      vehicle insurers. In the event of an underwriting deficit incurred by the JUA
      Plan which is not recovered through the policyholders in the JUA Plan, such
      deficit shall be recovered from the companies participating in the JUA Plan
      in
      the proportion that the net direct written premiums of each such member during
      the preceding calendar year bear to the aggregate net direct premiums written
      in
      this state by all members of the JUA Plan. Federated National and American
      Vehicle were assessed $44,350 and $1,615, respectively by the JUA Plan based
      on
      its July 2005 Cash Activity Report. 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 Property Insurance Corporation “Citizens” determined a 2004 plan year
      deficit existed in the High Risk Account. The Board decided that a $515 million
      Regular Assessment is in the best interest of Citizens and consistent with
      Florida Statutes. On this basis, the Board certified for a Regular Assessment.
      Federated National’s participation in this assessment totaled $2.0 million.
      Provisions contained in our excess of loss reinsurance policies provide for
      their participation totaling $1.5 million. Pursuant to Section 627.3512, Florida
      Statutes, insurers are permitted to recoup the assessment by adding a surcharge
      to policies in an amount not to exceed the amount paid by the insurer to
      Citizens. Federated National is currently underwriting the recoupment in
      connection with this assessment began in March 2006. As noted above, Federated
      National is entitled to recoup this assessment, and will subrogate $1.5 million
      to our reinsurers.





The
      Florida Office of Insurance Regulation (“OIR”) issued OIR-06-008M dated May
      4 th 2006 to
      all property and casualty, Surplus lines Insurers, and Surplus Lines Agents
      in
      the state of Florida placing them on notice of an anticipated Florida Hurricane
      Catastrophic Fund (“FHCF”) assessment. Sighting the unprecedented hurricane
      seasons of 2004 and 2005, the FHCF has exhausted nearly all of the $6 billion
      in
      reserves it has accumulated since its inception in 1993. The OIR anticipates
      the
      Florida State Board of Administration, the body that oversees the FHCF, will
      issue its directive to levy an emergency assessment upon all property and
      casualty business in the state of Florida near the end of May 2006.





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





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


10


**21** **st** **Century Holding Company**
 Notes
        to
        Consolidated Financial Statements
  **Fiscal
                  Year**
              ****
              ****
              **Lease
                  payments**2006
              
              $
              418,1872007
              
              
              557,5832008
              
              
              557,5832009
              
              
              557,5832010
              
              
              557,583Thereafter
              
              
              557,583Total
              
              $
              3,206,102





**(5)
      Comprehensive Income**





For
      the
      three months ended March 31, 2006 and 2005, comprehensive income consisted
      of
      the following:


**For
                  the three months ended March 31,**
              ********
              ****
              **2006**
              ****
              **2005**Net
                  income
              
              $
              6,013,312
              
              $
              5,820,280Change
                  in net unrealized gains on investments available for sale
              
              
              182,260
              
              
              (737,566
              )Comprehensive
                  income, before tax
              
              
              6,195,572
              
              
              5,082,714Income
                  tax (expense) benefit related to items of other comprehensive
                  income
              
              
              (68,585
              )
              
              278,520Comprehensive
                  income
              
              $
              6,126,987
              
              $
              5,361,234





**(6)
      Segment Information**





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





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





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


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


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





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





Accordingly,
      we have discontinued our segment disclosures due to the finance segment not
      exceeding the 10% threshold for revenues, earnings or assets.





**(7)
      Reinsurance Agreements**





We
      follow
      industry practice of reinsuring a portion of our risks and paying for that
      protection based upon premiums received on all policies 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 loss.


11


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





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





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





Maximum
      coverage afforded from the combined policies of our FHCF and excess of loss
      policies in effect for varying dates from June 1, 2005 to June 30, 2006 total
      approximately $194.8 million. FHCF will retain approximately $131.0 million,
      our
      excess of loss reinsurance policies will retain $64.0 million, and the Company
      will retain the first $3 million of insurable losses for two events. For events
      beyond the second largest catastrophic event during the policy term, FHCF
      coverage attaches after the Company and its excess of loss reinsures collective
      retention of approximately $15.0 million. Additionally, unused coverage from
      our
      excess of loss reinsurance treaties may be carried forward and totals $20.0
      million. However,
      loss and LAE incurred up to approximately $15.0 million for each hurricane
      subsequent to Hurricane Wilma in October 2005 and through June 30, 2006 and
      deemed to be a catastrophic event would be the responsibility of the Company.
      To
      date, no such catastrophic events have occurred.





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


****
              **Claim**
              ****
              **Gross**
              ****
              **Reinsurance**
              ****
              **Net**
              ******2004
                  Hurricanes**
              ****
              **Count**
              ****
              **Losses**
              ****
              **Recoveries**
              ****
              **Losses**(Dollars
                  in millions)Charley
                  (August 13)
              
              
              2,567
              
              $
              59.5
              
              $
              49.5
              
              $
              10.0Frances
                  (September 3)
              
              
              3,805
              
              
              50.2
              
              
              40.2
              
              
              10.0Ivan
                  (September 14)
              
              
              1,061
              
              
              21.0
              
              
              -
              
              
              21.0Jeanne
                  (September 25)
              
              
              1,557
              
              
              13.1
              
              
              -
              
              
              13.1Total
                  Loss Estimate
              
              
              8,990
              
              $
              143.8
              
              $
              89.7
              
              $
              54.1****
              ****
              **Claim**
              ****
              ****
              **Gross**
              
              
              **Reinsurance**
              
              
              **Net****2005
                  Hurricanes**
              
              
              **Count**
              
              
              **Losses**
              
              
              **Recoveries**
              
              
              **Losses**(Dollars
                  in millions)Dennis
                  (July 10)
              
              
              320
              
              $
              2.7
              
              
              -
              
              $
              2.7Katrina
                  (August 25)
              
              
              2,094
              
              
              14.6
              
              
              11.6
              
              
              3.0Rita
                  (September 20)
              
              
              19
              
              
              0.2
              
              
              -
              
              
              0.2Wilma
                  (October 24)
              
              
              11,038
              
              
              137.8
              
              
              134.8
              
              
              3.0Total
                  Loss Estimate
              
              
              13,471
              
              $
              155.3
              
              $
              146.4
              
              $
              8.9





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




During
      2005 and 2004 American Vehicle did not
      reinsure any of its insurance products.


12




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




**(8)
      Stock Compensation Plans**





We
      implemented a stock option plan in November 1998 that provides for the granting
      of stock options to officers, key employees and consultants. The objectives
      of
      this plan include attracting and retaining the best personnel, providing for
      additional performance incentives, and promoting our success by providing
      employees the opportunity to acquire common stock. Options outstanding under
      this plan have been granted at prices which are either equal to or above the
      market value of the stock on the date of grant, vest over a four-year period,
      and expire ten years after the grant date. Under this plan, we are authorized
      to
      grant options to purchase up to 900,000 common shares, and, as of March 31,
      2006
      and December 31, 2005, we had outstanding exercisable options to purchase 69,750
      and 97,650 shares, respectively.





In
      2001,
      we implemented a franchisee stock option plan that provides for the granting
      of
      stock options to individuals purchasing Company owned agencies which are then
      converted to franchised agencies. The purpose of the plan is to advance our
      interests by providing an additional incentive to encourage managers of Company
      owned agencies to purchase the agencies and convert them to franchises. Options
      outstanding under the plan have been granted at prices which are above the
      market value of the stock on the date of grant, 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, though in connection
      with
      our sale of our franchise operations we do not anticipate additional options
      to
      be granted under this plan. As of March 31, 2006 and December 31, 2005, we
      had
      outstanding exercisable options to purchase -0- and 15,000 shares, respectively.





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
      key
      employees, consultants, independent contractors, and Officers and Directors,
      upon whose efforts and judgment our success is largely dependent, by authorizing
      the grant of options to purchase Common Stock to persons who are eligible to
      participate hereunder, thereby encouraging stock ownership by such persons,
      all
      upon and subject to the terms and conditions of the Plan. Options outstanding
      under the plan have been granted at prices which are above the market value
      of
      the stock on the date of grant, vest over a five-year period, and expire six
      years after the grant date. Under this plan, the Company is authorized to grant
      options to purchase up to 1,800,000 common shares, and, as of March 31, 2006
      and
      December 31, 2005, we had outstanding exercisable options to purchase 727,589
      and 818,608 shares, respectively.





Activity
      in the Company’s stock option plans for the period from January 1, 2005 to March
      31, 2006, is summarized below:




**1998
                Plan**
            
            **2001
                Franchisee Plan**
            
            **2002
                Plan****Number
                of Shares**
            
            **Weighted
                Average Option Exercise Price**
            
            **Number
                of Shares**
            
            **Weighted
                Average Option Exercise Price**
            
            **Number
                of Shares**
            
            **Weighted
                Average Option Exercise Price**Outstanding
                at January 1, 2005
            
            
            198,275
            
            $
            6.67
            
            
            15,000
            
            $
            9.17
            
            
            906,300
            
            $
            10.80Granted
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            446,500
            
            $
            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
            
            
            818,608
            
            $
            12.35Granted
            
            
            —
            
            
            
            
            
            —
            
            
            
            
            
            —
            
            $
            —Exercised
            
            
            (27,900
            )
            $
            6.67
            
            
            (15,000
            )
            $
            9.17
            
            
            (82,319
            )
            $
            9.22Cancelled
            
            
            —
            
            $
            6.67
            
            
            —
            
            
            
            
            
            (8,700
            )
            $
            10.35Outstanding
                at March 31, 2006
            
            
            69,750
            
            $
            6.67
            
            
            —
            
            $
            —
            
            
            727,589
            
            $
            12.72


13


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


Options
      outstanding as of March 31, 2006 are
      exercisable as follows:


**1998
                  Plan******
              ****
              **2001
                  Franchisee Plan**********
              ****
              **2002
                  Plan**********
              ******Options
                  Exercisable at:**
              ****
              **Number
                  of Shares**
              ****
              **Weighted
                  Average Option Exercise Price**
              ****
              **Number
                  of Shares**
              ****
              **Weighted
                  Average Option Exercise Price**
              
              **Number
                  of Shares**
              ****
              **Weighted
                  Average Option Exercise Price**March
                  31, 2006
              
              
              68,250
              
              $
              6.67
              
              
              —
              
              $
              —
              
              
              283,489
              
              $
              12.72December
                  31, 2006
              
              
              1,500
              
              $
              6.67
              
              
              —
              
              
              
              
              
              112,600
              
              $
              12.72December
                  31, 2007
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              120,700
              
              $
              12.72December
                  31, 2008
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              87,100
              
              $
              12.72December
                  31, 2009
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              75,100
              
              $
              12.72December
                  31, 2010
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              48,600
              
              $
              12.72Thereafter
              
              
              —
              
              
              
              
              
              —
              
              
              
              
              
              —Total
                  options exercisible
              
              
              69,750
              
              
              
              
              
              —
              
              
              
              
              
              727,589
  At
      March 31, 2006, the Company has
      three stock-based employee compensation plans, 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. 123 (R) using the modified-prospective-transition method.
      Under that transition method, compensation cost recognized in the first quarter
      of 2006 includes: (a) compensation cost for all share-based payments granted
      prior to, but not yet vested as of January 1, 2006, based on the grant date
      fair
      value estimated in accordance with the original provisions of Statement 123,
      and
      (b) compensation cost for all share-based payments granted subsequent to January
      1, 2006, based on the grant-date fair-value estimated in accordance with the
      provisions of SFAS
      No.
      123R .
      Results
      for prior periods have not been restated.





As
      a
      result of adopting SFAS
      No.
      123R on
      January 1, 2006, the Company’s income from continuing operations before
      provision for income taxes and net income for the three months ended March
      31,
      2006, are lower by approximately $157,000 and $98,000, 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 three month period ended March
      31,
      2006 for both basic and diluted would have been $0.89 and $0.84, respectively,
      if the Company had not adopted SFAS
      No.
      123R ,
      compared to reported basic and diluted earnings per share of $0.88 and $0.83,
      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
      following table illustrates the effect on net income and earnings per share
      if
      the Company had applied the fair value recognition provisions of Statement
      123
      to options granted under our stock option plans in the period presented. For
      purposes of this provision disclosure and comparability, the value of the
      options were estimated using
      the
      Black-Scholes option-pricing model and amortized to expense over the options
      vesting periods.


14




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


Notes
      to
      Consolidated Financial Statements




**For
                  the three**
                **months
                  ended**
              ********
              ****
              **March
                  31, 2005**Net
                  Income as reported
              
              $
              5,820,280Compensation,
                  net of tax effect
              
              
              653,931Pro
                  forma net income
              
              $
              5,166,349Net
                  income per shareAs
                  reported - Basic
              
              $
              0.95As
                  reported - Diluted
              
              $
              0.89Pro
                  forma - Basic
              
              $
              0.84Pro
                  forma - Diluted
              
              $
              0.79
  Additional
      stock option awards are not anticipated in future years.





There
      were no new options granted during the three months ending March 31, 2006.
      The
      weighted average fair value for new options granted during the three months
      ending March 31, 2005, estimated on the date of grant using the Black-Scholes
      option-pricing model was $20.00. In connection with the sale of Express Tax
      Service, Inc. and EXPRESSTAX Franchise Corporation on January 1, 2005, 105,000
      Incentive Stock Options under the 2002 Stock Option plan were cancelled and
      reissued as Non-Qualified Stock Options.





The
      weighted average fair value of options granted during 2005 as estimated on
      the
      date of grant using the Black-Scholes option-pricing model was $2.81 to $10.75
      in 2005. The fair value of options granted is estimated on the date of grant
      using the following assumptions:





**March
                  31, 2006**
              **March
                  31, 2005**Dividend
                  yield
              2.80%
              2.33%
                  to 2.41%Expected
                  volatility
              44.30%
              95.82%
                  to 96.76%Risk-free
                  interest rate
              4.83%
              3.34%
                  to 3.86%Expected
                  life (in years)
              2.04
                  to 2.82
              2.60
                  to 2.63





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





Summary
      information about the Company’s stock options outstanding at March 31,
      2006:


**Range
                  of**
                **Exercise
                  Price**
              **Outstanding
                  at**
                **March
                  31, 2006**
              **Weighted
                  Average**
                **Contractual**
                **Periods
                  in Years**
              **Weighted**
                **Average**
                **Exercise
                  Price**
              **Exercisable
                  at**
                **March
                  31, 2006**1998
                  Plan
              $6.67
              69,750
              2.60
              $6.67
              68,2502001
                  Franchise Plan
              —
              —
              —
              —
              —2002
                  Plan
              $8.33
                  - $17.00
              727,589
              2.82
              $12.72
              283,489





**(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.


15


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


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





The
      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 entitle the holder to purchase 3⁄4 of one share of our Common
      Stock at an exercise price of $12.74 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 507,491. 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 July 2003 Warrants
      had
      zero value at the date of issuance.




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





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





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





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





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




**Quarterly
                  payment due date**
              
              **2006**
              ****
              **2005**January
                  31,
              
              
              -
              
              
              55,537April
                  30,
              
              
              -
              
              
              -July
                  31,
              
              
              -
              
              
              -October
                  31,
              
              
              -
              
              
              -Total
                  common stock issued
              
              
              -
              
              
              55,537


16


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


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


**Quarterly
                  payment due date**
              
              **2006**
              
              **2005**January
                  31,
              
              
              -
              
              
              103,870April
                  30,
              
              
              -
              
              
              -July
                  31,
              
              
              -
              
              
              -October
                  31,
              
              
              -
              
              
              -Total
                  common stock issued
              
              
              -
              
              
              103,870





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





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





For
      the
      September 2004 Notes, the quarterly principal and interest payments, totaling
      approximately $1.2 million per payment, are due quarterly for two more years
      with the last installment due on September 30, 2007. The scheduled loan payments
      for the next two years are as follows:


**For
                  the period**Year
                  ending December 31, 2006
              
              $
              3,125,000Year
                  ending December 31, 2007
              
              
              4,166,666Total
              
              $
              7,291,666





**(10)
      Discontinued Operations**





In
      2006
      the company has separately disclosed the operating, investing and financing
      portions of the cash flows attributable to its discontinued operations, which
      in
      prior periods were reported on a combined basis with its continuing
      operations.





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





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





In
      connection with the transaction, the Company has extended the expiration dates
      for the 75,000 outstanding stock options previously granted to Mr. Kluba and
      the
      30,000 outstanding stock options previously granted to Mr. Kluba’s wife, such
      that 80% of such stock options shall expire, if not exercised, on the first
      anniversary date of the closing and the remaining 20% of such stock options
      shall expire on the second anniversary date of the closing; none of these
      options were exercisable for the six-month period following the
      closing.


17


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





**Item
      2**





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





**Forward-Looking
      Statements**





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




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





**Overview**





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





We
      are an
      insurance holding company, which, through our subsidiaries and our contractual
      relationships with our independent agents and general agents, control
      substantially all aspects of the insurance underwriting, distribution and claims
      process. We are authorized to underwrite personal automobile insurance,
      commercial general liability insurance, homeowners’ property and casualty
      insurance and mobile home property and casualty 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.





Federated
      National is authorized to underwrite personal automobile insurance, homeowners’
property and casualty insurance and mobile home property and casualty insurance
      in Florida as an admitted carrier. American Vehicle is authorized to underwrite
      personal and commercial automobile insurance and commercial general liability
      insurance in Florida as an admitted carrier. In addition, American Vehicle
      is
      authorized to underwrite commercial general liability insurance in Georgia,
      Kentucky, South Carolina and Virginia as a surplus lines carrier and in Texas,
      Louisiana and Alabama as an admitted carrier. American Vehicle operations in
      Florida, Georgia and Louisiana are on-going. American Vehicle operations in
      Texas, Alabama, Kentucky, South Carolina and Virginia are expected to begin
      this
      year. American Vehicle has pending applications, in various stages of approval,
      to be authorized as a surplus lines carrier in the states of Connecticut,
      Illinois, Missouri, Nevada, New Mexico, West Virginia, California and
      Arkansas.


18




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


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




During
      the three months ended March 31, 2006, 64.9%, 23.1% and 12.0% of the premiums
      we
      underwrote were for homeowners’ property and casualty insurance, commercial
      general liability insurance and personal automobile insurance, respectively.
      During the three months ended March 31, 2005, 52.9%, 17.1% and 30.0% of the
      premiums we underwrote were for homeowners’ property and casualty insurance,
      commercial general liability insurance and personal automobile insurance,
      respectively. We internally process claims made by our own and third-party
      insureds through our wholly owned claims adjusting company, Superior. We also
      offer premium financing to our own and third-party insureds through our wholly
      owned subsidiary, Federated Premium.





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





Assurance
      MGA, a wholly owned subsidiary, acts as Federated National’s and American
      Vehicle’s exclusive managing general agent. Assurance MGA currently provides all
      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 company’s net written premium, policy fee
      income of $25 per policy and other administrative fees from the marketing of
      companies’ products through the Company’s distribution network. The 6%
      commission fee from Federated National and American Vehicle was made effective
      January 1, 2005. Assurance MGA plans to establish relationships with additional
      carriers and add additional insurance products in the future.





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





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





In
      Florida, more than 200 companies, are authorized to underwrite homeowners’
insurance. Comparable companies which compete with us in the homeowners’ market
      include Allstate Insurance Company, State Farm Insurance Company, First
      Floridian Insurance Company, and Vanguard Insurance Company. Subsequent to
      March
      31, 2006, but before the filing of this report the Florida OIR announced the
      take over of three of our major competitors due to the poor financial condition
      stemming from the effects of last years catastrophic hurricanes. We are
      currently experiencing an increase in policy volume relative to our homeowners’
insurance products due to the narrowed competition.





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





With
      respect to automobile insurance in Florida, we compete with more than 100
      companies, which underwrite personal automobile insurance. Comparable
      companies which compete with us in the personal automobile insurance market
      include Affirmative Insurance Holdings, Inc., which acquired our non-standard
      automobile agency business in Florida, 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.


19


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




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




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




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




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




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




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




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




·
            Legislative
                actions,




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




·
            Changes
                in our underwriting standards, and




·
            Any
                changes in our claim handling
                procedures.




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




20




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




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




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




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




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




**New
      Accounting Pronouncements**




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




At
      March
      31, 2006, the Company has three stock-based employee compensation plans, which
      are described in Item 1, Part I, “Financial Statements - Note 8 - Stock
      Compensation Plans” of this Form 10-Q. Prior to January 1, 2006, we accounted
      for those plans under the recognition and measurement provisions of stock-based
      compensation using the intrinsic value method prescribed by APB Opinion No.
      25, *Accounting
      for Stock Issued to Employees,* and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Under
      these provisions, no stock-based employee compensation cost was recognized
      in
      the Statement of Operations for the years ended December 31, 2005 or 2004 as
      all
      options granted under those plans had an exercise price equal to or 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. 123 (R) using the modified-prospective-transition method.
      Under that transition method, compensation cost recognized in the first quarter
      of 2006 includes: (a) compensation cost for all share-based payments granted
      prior to, but not yet vested as of January 1, 2006, based on the grant date
      fair
      value estimated in accordance with the original provisions of Statement 123,
      totaling approximately $157,000 and (b) compensation cost for all share-based
      payments granted subsequent to January 1, 2006, based on the grant-date
      fair-value estimated in accordance with the provisions of SFAS No. 123R; and
      totaled nothing because we did not grant any new options during the first
      quarter of 2006. Results for prior periods have not been restated and there
      were
      no cumulative adjustments recorded in the March 31, 2006 Statement of Operations
      as a result of the adoption of FASB Statement 123 (R).





As
      a
      result of adopting SFAS No. 123R on January 1, 2006, the Company’s Income from
      continuing operations before provision for income taxes and Net income for
      the
      three months ended March 31, 2006, are lower by approximately $157,000 and
      $
      98,000, respectively, than if it had continued to account for share-based
      compensation under ABP Opinion No. 25. Basic and diluted earnings per share
      for
      the three month period ended March 31, 2006 for both basic and diluted would
      have been $0.89 and $0.84, respectively, if the Company had not adopted SFAS
      No.
      123R, compared to reported basic and diluted earnings per share of $0.88 and
      0.83, respectively. Our estimate for compensation cost related to non-vested
      awards not yet recognized as of January 1, 2006 total approximately $1.7 million
      and the weighted average period over which it is expected to be recognized
      ranges between 2.6 and 2.82 years.





The
      weighted average fair value of options granted during 2005 as estimated on
      the
      date of grant using the Black-Scholes option-pricing model was $2.81 to $10.75
      in 2005. The fair value of options granted is estimated on the date of grant
      using the following assumptions:


-21-


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


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





**March
                31, 2006**
            ****
            **March
                31, 2005**Dividend
                yield
            
            
            2.80%
            
            
            2.33%
                to 2.41%Expected
                volatility
            
            
            44.30%
            
            
            95.82%
                to 96.76%Risk-free
                interest rate
            
            
            4.83%
            
            
            3.34%
                to 3.86%Expected
                life (in years)
            
            
            2.04
                to 2.82
            
            
            2.60
                to 2.63





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





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





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





**Analysis
      of Financial Condition**


**As
      of March 31, 2006 as Compared to December 31, 2005**





**Total
      Investments**




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





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


Total
        Investments increased $7.5 million, or 7.5%, to $107.6 million as of March
        31,
        2006, as compared to $100.1 million as of December 31, 2005.
        The
        increase is primarily a result of our investment of the proceeds from an
        increase in written insurance premiums.





The
        fixed
        maturities and the equity securities that are available for sale and carried
        at
        fair value represent 81.7% of total investments as of March
        31,
        2006, as compared to 80.3% as of December 31, 2005.


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





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


-22-


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


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





**Unrealized
                Gains and (Losses)****March
                31, 2006**
            ****
            **December
                31, 2005**Fixed
                maturities:U.S.
                government obligations and agency obligations
            
            $
            (982,314
            )
            $
            (618,703
            )Obligations
                of states and political subdivisions
            
            
            (247,534
            )
            
            (135,305
            )(1,229,848
            )
            
            (754,008
            )Corporate
                securities:Communications
            
            
            9,747
            
            
            14,735Financial
            
            
            (100,865
            )
            
            (225,768
            )Other
            
            
            (20,709
            )
            
            (19,681
            )(111,827
            )
            
            (230,714
            )Equity
                securities:Common
                stocks
            
            
            (940,781
            )
            
            (1,479,994
            )Total
                unrealized gains and (losses), net
            
            $
            (2,282,456
            )
            $
            (2,464,716
            )





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





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





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





The
      investments held at March 31, 2006 and December 31, 2005 were comprised mainly
      of United States government and agency bonds as well as municipal bonds which
      are viewed by the Company as conservative and less risky holdings however,
      sensitive to interest rate changes. There is a smaller concentration of
      corporate bonds predominantly held in the financial and conglomerate industries.
      Approximately two-thirds of the equity holdings are in income funds while the
      other third is invested in equities related to the mortgage investment industry
      and business service industry.





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


-23-


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


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





**Cash
      and Cash Equivalents**





Cash
      and
      cash equivalents, which include cash, certificates of deposits, and money market
      accounts increased $22.3 million, or 367.2%, to $28.4 million as of March 31,
      2006, as compared to $6.1 million as of December 31, 2005. These balances are
      held primarily in money market accounts and are available for the settlement
      of
      hurricanes related claims.





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





Finance
      contracts receivable, net of allowance for credit losses, decreased $2.5
      million, or 33.8%, to $4.8 million as of March 31, 2006, as compared to $7.3
      million as of December 31, 2005. The decrease is primarily due to our sale
      in
      December 2004 of our assets related to our non-standard automobile insurance
      agency business in Florida and the associated financed contracts. We anticipate
      a continued decline in the financed contracts receivable, net over the future
      short term and its related conversion to cash, cash equivalents and
      investments.





**Prepaid
      Reinsurance Premiums**





Prepaid
      reinsurance premiums decreased $8.7 million, or 71.5%, to $3.5 million as of
      March 31, 2006, as compared to $12.1 million as of December 31, 2005. The
      decrease is due to the amortization of prepaid reinsurance premiums associated
      with our homeowners’ book of business.





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





Premiums
      receivable, net of allowance for credit losses, increased $2.8 million, or
      37.0%, to $10.3 million as of March 31, 2006, as compared to $7.5 million as
      of
      December 31, 2005.





The
      largest component of the increase relates to our expanding homeowners’ insurance
      business for which premiums receivable increased $2.2 million, or 113.5%, to
      $4.1 million as of March 31, 2006, as compared to $1.9 million as of December
      31, 2005. The increase in the homeowner’s receivable is due to the Company’s
      success in expanding homeowner’s written premium to new customers and the
      implementation of overall rate increases..





Additional
      components of the premium receivable include amounts in connection with our
      commercial general liability insurance business which increased $1.1 million,
      or
      47.0%, to $3.3 million as of March 31, 2006, as compared to $2.3 million as
      of
      December 31, 2005.





Premiums
      receivable in connection with our automobile line of business decreased $0.8
      million, or 19.8%, to $3.4 million as of March 31, 2006, as compared to $4.2
      million as of December 31, 2005. The decrease in automobile related premiums
      receivable is associated with the sale of our distribution channels in
      connection with the sale of our agencies, effective December 31, 2004.





**Reinsurance
      Recoverable**





Reinsurance
      recoverable decreased $84.8 million, or 62.1%, to $51.9 million as of March
      31,
      2006, as compared to $136.7 million as of December 31, 2005. The decrease is
      due
      to the timing of settlements with our reinsurers in connection with the
      adjustment of loss and LAE claims as they relate to costs recoverable under
      our
      reinsurance agreements. All amounts are considered current; the private
      reinsurance recoverable is collateralized by irrevocable letters of credit
      in
      favor of Federated National.





**Deferred
      Policy Acquisition Costs**





Deferred
      policy acquisition costs increased $0.6 million, or 7.0%, to $9.8 million as
      of
      March 31, 2006, as compared to $9.2 million as of December 31, 2005. The
      increased production volume for both the homeowners’ and commercial general
      liability product lines is the reason for the modest increase to this
      asset.


-24-


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


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





**Deferred
      Income Taxes, net**





Deferred
      income taxes, net, increased $1.6 million, or 59.4%, to $4.3 million as of
      March
      31, 2006, as compared to $2.7 million as of December 31, 2005. The increase
      is
      primarily due to a $1.0 million increase in discounted unearned premiums and
      $1.0 million in connection with the sale of our property in Lauderdale
      Lakes.





**Property,
      Plant and Equipment, net**





Property,
      plant and equipment, net, decreased $2.5 million, or 64.3%, to $1.4 million
      as
      of March 31, 2006, as compared to $3.9 million as of December 31, 2005.
      Effective on or about March 1, 2006, 21 st Century
      sold its interest in the Lauderdale Lakes property to an unrelated party for
      approximately $5.0 million cash and a $0.9 million six year 5% note, generating
      a gain on sale totaling approximately $2.9 million. As part of the transaction,
      21 st Century
      has agreed to lease the same facilities for a six year term. Our lease for
      this
      office space expires in February 2011. The Company has recognized a deferred
      gain in connection with the sale totaling approximately $2.8 million.





**Other
      Assets**





Other
      assets increased $0.5 million, or 11.6%, to $5.1 million as of March 31, 2006,
      as compared to $4.6 million as of December 31, 2005. Other assets include $2.0
      million related to Federated National’s statutory approval to recoup the
      Citizens assessment by adding a surcharge to homeowner insurance policies in
      an
      amount limited to the assessment. Major components of other assets are as
      follows:





**March
                31, 2006**
            ****
            **December
                31, 2005**Accrued
                interest income
            
            $
            828,298
            
            $
            734,059Notes
                receivable
            
            
            878,646
            
            
            -Unamortized
                loan costs
            
            
            222,106
            
            
            310,832Compensating
                cash balances
            
            
            114,188
            
            
            363,021Due
                from sale of discontinued operations, net
            
            
            410,000
            
            
            410,000Recoupment
                of Citizen's assessment
            
            
            2,025,210
            
            
            2,025,210Other
            
            
            633,018
            
            
            736,941Total
            
            $
            5,111,466
            
            $
            4,580,063





**Unpaid
      Losses and LAE**





Unpaid
      losses and LAE decreased $100.2 million, or 65.1%, to $53.8 million as of March
      31, 2006, as compared to $154.0 million as of December 31, 2005. The decrease
      in
      unpaid losses and LAE relates to our payment patterns primarily relative to
      the
      settling of hurricane related claims. The composition of unpaid loss and LAE
      by
      product line is as follows:





**March
                31, 2006**
            
            **December
                31, 2005**Homeowners'
            
            $
            36,268,901
            
            $
            135,883,242Commercial
                general liability
            
            
            4,611,007
            
            
            2,951,041Automobile
            
            
            12,917,505
            
            
            15,204,261$
            53,797,413
            
            $
            154,038,544





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


-25-


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


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





**Unearned
      Premium**





Unearned
      premiums increased $5.1 million, or 8.3%, to $67.0 million as of March 31,
      2006,
      as compared to $61.8 million as of December 31, 2005. The increase was due
      to a
      $3.0 million increase in unearned homeowners’ insurance premiums, a $2.4 million
      increase in unearned commercial liability premiums, a $0.4 million decrease
      in
      unearned automobile premiums, and a $0.1 million decrease in unearned mobile
      home insurance premiums. These changes reflect our continued emphasis in 2006
      on
      property and commercial general liability insurance products.




**Revolving
      Credit Outstanding**





Revolving
      credit outstanding decreased $0.1 million, or 70.9%, to $0.1 million as of
      March
      31, 2006, as compared to $0.2 million as of December 31, 2005. The decrease
      is
      due to our cash management efforts, requested credit reduction from the lender,
      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 $18.5 million, or 151.0%, to $30.7 million as of March
      31,
      2006, as compared to $12.2 million as of December 31, 2005. The bank overdraft
      relates to hurricane-related loss and LAE disbursements paid but not yet
      presented for payment by the policyholder or vendor. The increase relates to
      our
      payment patterns in relationship to the rate at which those cash disbursements
      are presented to the bank for payment.





**Funds
      Held Under Reinsurance Treaties**





Funds
      held under reinsurance treaties remained unchanged at $1.5 million as of March
      31, 2006, as compared to $1.5 million as of December 31, 2005. During its
      regularly scheduled meeting on August 17, 2005, the Board of Governors of
      Citizens determined a 2004 plan year deficit existed in the High Risk Account.
      The Board decided that a $515 million Regular Assessment is in the best interest
      of Citizens and consistent with Florida Statutes. On this basis, the Board
      certified for a Regular Assessment. Federated National’s participation in this
      assessment totaled $2.0 million. Provisions contained in our excess of loss
      reinsurance policies provide for their participation totaling $1.5 million.
      Pursuant to Section 627.3512, Florida Statutes, insurers are permitted to recoup
      the assessment by adding a surcharge to policies in an amount not to exceed
      the
      amount paid by the insurer to Citizens. Federated National is currently
      underwriting the recoupment in connection with this assessment which began
      during the later part of the first quarter of 2006. As noted above, Federated
      National is entitled to recoup this assessment, and will subrogate $1.5 million
      to our reinsurers.





**Income
      Taxes Payable**





Income
      taxes payable increased $1.2 million, or 39.5%, to $4.2 million as of March
      31,
      2006, as compared to $3.0 million as of December 31, 2005. The increase is
      due
      to the one time gain in connection with the sale of our property in Lauderdale
      Lakes and our continued profitable operations.





**Subordinated
      Debt**





Subordinated
      Debt decreased $1.7 million, or 16.3%, to $8.5 million as of March 31, 2006,
      as
      compared to $10.2 million as of December 31, 2005. The decrease is in connection
      with the quarterly principle payments as scheduled.





**Deferred
      Gain from Sale of Property**





Deferred
      gain from sale of property increased to $2.8 million as of March 31, 2006,
      as
      compared to nothing as of December 31, 2005. In accordance with the provisions
      of FASB No. 13, we will amortize the deferred gain over the term of the
      lease-back which is scheduled to end in December 2011.





-26-


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


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





**Accounts
      Payable and Accrued Expenses**





Accounts
      payable and accrued expenses decreased $1.5 million, or 34.9%, to $2.7 million
      as of March 31, 2006, as compared to $4.2 million as of December 31, 2005.
      The
      decrease is due to our cash management efforts and timing of payments with
      our
      trade vendors.





**Results
      of Operations**


**Three
      Months Ended March 31, 2006 as Compared to Three Months Ended March 31,
      2005**





**Gross
      Premiums Written**





Gross
      premiums written increased $5.5 million, or 18.3%, to $35.6 million for the
      three months ended March 31, 2006, as compared to $30.1 million for the three
      months ended March 31, 2005. The following table denotes gross premiums written
      by major product line.





**During
                  the Three Months Ending****March
                  31, 2006**
            
            
            **March
                31, 2005****Amount**
            
            
            **Percentage**
            
            
            **Amount**
            
            
            **Percentage****(Dollars
                  in Thousands)**Homeowners'
            
            $
            23,102,526
            
            
            64.88
            %
            $
            15,923,037
            
            
            52.91
            %Commercial
                liability
            
            
            8,220,213
            
            
            23.08
            %
            
            5,155,762
            
            
            17.13
            %Automobile
            
            
            4,286,334
            
            
            12.04
            %
            
            9,018,245
            
            
            29.96
            %Gross
                written premiums
            
            $
            35,609,073
            
            
            100.00
            %
            $
            30,097,044
            
            
            100.00
            %





As
      noted
      above, the Company’s efforts to expand commercial liability lines of insurance
      products are coming to fruition, as reflected by increased premiums written
      of
      $3.1 million, or 59.4 % to $8.2 million for the three months ended March 31,
      2006, as compared to $5.2 million for the same three month period last year.
      Furthermore, these policies reflect an increased percentage of the Company’s
      total gross premiums written, increasing to 23.1% of total premiums written
      during the three months ended March 31, 2006, as compared to 17.1% in the same
      three month period last year.





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




**During
                the Three Months Ending****March
                31, 2006**
            
            **March
                31, 2005****Amount**
            
            **Percentage**
            
            **Amount**
            
            **Percentage****(Dollars
                in Thousands)**StateFlorida
            
            $
            6,567
            
            
            80.0
            %
            $
            4,519
            
            
            87.5
            %Georgia
            
            
            335
            
            
            4.0
            %
            
            205
            
            
            4.1
            %Lousiania
            
            
            1,318
            
            
            16.0
            %
            
            432
            
            
            8.4
            %Total
            
            $
            8,220
            
            
            100.0
            %
            $
            5,156
            
            
            100.0
            %





The
      Company’s sale of homeowners’ policies increased $7.2 million, or 45.1% to $23.1
      million for the three months ended March 31, 2006, as compared to $15.9 million
      in the same three months ended March 31, 2005. The increase in homeowners’ gross
      premiums written is primarily due to the Company’s rate increase and the
      addition of new customers.





The
      Company’s sale of auto insurance policies decreased by $4.7 million, or 52.3% to
      $4.3 million for the three months ended March 31, 2006, as compared to $9.0
      million in the same three months ended March 31, 2005.





**Gross
      Premiums Ceded**





Gross
      premiums ceded decreased to nothing for the three months ended March 31, 2006,
      as compared to a debit balance of ($2.9) million for the three months ended
      March 31, 2005. The change is associated with our decreased prepaid reinsurance
      premiums.


-27-


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


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





**Decrease
      in Prepaid Reinsurance Premiums**





The
      decrease in prepaid reinsurance premiums was $8.7 million for the three months
      ended March 31, 2006, as compared to $2.7 million for the three months ended
      March 31, 2005. The increased charge against written premium is primarily
      associated with the timing of our reinsurance payments measured against the
      term
      of the underling reinsurance policies.




**(Increase)
      in Unearned Premiums**





The
      (increase) in unearned premiums was ($5.1) million for the three months ended
      March 31, 2006, as compared to ($5.7) million for the three months ended March
      31, 2005. The change was due to a $3.0 million increase in unearned homeowners’
insurance premiums, a $2.4 million increase in unearned commercial liability
      premiums, a $0.4 million decrease in unearned automobile premiums, and a $0.1
      million decrease in unearned mobile home insurance premiums. These changes
      reflect our continued growth along our homeowners’ and commercial liability
      lines of business. For further discussion, see “Unearned Premiums”
above.





**Finance
      Revenue**





Finance
      revenue decreased $0.5 million, or 42.4%, to $0.6 million for the three months
      ended March 31, 2006, as compared to $1.1 million for the three months ended
      March 31, 2005. The decrease is primarily due to the sale in December 2004
      of
      our assets related to our non-standard automobile insurance agency business in
      Florida and the finance revenue derived there from.





**Managing
      General Agent Fees**





Managing
      general agent fees increased $0.03 million, or 4.1%, to $0.66 million for the
      three months ended March 31, 2006, as compared to $0.63 million for the three
      months ended March 31, 2005. The increase is associated with the number of
      policies issued during the respective periods.





**Net
      Investment Income**





Net
      investment income increased $0.3 million, or 34.0%, to $1.2 million for the
      three months ended March 31, 2006, as compared to $0.9 million for the three
      months ended March 31, 2005. The increase in investment income is primarily
      a
      result of the additional amounts of invested assets. Also affecting our net
      investment income was a modest increase in overall yield to 4.61% for the three
      months ended March 31, 2006 as compared to a yield of 4.35% for the three months
      ending March 31, 2005.





**Net
      Realized Investment Gains**





Net
      realized investment gains increased $0.04 million, or 23.0% to $0.20 million
      for
      the three months ended March 31, 2006, as compared to $0.16 million for the
      three months ended March 31, 2005. The table below depicts the gains by
      investment category.


-28-


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


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





**Net
                Realized Gains (Losses)**
              **Three
                Months Ended March 31,**
            ********
            ****
            **2006**
            ****
            **2005**Fixed
              maturities:U.S.
                government obligations and agencies
            
            $
            -
            
            $
            (131,066
            )Obligations
                of states and political subdivisions
            
            
            75
            
            
            (43
            )75
            
            
            (131,109
            )Corporate
              securities:Financial
            
            
            (33,816
            )
            
            9,995Equity
              securities:Common
                stocks
            
            
            229,952
            
            
            280,637Total
              net realized gains
            
            $
            196,211
            
            $
            159,523





**Other
      Income**





Other
      income increased $0.4 million, or 156.0%, to $0.6 million for the three months
      ended March 31, 2006, as compared to $0.2 million for the three months ended
      March 31, 2005. Major components of other income for the three months ended
      March 31, 2006 included approximately $155,000 in connection with the
      recognition of our gain on the sale of our Lauderdale Lakes property,
      approximately $153,000 in connection with our business interruption insurance
      proceeds stemming from Hurricane Wilma and $123,000 of commissions in connection
      the acquisition our current reinsurance program.





**Loss
      and LAE**





Loss
      and
      LAE increased by $0.7 million, or 9.53%, to $7.6 million for the three months
      ended March 31, 2006, as compared to $6.9 million for the three months ended
      March 31, 2005. The modest increase is commensurate with the increase in earned
      premiums.





Management
      continues 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 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.





The
      table
      below reflects no charge to the first quarter 2006 earnings from the four
      hurricanes that occurred in July, August and September and October of 2005.
      As
      to Hurricane Wilma, despite the increase in claim count during the three months
      ended March 31, 2006, gross losses and reinsurance recoveries have declined
      by
      $0.2 million due primarily to the average claim severities being less than
      originally anticipated.





**2005
                Hurricanes**
            ****
            **Claim**
              **Count**
            ****
            **Gross**
              **Losses**
            ****
            **Reinsurance**
              **Recoveries**
            ****
            **Net**
              **Losses**
            ********
            ****
            ****
            ****
            **(Dollars
                in millions)**Dennis
                (July 10)
            
            
            (2
            )
            $
            0.0
            
            $
            0.0
            
            $
            0.0Katrina
                (August 25)
            
            
            18
            
            
            -
            
            
            -
            
            
            -Rita
                (September 20)
            
            
            (5
            )
            
            -
            
            
            -
            
            
            -Wilma
                (October 24)
            
            
            999
            
            
            (0.2
            )
            
            (0.2
            )
            
            -Total
                Loss Estimate
            
            
            1,010
            
            $
            (0.2
            )
            $
            (0.2
            )
            $
            -




-29-


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


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





The
      following table reflects the changes during the period ended March 31, 2006
      in
      connection with the four hurricanes that occurred in August and September of
      2004. A charge of $0.1 million occurred during the first quarter 2006 in
      connection with these storms.





**2004
                Hurricanes**
            ****
            **Claim**
              **Count**
            ****
            **Gross**
              **Losses**
            ****
            **Reinsurance**
              **Recoveries**
            ****
            **Net**
              **Losses**
            ********
            ****
            ****
            ****
            **(Dollars
                in millions)**Charley
                (August 13)
            
            
            2
            
            $
            0.0
            
            $
            0.0
            
            $
            0.0Frances
                (September 3)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Ivan
                (September 14)
            
            
            (4
            )
            
            -
            
            
            -
            
            
            -Jeanne
                (September 25)
            
            
            9
            
            
            0.1
            
            
            -
            
            
            0.1Total
                Loss Estimate
            
            
            7
            
            $
            0.1
            
            $
            0.0
            
            $
            0.1





Our
      loss
      ratio, as determined in accordance with GAAP, for the three-month period ended
      March 31, 2006 was 34.70% compared with 36.69% for the same period in 2005.
      The
      table below reflects the loss ratios by product line.





**Three
                months ended March 31**
            ********
            ****
            **2006**
            ****
            **2005**Homeowners'
            
            
            26.23
            %
            
            30.79
            %Commercial
                liability
            
            
            22.59
            %
            
            25.89
            %Automobile
            
            
            70.51
            %
            
            53.94
            %All
                lines
            
            
            34.70
            %
            
            36.69
            %





Losses
      and LAE, our most significant expense, represent actual payments made and
      changes in estimated future payments to be made to or on behalf of our
      policyholders, including expenses required to settle claims and losses.
      Management revises its estimates based on the results of its 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





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





**Operating
      and Underwriting Expenses**





Operating
      and underwriting expenses increased $0.7 million, or 45.6%, to $2.3 million
      for
      the three months ended March 31, 2006, as compared to $1.6 million for the
      three
      months ended March 31, 2005. The increase can be primarily attributed to a
      $276,000 increase in premium taxes in connection with the issuance of our
      insurance products, $131,000 in real estate taxes and $107,000 in connection
      with our affiliations with boards, bureaus and associations.





**Salaries
      and Wages**





Salaries
      and wages increased $0.3 million, or 16.4%, to $1.8 million for the three months
      ended March 31, 2006, as compared to $1.6 million for the three months ended
      March 31, 2005. As a result of adopting SFAS No. 123R on January 1, 2006,
      salaries and wages for the three months ended March 31, 2006 increased $157,000,
      representing approximately 9.3% of the 2006 first quarter’s overall 16.4%
      increase. Management believes that the remaining increase in salaries and wages
      was due in part to the increased labor costs in connection with additional
      claims loss adjusters added to our staff. Management further believes that
      salaries and wages are consistent with retaining quality management and
      increased premium production.




**Interest
        Expense**
 
 Interest
        expense decreased $0.2 million, or 46.8%, to $0.2 million for the three months
        ended March 31, 2006, as compared to $0.4 million for the three months ended
        March 31, 2005. The change is primarily attributed to our decreased reliance
        upon outside sources for financing our contracts
        receivable.


-30-


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


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




**Policy
      Acquisition Costs, Net of Amortization**





Policy
      acquisition costs, net of amortization, increased $0.1 million, or 2.4%, to
      $3.9
      million for the three months ended March 31, 2006, as compared to $3.8 million
      for the three months ended March 31, 2005. Policy acquisition costs, net of
      amortization, consists of the actual policy acquisition costs, including
      commissions, payroll and premium taxes, less commissions earned on reinsurance
      ceded and policy fees earned.





**Provision
      for Income Tax Expense**





The
      provision for income tax expense for continuing and discontinued operations
      decreased $1.0 million, or 3.2%, to $3.2 million for the three months ended
      March 31, 2006, as compared to $3.3 million for the three months ended March
      31,
      2005. The effective rate for income tax expense is 35.0% for the three months
      ended March 31, 2006, as compared to 36.5% for the same three-month period
      in
      2005.





**Liquidity
      and Capital Resources**





For
      the
      three months ended March 31, 2006, our primary sources
      of capital were
      revenues generated from operations, including decreased amounts due from
      reinsurers, net, increased bank overdrafts, decreased prepaid reinsurance
      premiums, and increased unearned premiums. Additionally, operational sources
      of
      capital came from decreased finance contracts receivable, decreased other
      assets, increased income taxes payable, increased premium deposits, net realized
      investment gains, non-cash compensation, depreciation and amortization, and
      increases in the provisions for credit losses and uncollectible premiums
      receivable. Also contributing to our liquidity were proceeds from the sale
      of
      assets, 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
      three months ended March 31, 2006, operations provided net operating cash flow
      of $23.0 million, as compared to using net operating cash flow of $8.2 million
      for the three months ended March 31, 2005.





For
      the
      three months ended March 31, 2006, operations generated $129.9 million of gross
      cash flow, due to an $84.8 million decrease in amounts due from reinsurers,
      net,
      an $18.5 million increase in bank overdrafts, an $8.7 million decrease in
      prepaid reinsurance premiums, a $5.1 million increase in unearned premiums,
      a
      $2.4 million decrease in finance contracts receivable, a $2.3 million decrease
      in other assets and a $1.2 million increase in income taxes payable. Operations
      also generated sources of cash through a $0.4 million increase in premium
      deposits and $0.2 million in net realized investment gains. To a much less
      significant extent, operations generated additional sources of cash via $0.2
      million of non-cash compensation, $0.1 million in depreciation and amortization,
      and less than a $0.1 million increase in the provisions for credit losses and
      uncollectible premiums receivable; all in conjunction with net income of $6.0
      million.





For
      the
      three months ended March 31, 2006, operations used $106.9 million of gross
      cash
      flow primarily due to a $100.2 million decrease in unpaid losses and LAE, a
      $2.8
      million increase in premiums receivable, a $1.6 million increase in deferred
      income tax expense, a $1.5 million decrease in accounts payable and accrued
      expenses, a $0.6 million increase in policy acquisition costs, net of
      amortization, $0.1 million in amortization of investment discount, net and
      a
      $0.1 million tax benefit related to non-cash compensation.





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





For
      the
      three months ended March 31, 2006, net investing activities used $5.1 million,
      as compared to providing $5.4 million for the three months ended March 31,
      2005.
      Our available for sale investment portfolio is highly liquid as it consists
      entirely of readily marketable securities. For the three months ended March
      31,
      2006, investing activities generated $103.9 million and used $111.4 million
      from
      the maturity several times over of our very short municipal portfolio.
      Additional cash flow from investing activities was generated by the sale of
      property with net book value of $2.7 million, for which we received $5.6 million
      in proceeds and recorded a $2.9 million deferred gain. The company also used
      $0.2 million for the purchase of equipment.


-31-


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


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





For
      the
      three months ended March 31, 2006, net financing activities provided $4.4
      million, as compared to $0.4 million for the three months ended March 31, 2005.
      For the three months ended March 31, 2006, the sources of cash in connection
      with financing activities included $6.0 million from the exercise of warrants,
      $1.1 million from the exercise of stock options and less than a $0.1 million
      tax
      benefit related to non-cash compensation. The uses of cash in connection with
      financing activities included the regularly scheduled retirement of our Notes
      totaling $1.7 million, $0.9 million in dividends paid and $0.1 million in
      connection with the reduction of our outstanding revolving credit.





Federated
      Premium’s operations are partially funded by the Revolving loan agreement with
      FlatIron. The effective interest rate on this line of credit, based on our
      average outstanding borrowings under the Revolving Agreement, was 11.64% and
      6.94% for the three months ended March 31, 2006 and 2005, respectively. Interest
      expense on this revolving credit line totaled approximately $3,700 and $36,000
      for the three months ended March 31, 2006 and 2005, respectively.





Outstanding
      borrowings under the Revolving Agreement were approximately $57,000 and $200,000
      as of March 31, 2006 and December 31, 2005, respectively.





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





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





Federated
      National’s and American Vehicle’s statutory capital surplus levels as of March
      31, 2006 were approximately $14.3 million and $21.4 million, respectively,
      and
      their statutory net income for the three months ended March 31, 2006 were $3.9
      million and $2.1 million, respectively.





As
      of
      March 31, 2006, we did not have any relationships with unconsolidated entities
      or financial partnerships, such as entities often referred to as “structured
      finance” or “special purpose” entities, which were established for the purpose
      of facilitating off-balance-sheet arrangements or other contractually narrow
      or
      limited purposes. As such, management believes that we currently are not exposed
      to any financing, liquidity, market or credit risks that could arise if we
      had
      engaged in transactions of that type requiring disclosure herein.





**Impact
      of Inflation and Changing Prices**





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





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


-32-


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





**Item
      3**





**Quantitative
      and Qualitative Disclosures about Market Risk**





Information
      related to quantitative and qualitative disclosures about market risk was
      included under Item 7a, “Quantitative and Qualitative Disclosures about Market
      Risk”, in our Annual Report on Form 10-K for the year ended December 31, 2005.
      No material changes have occurred in market risk since this information was
      disclosed except as discussed below.





Our
      investment portfolio is available for sale and is carried at fair value, except
      for that portion deemed as held to maturity. Gains that represent securities
      with a fair value in excess of amortized cost, and losses (amortized cost is
      in
      excess of fair value) that are deemed temporary by management are recorded
      in
      shareholders’ equity in accumulated other comprehensive income. Losses that are
      deemed other than temporary by management, are recorded as net realized losses
      in the consolidated statement of operations. A summary of the investment
      portfolio as of March 31, 2006 follows :





**Amortized
                Cost**
            
            **Fair
                Value**
            
            **Unrealized**
              **Gain
                (Loss)**Fixed
                maturities:U.S.
                government obligations and agencies
            
            $
            59,877,457
            
            
            66.38
            %
            $
            58,895,143
            
            
            66.99
            %
            $
            (982,314
            )Obligations
                of states and political subdivisions
            
            
            17,643,896
            
            
            19.56
            %
            
            17,396,362
            
            
            19.78
            %
            
            (247,534
            )77,521,353
            
            
            85.94
            %
            
            76,291,505
            
            
            86.77
            %
            
            (1,229,848
            )Corporate
                securities:Communications
            
            
            516,025
            
            
            0.57
            %
            
            525,773
            
            
            0.59
            %
            
            9,748Financial
            
            
            2,000,000
            
            
            2.22
            %
            
            1,899,135
            
            
            2.16
            %
            
            (100,865
            )Other
            
            
            650,000
            
            
            0.72
            %
            
            629,290
            
            
            0.72
            %
            
            (20,710
            )3,166,025
            
            
            3.51
            %
            
            3,054,198
            
            
            3.47
            %
            
            (111,827
            )Equity
                securities:Common
                stocks
            
            
            9,519,618
            
            
            10.55
            %
            
            8,578,837
            
            
            9.76
            %
            
            (940,781
            )9,519,618
            
            
            10.55
            %
            
            8,578,837
            
            
            9.76
            %
            
            (940,781
            )Total
                fixed, corporate and equity securities
            
            $
            90,206,996
            
            
            100.00
            %
            $
            87,924,540
            
            
            100.00
            %
            $
            (2,282,456
            )





As
      of
      March 31, 2006, there were no concentrations greater than 5% of total
      investments in any single investment other than United States government
      obligations.





**Item
      4**





**Controls
      and Procedures**





**Evaluation
      of Disclosure Controls and Procedures** An
      evaluation of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures was carried out as of March 31, 2006 by
      the
      Company under the supervision and with the participation of the Company’s
      management, including the Chief Executive Officer and Chief Financial Officer.
      Based on that evaluation, the Chief Executive Officer and Chief Financial
      Officer concluded that the Company’s disclosure controls and procedures have
      been designed and are being operated in a manner that provides reasonable
      assurance that the information required to be disclosed by the Company in
      reports filed under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms. Nevertheless, the controls system, no matter how well designed and
      operated, cannot provide absolute assurance that the objectives of the controls
      system are met, and no evaluation of controls can provide absolute assurance
      that all control issues and instances of fraud, if any, within a company have
      been detected.





**Changes
      in Internal Controls** Subsequent
      to the date of the most recent evaluation of the Company’s internal controls,
      there were no significant changes in the Company’s internal controls or in other
      factors that could significantly affect the internal controls, including any
      corrective actions with regard to significant deficiencies and material
      weaknesses.


-33-


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





**Part
      II: OTHER INFORMATION**





**Item
      1**





**Legal
      Proceedings**





We
      are
      involved in various claims and legal actions arising in the ordinary course
      of
      business. Specifically, we are a party to approximately fifteen lawsuits in
      connection with coverage disputes associated with claims resulting from
      Hurricanes Ivan and Jeanne. Hurricane Ivan occurred on September 14, 2004.
      Hurricane Jeanne occurred on September 25, 2004. As of December 31, 2005 the
      Company established reserves and charged against current operations $2.0 million
      to satisfy two of these suits settled in the first quarter of 2006 for
      approximately $1.2 million.





The
      outcome of the pending litigation in connection with these cases remains unclear
      but could have a significant negative impact on current operations once
      additional uncertainties become a matter of fact. These uncertainties involve
      the outcome of other cases involving similarly styled coverage issues involving
      other property insurers in various stages of discovery. Due to these
      uncertainties management recognizes the potentially negative outcome of this
      pending litigation is reasonably possible, but the ultimate financial impact
      is
      currently undeterminable.




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





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





**Item
      1A**





**Risk
      Factors**





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





**Item
      2**





**Unregistered
      Sales of Equity Securities and Use of Proceeds**





During
      the quarter ended March 31, 2006, three warrant holders exercised their warrants
      to acquire an aggregate of 467,755 shares of our common stock. The exercise
      price of the Warrants was approximately $12.75 per share. The names of the
      warrant holders, dates of exercise, number of shares purchased, exercise price
      and proceeds received by us are listed below.


-34-





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




**Name**
              
              **Date
                  of**
                **Grant**
              
              **Date
                  of**
                **Exercise**
              
              **Number
                  of**
                **Shares**
              
              **Exercise**
                **Price**
              
              **Proceeds**
                **Received**Whitebox
                  Convertible Arbitrage Partners LP
              
              
              September
                  30, 2004
              
              
              January
                  27, 2006
              
              
              224,619
              
              
              12.750
              
              
              2,863,892Omega
                  Overseas Partners Ltd.
              
              
              July
                  31, 2003
              
              
              January
                  20, 2006
              
              
              82,500
              
              
              12.744
              
              
              1,051,380Hillson
                  Partners LP
              
              
              September
                  30, 2004
              
              
              January
                  25, 2006
              
              
              78,431
              
              
              12.750
              
              
              999,995Pandora
                  Select Parnters LP
              
              
              September
                  30, 2004
              
              
              January
                  27, 2006
              
              
              45,131
              
              
              12.750
              
              
              575,420Whitebox
                  Intermarket Partners LP
              
              
              September
                  30, 2004
              
              
              January
                  27, 2006
              
              
              33,824
              
              
              12.750
              
              
              431,256Chris
                  Pellegrini
              
              
              July
                  31, 2003
              
              
              January
                  20, 2006
              
              
              2,250
              
              
              12.744
              
              
              28,674Whitebox
                  Convertible Arbitrage Partners LP
              
              
              September
                  30, 2004
              
              
              January
                  18, 2006
              
              
              1,000
              
              
              12.750
              
              
              12,750
  Each
        of
        the warrant holders paid for their shares with cash. Each of these warrant
        holders exercised their warrants in reliance upon Section 4(2) of the Securities
        Act of 1933, because each of these holders was knowledgeable, sophisticated
        and
        had access to comprehensive information about us. We placed legends on the
        certificates stating that the securities were not registered under the
        Securities Act and set forth the restrictions on their transferability and
        sale.





During
      the first quarter of 2006, twenty five persons exercised options to acquire
      an
      aggregate of 125,219 shares of the Company's common stock with proceeds to
      the
      Company aggregating to approximately $1.1 million. The individuals exercising
      options consists of twenty-two employees, the former Chief Operating Officer
      of
      the Company and two franchise owners. The exercise (grant) price on
      27,900 and 97,319 options was $6.667 and $9.167, respectively. 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.





**Item
      3**





**Defaults
      Upon Senior Securities**





None





**Item
      4**





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





None





**Item
      5**





**Other
      Information**





None





**Item
      6**





**Exhibits**




10.37
            American
                  Vehicle Insurance Company 100% Quota Share Reinsurance Agreement
                  with
                  Republic Underwriters Insurance Company for a portion of its business
                  and
                  a portion of the business assumed by it from its affiliated member
                  companies executed on April 15, 2006 and became effective April
                  15, 2006
                  (incorporated by reference as filed previously with Form 8-K on
                  April 19,
                  2006).




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-OxleyAct.*****




* **** filed
      herewith


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





**Signatures**





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




**21**st****CENTURY HOLDING COMPANY****By:
            /s/ *Edward
              J. Lawson*Edward J. Lawson, President, Chief Executive
                Officer and
              Chairman of the Board*/s/
              James G.
              Jennings, III*James
              G. Jennings III, Chief Financial OfficerDate: May 12, 2006


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