SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-K/A
                                 AMENDMENT NO.2
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

      (Mark One)

|X|   Annual Report under Section 13 or 15(d) of the  Securities Act of 1934 For
      the fiscal year ended December 31, 2004

                                       or

|_|   Transition Report under Section 13 or 15(d) of the Securities Exchange Act
      of 1934 For the transition period of _____________to_______________

                        Commission file number: 0-2500111


                          21st Century Holding Company
             (Exact name of registrant as specified in its Charter)


            Florida                                       65-0248866
  -----------------------------------     --------------------------------------
   (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                     Identification No)


3661 West Oakland Park Boulevard, Suite 300, Lauderdale Lakes, Florida  33313
--------------------------------------------------------------------------------
       (Address of principal executive offices)                       (Zip Code)

      Registrant's telephone number, including area code (954) 581-9993

      Securities registered pursuant to Section 12(b) of the Exchange Act: None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                  Common Stock, par value $0.01 per share
                  Redeemable Warrants expiring July 31, 2006
                  Redeemable Warrants expiring September 30, 2007
                             (Title of Class)

      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, and (2) has been subject to such filing
requirements for the past 90 days.

Yes   |X|          No  |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2).

Yes   |_|          No   |X|

      The aggregate market value of the Issuer's common stock held by
non-affiliates (based on the last sale price of the common stock as reported by
the Nasdaq National Market) on June 30, 2004 was: $55,606,662.

      As of June 30, 2004, there were 5,558,347 shares of the common stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.


                                     - 1 -


                          21st Century Holding Company


PART I........................................................................5

ITEM  1. BUSINESS.............................................................5

     GENERAL..................................................................5
     RECENT DEVELOPMENTS......................................................6
     BUSINESS STRATEGY........................................................8
     INSURANCE OPERATIONS AND RELATED SERVICES................................9
        General...............................................................9
        Nonstandard Automobile................................................9
        Standard Automobile..................................................10
        Homeowners' and Mobile Homeowners'...................................10
        Flood................................................................11
        Commercial General Liability.........................................11
        Future Products......................................................11
        Assurance MGA........................................................11
        Superior Adjusting...................................................11
        Federated Premium Finance............................................11
        Discontinued Operations..............................................13
          Tax Preparation Services and Ancillary Services....................13
          Franchise Operations...............................................13
     MARKETING AND DISTRIBUTION..............................................13
     REINSURANCE.............................................................14
     LIABILITY FOR UNPAID LOSSES AND LAE.....................................16
     COMPETITION.............................................................21
     REGULATION..............................................................21
        General..............................................................21
        Insurance Holding Company Regulation.................................24
        Finance Company Regulation...........................................24
        Underwriting and Marketing Restrictions..............................24
        Legislation..........................................................24
        Industry Ratings Services............................................24
     EMPLOYEES...............................................................24
     SENIOR MANAGEMENT.......................................................25
     GLOSSARY OF SELECTED TERMS..............................................25

ITEM  2. PROPERTIES..........................................................27

ITEM  3. LEGAL PROCEEDINGS...................................................27

ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................27

PART II......................................................................28

ITEM  5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS.............................................................28

     (a)     MARKET INFORMATION..............................................28
     (b)     HOLDERS ........................................................28
     (c)     DIVIDENDS.......................................................28
     (d)     SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY
                COMPENSATION PLANS...........................................28
ITEM  6. SELECTED FINANCIAL DATA.............................................29

ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS..............................31

     OVERVIEW................................................................31
     CRITICAL ACCOUNTING POLICIES............................................32
     ACCOUNTING CHANGES......................................................32
     ANALYSIS OF FINANCIAL CONDITION AS OF DECEMBER 31, 2004 AS
         COMPARED TO DECEMBER 31, 2003.......................................33
             Investments.....................................................33
             Receivable for Investments Sold.................................33


                                     - 2 -


                          21st Century Holding Company


             Finance Contracts...............................................33
             Prepaid Reinsurance Premiums....................................33
             Premiums Receivable.............................................34
             Reinsurance Recoverable - net...................................34
             Deferred Acquisition Costs - net................................34
             Income Tax Recoverable..........................................34
             Goodwill........................................................34
             Other Assets....................................................34
             Unpaid Losses and Loss Adjustment Expenses......................35
             Unearned Premium................................................35
             Bank Overdraft..................................................35
             Deferred Income from sale of agency operations..................35
             Subordinated Debt...............................................35
     RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2004 COMPARED
         TO YEAR ENDED DECEMBER 31, 2003.....................................36
             Gross Premiums Written..........................................36
             Gross Premiums Ceded............................................36
             Increase (Decrease) in Prepaid Reinsurance Premiums.............36
             Increase in Unearned Premiums...................................36
             Managing General Agent Fees.....................................36
             Net Investment Income...........................................36
             Net Realized Investment Gains (Losses)..........................36
             Losses and LAE..................................................36
             Salaries and Wages..............................................37
             Interest expense................................................38
             Policy Acquisition Costs, Net of Amortization...................38
     RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 COMPARED
        TO YEAR ENDED DECEMBER 31, 2002......................................38
             Gross Premiums Written..........................................38
             Gross Premiums Ceded............................................39
             Increase (Decrease) in Prepaid Reinsurance Premiums.............39
             Increase in Unearned Premiums...................................39
             Managing General Agent Fees.....................................39
             Net Investment Income...........................................39
             Net Realized Investment Gains (Losses)..........................39
             Losses and LAE..................................................40
             Salaries and Wages..............................................40
             Policy Acquisition Costs, Net of Amortization...................40
        LIQUIDITY AND CAPITAL RESOURCES......................................41
        IMPACT OF INFLATION AND CHANGING PRICES..............................43
        SELECTED QUARTERLY FINANCIAL DATA (Unaudited)........................44

ITEM 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.....46

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................48

        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..............49
        CONSOLIDATED BALANCE SHEETS..........................................50
        CONSOLIDATED STATEMENTS OF OPERATIONS................................51
        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
           AND COMPREHENSIVE INCOME (LOSS)...................................52
        CONSOLIDATED STATEMENTS OF CASH FLOWS................................53
          (1) ORGANIZATION AND BUSINESS......................................55
          (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES.......56
             (a) CASH AND CASH EQUIVALENTS...................................56
             (b) INVESTMENTS.................................................56
             (c) PREMIUM REVENUE.............................................56
             (d) DEFERRED ACQUISITION COSTS..................................56
             (e) PREMIUM DEPOSITS............................................56
             (f) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES..................57
             (g) COMMISSION INCOME...........................................57
             (h) FINANCE REVENUE.............................................57
             (i) CREDIT LOSSES...............................................57
             (j) MANAGING GENERAL AGENT FEES.................................58
             (k) POLICY FEES.................................................58
             (l) REINSURANCE.................................................58
             (m) INCOME TAXES................................................58
             (n) CONTINGENT REINSURANCE COMMISSION...........................58

                                     - 3 -


                          21st Century Holding Company

             (o) CONCENTRATION OF CREDIT RISK................................59
             (p) ACCOUNTING CHANGES..........................................59
             (q) USE OF ESTIMATES............................................59
             (r) NATURE OF OPERATIONS........................................60
             (s) FAIR VALUE..................................................60
             (t) GOODWILL....................................................61
             (u) STOCK OPTION PLANS..........................................61
             (v) PROPERTY, PLANT AND EQUIPMENT...............................62
             (w) RECLASSIFICATIONS...........................................62
          (3) INVESTMENTS....................................................62
             (a) FIXED MATURITIES AND EQUITY SECURITIES......................62
             (b) MORTGAGE LOANS..............................................64
          (4) FINANCE CONTRACTS RECEIVABLE...................................64
          (5) PROPERTY, PLANT AND EQUIPMENT..................................65
          (6) REINSURANCE....................................................65
          (7) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES.....................67
          (8) REVOLVING CREDIT OUTSTANDING...................................68
          (9) INCOME TAXES...................................................69
          (10) REGULATORY REQUIREMENTS AND RESTRICTIONS......................71
          (11) COMMITMENTS AND CONTINGENCIES.................................73
          (12) LEASES........................................................74
          (13) RELATED PARTY TRANSACTIONS....................................74
          (14) NET INCOME (LOSS) PER SHARE...................................74
          (15) SEGMENT INFORMATION...........................................75
          (16) STOCK COMPENSATION PLANS......................................77
          (17) EMPLOYEE BENEFIT PLAN.........................................79
          (18) ACQUISITIONS..................................................79
          (19) COMPREHENSIVE INCOME (LOSS)...................................79
          (20) AUTHORIZATION OF PREFERRED STOCK..............................80
          (21)  21ST CENTURY HOLDING COMPANY.................................80
          (22) SUBORDINATED DEBT.............................................82
          (23) SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING
                   PROPERTY CASUALTY INSURANCE OPERATIONS....................83
          (24) DISCONTINUED OPERATIONS.......................................84
          (25) SUBSEQUENT EVENTS.............................................84

ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE..............................86

ITEM 9A.       CONTROLS AND PROCEDURES.......................................86

     (a)     EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES................86
     (b)     CHANGES IN INTERNAL CONTROLS....................................86

ITEM 9B.       OTHER INFORMATION.............................................86

PART III.....................................................................86

ITEM  10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................86

ITEM  11. EXECUTIVE COMPENSATION.............................................88

ITEM  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....89

ITEM  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................91

ITEM  14. PRINCIPAL ACCOUNTING FEES AND SERVICES.............................91

ITEM  15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
             REPORTS ON FORM 8K..............................................92


                                     - 4 -


                          21st Century Holding Company

General  information  about  21st  Century  Holding  Company  can  be  found  at
www.21stcenturyholding.com.  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.

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 generally; inflation and other
changes  in  economic  conditions  (including  changes  in  interest  rates  and
financial  markets);  catastrophe  losses;  weather  conditions  (including  the
severity  and  frequency of storms,  hurricanes,  tornadoes  and hail);  pricing
competition and other  initiatives by competitors;  ability to obtain regulatory
approval for  requested  rate changes and the timing  thereof;  legislative  and
regulatory developments,  including with respect to state-sponsored  catastrophe
loss funds; the outcome of litigation pending against us, including the terms of
any  settlements;  risks  related to the  nature  and the type 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;  the
availability  and terms of reinsurance;  insurance  agents;  claims  experience;
ratings by  industry  services;  changes in driving  patterns  and loss  trends;
reliance on key personnel; acts of war and terrorist activities; court decisions
and trends in litigation; construction and property owners' repair costs; 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. We undertake 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 generally accepted accounting principles,  or 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.

PART I
------

ITEM 1.           BUSINESS
-------           --------

GENERAL

      21st Century  Holding  Company  ("21st  Century") is an insurance  holding
company, which, through our subsidiaries and our contractual  relationships with
our  independent  agents,  controls  substantially  all aspects of the insurance
underwriting, distribution and claims process. We underwrite personal automobile
insurance, general liability insurance, homeowners' and mobile home property and
casualty  insurance in Florida,  Georgia and Louisiana  through our wholly owned
subsidiaries,  Federated National Insurance Company  ("Federated  National") and
American Vehicle Insurance Company  ("American  Vehicle").  American Vehicle has
recently  been  authorized to write  commercial  general  liability  policies in
Kentucky  and Texas and expects to begin  writing  policies in that state in the
near future.  American Vehicle is a fully admitted insurance carrier in Florida,
Louisiana  and Texas and is admitted as a surplus  lines  carrier in Georgia and
Kentucky.

      During the year ended December 31, 2004, 62.0%,  24.1%,  12.4% and 1.5% of
the policies we underwrote were for homeowners' property and casualty insurance,
personal  automobile  insurance,  commercial  general liability  insurance,  and
mobile home property and casualty insurance, respectively. During the year ended
December 31, 2003,  67.5%,  23.0%,  2.4% and 7.1% of the policies we  underwrote
were for  personal  automobile  insurance,  homeowners'  property  and  casualty
insurance,  mobile home property and casualty insurance,  and commercial general
liability insurance,  respectively. We internally process claims made by our own
and  third-party  insureds  through our wholly owned claims  adjusting  company,
Superior Adjusting,  Inc.  ("Superior").  We also offer premium financing to our
own and  third-party  insureds  through our wholly owned  subsidiary,  Federated
Premium Finance, Inc. ("Federated Premium").

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


                                     - 5 -


                          21st Century Holding Company

RECENT DEVELOPMENTS

Impact of 2004 Hurricane Season

      In August  and  September  2004,  the State of  Florida  experienced  four
hurricanes,  Charley,  Frances,  Ivan  and  Jeanne.  Since  then,  we have  been
receiving  and  processing  claims  made under our  homeowners'  and mobile home
owners'  policies,  a process  that is  expected to be  substantially  completed
during  the first half of 2005.  One of our  subsidiaries,  Federated  National,
incurred  significant  losses  relative  to its  homeowners'  insurance  line of
business.  As of December 31, 2004,  approximately 8,500 policyholders had filed
hurricane-related  claims  totaling an  estimated  $105.4  million,  of which we
currently  estimate that our share of the costs associated with these hurricanes
will be  approximately  $43.5  million,  net of our  reinsurance  recoveries and
amortized reinstatement premiums.

      We  have  a  reinsurance  structure  that  is  a  combination  of  private
reinsurance  and  the  Florida  Hurricane  Catastrophe  Fund  (FHCF).  For  each
catastrophic  occurrence,  the  excess  of loss  treaty  will  insure us for $24
million  with the  company  retaining  the  first $10  million  of loss and loss
adjustment expense ("LAE") There are two layers involved with our excess of loss
reinsurance  treaties,  the $24 million is considered the 1st layer.  The treaty
has a provision  which,  for an additional  prorated  premium will insure us for
another $24 million of loss and LAE for subsequent  occurrences with the company
retaining the first $10 million in loss and LAE. As a result of the loss and LAE
incurred in connection  with the Hurricanes  Charles and Frances the company has
exhausted its recoveries of $48 million under the terms of this treaty.

      The 2nd layer of our excess of loss  treaty  insures us for an  additional
$34  million in excess of the $34  million  1st layer  noted above with the same
reinstatement provision. The excess of loss treaties expire on June 30, 2005 and
the company is negotiating a new reinsurance treaty.

      The FCAT treat provides protection for 90% of loss and LAE and attaches at
approximately $36.2 million.  This treaty inures to the benefit of our excess of
loss  treaty  and  expires  on June 1,  2005.  For a further  discussion  of our
reinsurance please see our section titled "REINSURANCE"

      Since our initial  preliminary  provision for losses from these hurricanes
of $33 million,  net of  reinsurance  recoveries,  as of September  30, 2004, we
revised our provision for losses as described above. Because the storms occurred
during  the  third  quarter  of  2004,  we were not  able to  complete  physical
inspections  of a  sufficiently  large  percentage of claims,  nor were complete
repair  estimates  available.  During the fourth  quarter of 2004,  as  physical
property inspections and repair estimates were completed,  our initial estimates
of losses for these  storms were  increased  to reflect  increased  estimates of
claim  severity on our  homeowners'  policies in  Florida.  We do not  currently
anticipate  further  material  increases  to our  loss  estimates  from the 2004
hurricanes.

      In August 2004, A.M. Best Company notified us that Federated  National and
American Vehicle were being placed under review with negative implications. A.M.
Best in 2003 had assigned  Federated  National a B rating  ("Fair," which is the
seventh of 14 rating  categories) and American Vehicle a B+ rating ("Very Good,"
which is the sixth of 14 rating categories).  In connection with this review, we
requested  that A.M.  Best  cease its  ratings of these  subsidiaries  "NR-4 Not
rated,  company's request". The withdrawal of our ratings could limit or prevent
us from  writing  or  renewing  desirable  insurance  policies,  from  obtaining
adequate  reinsurance,  or from  borrowing  on our line of credit,  as described
below.   Federated  National  and  American  Vehicle  are  currently  rated  "A"
("Unsurpassed," which is first of six ratings) by Demotech, Inc.

      To retain  our  certificates  of  authority,  Florida  insurance  laws and
regulations require that our insurance company subsidiaries,  Federated National
and American  Vehicle,  maintain  capital surplus equal to the greater of 10% of
its liabilities or $4.0 million, as defined in the Florida Insurance Code. As of
December 31, 2004,  Federated  National and American  Vehicle were in compliance
with statutory minimum capital and surplus requirement.

      The  insurance  companies  are  also  required  to  adhere  to  prescribed
premium-to-capital  surplus ratios. As of December 31, 2004,  Federated National
did not comply with the prescribed  premium-to-capital  surplus ratio, primarily
based on the incurred  losses  associated  with the four 2004  hurricanes.  As a
result of a $6.1 million capital  contribution  made during the first quarter of
2005 from 21st Century,  Federated  National's  compliance  with the  prescribed
premium-to-capital  surplus  ratios  has been  restored.  American  Vehicle  has
remained in compliance with the prescribed premium-to-capital surplus ratios.

      Throughout the  post-hurricane  period, we have been and continue to be in
regular  communications with the Florida Office of Insurance Regulation and have
complied  with the  office's  verbal  requests.  We have relied on the  office's
verbal  representation  that regulatory  action will not be imposed at this time
because   of   Federated   National's   non-compliance   with   the   prescribed
premium-to-capital surplus ratio.


                                     - 6 -


                          21st Century Holding Company

      In the  aftermath  of the  hurricanes  in Florida,  the Florida  Office of
Insurance  Regulation  issued  emergency  orders that  imposed a  moratorium  on
cancellations and non-renewals of various types of insurance  coverages and that
require mediation to resolve disputes over personal  property  insurance claims.
For personal residential and commercial residential policies, the moratorium ran
through   November  30,  2004.  The  orders  also  prohibit   cancellations   or
non-renewals based solely upon claims resulting from the hurricanes.

      We believe  that our company is  sufficiently  capitalized  to operate our
business as it now exists and as we  currently  plan to expand it. Our  existing
sources of funds include our revolving loan from Flatiron  Funding  Company LLC,
sales of our securities such as our September 2004 private  placement  described
below,  possible  sales of our  investment  securities,  and our  earnings  from
operations and investments.  Additional  unexpected  catastrophic  events in our
market  areas,  such as the 2004  hurricanes,  have  resulted and will result in
greater claims losses than anticipated,  which could require us to limit or halt
our growth  while we  redeploy  our  capital to pay these  unanticipated  claims
unless we are able to raise  additional  capital or increase our earnings in our
other  divisions.  During  September  2004, we  negotiated a new revolving  loan
agreement in which the maximum credit commitment  available to us was reduced at
our request to $2.0 million with built-in options to incrementally  increase the
maximum  credit  commitment  up to $4.0 million  over the next three years.  Our
lender  could  determine  to change our  available  credit  based on a number of
factors,  including  the A.M.  Best ratings of  Federated  National and American
Vehicle.  Pursuant to our loan  agreement,  if the A.M. Best rating of Federated
National falls below a "C," or if the financial  condition of American  Vehicle,
as  determined  by our lender (in its sole and  absolute  discretion)  suffers a
material  adverse change,  then under the terms of our loan agreement,  policies
written by that  subsidiary will no longer be eligible  collateral,  causing our
available credit to be reduced if we do not have other collateral  qualifying as
eligible  collateral.  As of December  31, 2004,  policies  written by Federated
National were not considered by our lender to be eligible  collateral.  In March
2005, our lender agreed to permit policies  written by Federated  National to be
eligible  collateral  up to $165,000.  We currently  believe that our  available
credit  under  this  loan  agreement  will be  sufficient  based on our  current
operations.  If  policies  written by our  insurance  subsidiaries  again do not
qualify as eligible  collateral  under our loan agreement and we are not able to
obtain working capital from our operations or other sources,  then we would have
to restrict our growth and, possibly, our operations.

      Although we believe that the occurrence of four hurricanes hitting Florida
within one year has not  previously  occurred for as long as records for weather
events have been kept,  some weather  analysts  believe that a period of greater
hurricane  activity has begun.  To address this  possibility,  we are  exploring
alternatives  to reduce our  exposure to these types of storms.  Although  these
measures may increase  operating  expenses,  management  believes that they will
assist  us in  protecting  long-term  profitability,  although  there  can be no
assurances that will be the case.

Sale of Assets Related to Our Non-Standard Automobile Insurance Agency Business

      On  December  31,  2004,  we,  along with our wholly  owned  subsidiaries,
Federated  Agency Group,  Inc.,  Fed USA, Inc. and  Assurance  Managing  General
Agents,  Inc.,  sold  certain  assets  related  to our  non-standard  automobile
insurance agency business located in Florida to Fed USA Retail, Inc. and Fed USA
Franchising,  Inc. As consideration for these assets, we received a cash payment
at closing of $7,000,000.  In addition, we are entitled to receive an additional
payment of up to  $2,500,000  calculated  based on 10% of the "Gross Net Written
Premiums" (as defined in the asset purchase agreement) through our two insurance
company  subsidiaries,  Federated National and American Vehicle,  or through any
insurance company affiliated with the buyers for gross net written premiums that
exceed  $15,000,000  in the aggregate and that are less than  $40,000,000 in the
aggregate  with  respect to agency  business  written  by the buyers  during the
12-month  period  following  the  closing.  Fed  USA  Retail,  Inc.  and Fed USA
Franchising,  Inc., which also assumed certain liabilities related to the assets
that were sold,  are  affiliates of  Affirmative  Insurance  Holdings,  Inc., an
insurance  holding  company based in Addison,  Texas.  Affirmative has agreed to
guarantee the buyers'  obligations to make the  post-closing  payment  described
above.

Sale of Express Tax

      Effective  January  1,  2005,  we sold our 80%  interest  in  Express  Tax
Service,   Inc.  ("Express  Tax"),  along  with  its  wholly  owned  subsidiary,
EXPRESSTAX  Franchise  Corporation.  The  purchasers  were Robert J. Kluba,  the
president of Express Tax and the holder of the 20% minority  interest in Express
Tax,  and Robert H. Taylor.  In exchange for our shares,  we received a net cash
payment of $311,351, which reflected a purchase price of $660,000 less $348,649.
in inter-company  receivables we owed to Express Tax. In addition, we received a
payment of  $1,200,000  in exchange  for our  agreement  not to compete with the
current businesses of Express Tax for five years after the sale.

                                     - 7 -


                          21st Century Holding Company

Private Placement

      On  September  30,  2004,  we  completed a private  placement of 6% Senior
Subordinated  Notes due September 30, 2007. These notes were offered and sold to
accredited  investors as units consisting of one note with a principal amount of
$1,000 and warrants to purchase  shares of our common stock,  the terms of which
are similar to our notes and  warrants  sold in July 2003,  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 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 6% Senior
Subordinated  Notes  due July  31,  2006 in the  original  principal  amount  of
$7,500,000  that we sold in 2003.  Quarterly  payments of principal and interest
due on these notes,  like the notes we sold in 2003,  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  Financial Markets for the 20 consecutive  trading days
preceding the payment date.

      We also  issued  warrants to  purchase  shares of our common  stock to the
purchasers of the notes and to the placement agent in the offering,  J. Giordano
Securities  Group. Each warrant entitles 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
warrants  issued to the purchasers in our 2004 private  placement  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 warrants  issued to J. Giordano
equaled  $500,000  divided by the exercise  price of the  warrants,  and totaled
39,216.  The terms of the 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.

Stock Split

      On September 7, 2004, we completed a three-for-two stock split in the form
of a stock dividend,  whereby shareholders received three shares of common stock
for every two shares of our common stock held on the record date.  Just prior to
the   three-for-two   stock  split,  we  had   approximately   3,957,000  shares
outstanding,  and  following  the stock split,  we had  approximately  5,936,000
shares outstanding.


BUSINESS STRATEGY

      Although our  operations  were dominated in the latter part of 2004 by the
claims made in connection  with the four  hurricanes,  we expect that in 2005 we
will return to a focus on the key aspects of our business strategy. We will seek
continued  growth of our business by  capitalizing  on the  efficiencies  of our
business model and by:

o     expanding into additional states.  Currently, we have obtained licenses to
      underwrite  and  sell  our  insurance  products  in  Alabama,   Texas  and
      Louisiana;

o     a  shift  in  emphasis  of our  product  mix to  balance  our  nonstandard
      automobile  insurance  products with our continued emphasis on homeowners'
      and commercial  general  liability lines of insurance and by expanding our
      product  offerings  to  include  other  insurance  products,   subject  to
      regulatory approval;

o     employing  our  business  practices  developed  and used in Florida in our
      expansion to other selected states;

o     maintaining a commitment to provide high quality  customer  service to our
      agents and insureds;

o     encouraging agents to place a high volume of high quality business with us
      by providing them with  attractive  commission  structures tied to premium
      levels and loss ratios;

o     forming a strategic  relationship with Affirmative,  the parent company of
      the purchasers of our non-standard agency assets located in Florida, which
      is  intended  to  enable  us to  market  our  insurance  products  through
      Affirmative's  retail  distribution  network  and which,  in turn,  should
      increase our  revenues.  For more  information  regarding  this  strategic
      relationship,  please see Note 24 to our Consolidated Financial Statements
      included under Item 8 of this Report on Form 10-K; and

o     additional  strategies that may include  possible  acquisitions or further
      dispositions  of assets,  and  development of procedures to improve claims
      history and mitigate losses from claims.

                                     - 8 -


                          21st Century Holding Company

      There can be no assurances,  however, that any of the foregoing strategies
will be developed or successfully implemented or, if implemented, that they will
positively affect our results of operations.

INSURANCE OPERATIONS AND RELATED SERVICES

General

      We underwrite  personal  automobile,  homeowners' and mobile home property
casualty insurance through Federated National and personal  automobile  property
and casualty  insurance  and  commercial  general  liability  insurance  through
American  Vehicle.  Federated  National and American  Vehicle are both currently
licensed to conduct business in Florida as domestic admitted insurers.  American
Vehicle  is also  licensed  to conduct  business  in Texas and  Louisiana  as an
admitted  foreign insurer and in Georgia and Kentucky as a non-admitted  foreign
insurer.  American Vehicle has been approved for admission into Alabama, subject
to our funding of a statutorily required deposit, which is in process.

      The following tables set forth the amount and percentages of our gross
premiums written, premiums ceded to reinsurers and net premiums written by line
of business for the periods indicated.



                                                                              Years Ended December 31
                                                    ----------------------------------------------------------------------------
                                                              2004                      2003                        2002
                                                    ----------------------     ----------------------      ---------------------
                                                     Premium       Percent      Premium       Percent      Premium       Percent
                                                    ---------      -------     ---------     --------      -------       -------
                                                                               (Dollars in Thousands)
                                                                                                       
Gross written premiums:
          Automobile                                $  24,239        24.1%      $  49,298       67.5%      $  52,586       83.4%
          Homeowners                                   62,400        62.0%         16,804       23.0%          8,670       13.8%
          Mobile Home                                   1,513         1.5%          1,739        2.4%          1,780        2.8%
          Commercial General Liability                 12,510        12.4%          5,151        7.1%             --        0.0%
                                                    ---------       ------      ---------      ------      ---------      ------

                  Total gross written premiums      $ 100,662       100.0%      $  72,992      100.0%      $  63,036      100.0%
                                                    =========       ======      =========      ======      =========      ======

Ceded premiums:
          Automobile                                $    (992)       (6.4%)     $  22,091      100.0%      $  27,765      100.0%
          Homeowners                                   14,932        96.4%             --        0.0%             --        0.0%
          Mobile Home                                   1,546        10.0%             --        0.0%             --        0.0%
          Commercial General Liability                     --         0.0%             --        0.0%             --        0.0%
                                                    ---------       ------      ---------      ------      ---------      ------

                  Total ceded premiums              $  15,486       100.0%      $  22,091      100.0%      $  27,765      100.0%
                                                    =========       ======      =========      ======      =========      ======

Net written premiums
          Automobile                                $  25,231        29.6%      $  27,207       53.5%      $  24,821       70.4%
          Homeowners                                   47,468        55.7%         16,804       33.0%          8,670       24.6%
          Mobile Home                                     (33)        0.0%          1,739        3.4%          1,780        5.0%
          Commercial General Liability                 12,510        14.7%          5,151       10.1%             --        0.0%
                                                    ---------       ------      ---------      ------      ---------      ------

                  Total net written premiums        $  85,176       100.0%      $  50,901      100.0%      $  35,271      100.0%
                                                    =========       ======      =========      ======      =========      ======


      During the years ended  December 31, 2004,  2003 and 2002, we marketed our
insurance  products  through a network  of  company-owned  agencies,  franchised
agencies,   independent   agents  and  general  agents.   Because  we  sold  our
company-owned  agencies and franchised  agencies at the end of 2004, in 2005 and
thereafter  we expect to continue to market our  products  through our  existing
network of independent agents and general agents.

NONSTANDARD AUTOMOBILE

      Nonstandard  personal  automobile  insurance  is  principally  provided to
insureds who are unable to obtain standard  insurance  coverage because of their
driving record, age, vehicle type or other factors, including market conditions.
Underwriting  standards  for  preferred  and standard  coverage have become more
restrictive,  thereby  requiring more insureds to seek nonstandard  coverage and
contributing to the increase in the size of the nonstandard  automobile  market.
Nonstandard automobile insurance,  however, generally involves the potential for
increased loss exposure and higher claims experience. Loss exposure is mitigated
because  premiums  usually  are written at higher  rates than those  written for
standard insurance coverage.


                                     - 9 -


                          21st Century Holding Company

Both of our insurance  subsidiaries  currently  underwrite  nonstandard personal
automobile  insurance only in Florida,  where the minimum limits are $10,000 per
individual,  $20,000 per  accident for bodily  injury,  $10,000 per accident for
property damage and comprehensive, and $50,000 for collision. The average annual
premium on policies  currently in force is approximately  $1,057, as compared to
$751 for 2003, and represented  approximately 97.25% of our written premiums for
automobile  insurance as of the year ended  December 31,  2004.  Both  Federated
National  and  American  Vehicle  underwrite  this  coverage  on an  annual  and
semi-annual basis.

      Due to the  purchasing  habits of  nonstandard  automobile  insureds  (for
example, nonstandard automobile insureds tend seek the least expensive insurance
required of the policyholder by statute that satisfies the requirements of state
laws to register a vehicle),  policy  renewal  rates tend to be low  compared to
standard policies. Our experience has been that a significant number of existing
nonstandard  policyholders  allow their  policies to lapse and then  reapply for
insurance  as new  policyholders.  Our  average  policy  renewal  rate  for  our
nonstandard  policies  is 35% to 40% on policies  that mature to full term.  The
success of our nonstandard automobile insurance program,  therefore,  depends in
part on our  ability to replace  non-renewing  insureds  with new  policyholders
through marketing efforts.

STANDARD AUTOMOBILE

      Standard personal automobile insurance is principally provided to insureds
who present an average risk profile in terms of driving record, vehicle type and
other factors.  Limits on standard personal  automobile  insurance are generally
significantly higher than those for nonstandard coverage,  but typically provide
for deductibles and other  restrictive  terms.  Federated  National  underwrites
standard personal  automobile  insurance  policies  providing coverage no higher
than $100,000 per individual,  $300,000 per accident for bodily injury,  $50,000
per accident for property damage and  comprehensive  and collision up to $50,000
per accident,  with deductibles ranging from $200 to $1,000. The average premium
on the  policies  currently  in force is  approximately  $1,402,  as compared to
$1,472 for 2003, and represented approximately 2.75% of our written premiums for
automobile insurance as of the year ended December 31, 2004.

HOMEOWNERS' AND MOBILE HOMEOWNERS'

      We underwrite  homeowners'  insurance  principally in Central and Southern
Florida.  Homeowners' insurance generally protects an owner of real and personal
property against covered causes of loss to that property.  Limits on homeowners'
insurance are generally  significantly  higher than those for mobile homes,  but
typically  provide for deductibles  and other  restrictive  terms.  Our property
insurance products typically provide maximum coverage in the amount of $200,000,
with the average  policy limit being  approximately  $250,000.  The  approximate
average premium on the policies  currently in force is approximately  $1,571, as
compared  to  $1,050  for  2003,  and  the  typical  deductible  is  $1,000  for
non-hurricane-related  claims and  generally 2% of the  coverage  amount for the
structure for hurricane-related claims.

      We  underwrite  homeowners'  insurance for mobile  homes,  principally  in
Central and Northern Florida, where we believe that the risk of catastrophe loss
from  hurricanes  is in a typical  year less than in other  areas of the  state.
Mobile homeowners'  insurance generally involves the potential for above-average
loss  exposure,  as compared to homeowners'  insurance.  In the absence of major
catastrophe losses,  however,  loss exposure is limited because premiums usually
are at higher rates than those charged for non-mobile home-property and casualty
insurance.  Additionally,  our property lines for mobile homes typically provide
maximum  coverage in the amount of $75,000,  with the average policy limit being
approximately  $31,000. In addition, we presently limit our mobile home coverage
to no more than 10% of our underwriting  exposure. The average annual premium on
policies  currently in force is  approximately  $315 and remains  unchanged from
2003.  The typical  non-hurricane  deductible  is $500 and  generally  2% of the
coverage amount for the structure for hurricane-related claims.

      Federated National incurred significant losses relative to its homeowner's
and  mobile  homeowners'  insurance  lines of  business  as a result of the four
Florida  hurricanes  in  2004.  Approximately  8,500  policyholders  have  filed
hurricane-related  claims  totaling an  estimated  $105.4  million,  of which we
estimate that our share of the costs  associated  with these  hurricanes will be
approximately  $43.5  million,  net  of  reinsurance  recoveries  and  amortized
reinstatement  premiums.  For a further discussion of our reinsurance please see
our section titled "REINSURANCE"

      Since our initial  preliminary  provision for losses from these hurricanes
of $33 million,  net of  reinsurance  recoveries,  as of September  30, 2004, we
revised our provision for losses as described above. Because the storms occurred
during  the  third  quarter  of  2004,  we were not  able to  complete  physical
inspections  of a  sufficiently  large  percentage of claims,  nor were complete
repair  estimates  available.  During the fourth  quarter of 2004,  as  physical
property inspections and repair estimates were completed,  our initial estimates
of losses for these  storms were  increased  to reflect  increased  estimates of
claim  severity on our  homeowners'  policies in  Florida.  We do not  currently
anticipate  further  materials  increases  to our loss  estimates  from the 2004
hurricanes.

                                     - 10 -


                          21st Century Holding Company

      We continue to evaluate  the  premium  rates that our  property  insurance
policyholders are charged and have implemented an average rate increase of 21.9%
for new and renewal  policies in effect as of December 1, 2004 and  December 15,
2004, respectively.  These increases in premium rates are subject to approval by
the Florida Office of Insurance Regulation.  There can be no assurances that our
requested rate increases will be approved.

FLOOD

      We write flood  insurance  through the National  Flood  Insurance  Program
("NFIP"). We write the policy for the NFIP, which assumes 100% of the flood risk
while we retain a commission  for our service.  The average flood policy premium
is $300 with limits up to $250,000.

COMMERCIAL GENERAL LIABILITY

      We underwrite commercial general liability insurance for approximately 250
classes of artisan  contracting trades (excluding  home-builders and developers)
and for certain special events.  The limits of liability range from $100,000 per
occurrence  and $200,000  policy  aggregate to $1 million per  occurrence and $2
million policy aggregate.  The average policy premium is approximately $520 with
deductibles  of $250  to $500  per  claim.  We  market  the  commercial  general
liability  insurance  products  through a limited  number  of  general  agencies
unaffiliated with the Company.

FUTURE PRODUCTS

      We  currently  intend to expand  our  product  offerings  by  underwriting
additional  insurance  products and  programs,  and  marketing  them through our
distribution  network.  Expansion  of  our  product  offerings  will  result  in
increases  in  expenses  due to  additional  costs  incurred in  actuarial  rate
justifications,  software and personnel.  Offering additional insurance products
may also require regulatory approval, further increasing our costs.

ASSURANCE MGA

      Assurance Managing General Agents, Inc.  ("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 policy fee income
and other  administrative fees from the marketing of companies' products through
the   Company's   distribution   network.   Assurance  MGA  plans  to  establish
relationships with additional carriers and add additional  insurance products in
the future.

SUPERIOR ADJUSTING

      Superior  processes  claims  made by  insureds  from  Federated  National,
American  Vehicle  and  third-party  insurance  companies.  Our  agents  have no
authority  to settle  claims  or  otherwise  exercise  control  over the  claims
process.  Furthermore,  we  believe  that  the  employment  of  salaried  claims
personnel, as opposed to independent adjusters, results in reduced ultimate loss
payments,  lower loss adjustment expenses and improved customer service for most
of our insurance  products.  Where this is not the case,  we retain  independent
appraisers  and  adjusters.  We also  employ an  in-house  legal  department  to
cost-effectively  manage  claims-related  litigation  and to monitor  our claims
handling practices for efficiency and regulatory compliance.

FEDERATED PREMIUM FINANCE

      Federated  Premium  provides  premium  financing to Federated  National's,
American  Vehicle's  and  third-party's  insureds.  Premium  financing  has been
marketed through our distribution network of general agencies and a small number
of  independent  agents whose  customer base and  operational  history meets our
strict criteria for  creditworthiness  and, prior to our sale at the end of 2004
of our  company-owned  and  franchised  agencies,  also through those  agencies.
Lending operations are supported by Federated Premium's own capital base and are
currently  leveraged  through our credit facility with FlatIron  Funding Company
LLC, which is described in more detail below.

      Premiums for property and casualty  insurance are typically payable at the
time a policy is placed in force or renewed.  Federated Premium's services allow
the insured to pay a portion of the  premium  when the policy is placed in force
and the balance in monthly installments over a specified term, generally between
six and eight  months.  As security,  Federated  Premium  retains a  contractual
right,  if a premium  installment  is not paid when due, to cancel the insurance
policy and to receive the unearned premium from the insurer,  or in the event of
insolvency of an insurer, from the Florida Guarantee  Association,  subject to a
$100 per policy  deductible.  In the event of  cancellation,  Federated  Premium
applies the unearned premium towards the payment obligation of the insured.

                                     - 11 -


                          21st Century Holding Company

      At times,  Federated  Premium may advance  funds for financed  premiums to
independent  insurance  agencies that  represent  third-party  insurers.  A risk
exists if remittance is not made by the agency to the  third-party  insurer,  as
advances made by Federated  Premium may only be  recoverable  to the extent that
the agency's receipt of such advances is received by the third-party insurer. In
order  to  reduce  this  risk,  we  have  in  place  strict   criteria  for  the
creditworthiness  of  the  agency's   operational  history  and  customer  base.
Additionally, we closely monitor these agencies on an ongoing basis.

      The  following  table sets forth the amount and  percentages  of  premiums
financed for Federated  National,  American  Vehicle and other  insurers for the
periods indicated:



                                         Years Ended December 31,
                            2004                   2003                   2002
                    ====================   ====================   ====================
                     Premium    Percent     Premium    Percent     Premium    Percent
                                          (Dollars in Thousands)
                                                           
Federated National  $  11,510       34.0%  $  19,227       49.9%  $  22,331       55.4%
American Vehicle        9,390       27.8%     15,519       40.3%     12,850       31.9%
Other insurers         12,925       38.2%      3,767        9.8%      5,124       12.7%
                    ---------  ---------   ---------  ---------   ---------  ---------
      Total         $  33,825      100.0%  $  38,513      100.0%  $  40,305      100.0%
                    =========  =========   =========  =========   =========  =========


      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 WPAC (Westchester Premium Acceptance  Corporation)
(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.

      During  September  2004, we negotiated a new revolving  loan  agreement in
which the maximum credit  commitment  available to us was reduced at our request
to $2.0  million with  built-in  options to  incrementally  increase the maximum
credit  commitment  up $4.0 million over the next three years.  Our lender could
determine to change our available credit based on a number of factors, including
the A.M. Best ratings of Federated  National and American  Vehicle.  Pursuant to
our loan agreement,  if the A.M. Best rating of Federated National falls below a
"C," or if the  financial  condition of American  Vehicle,  as determined by our
lender (in its sole and absolute  discretion) suffers a material adverse change,
then under the terms of our loan agreement,  policies written by that subsidiary
will no  longer be  eligible  collateral,  causing  our  available  credit to be
reduced if we do not have other collateral qualifying as eligible collateral. As
of December 31, 2004, policies written by Federated National were not considered
by our lender to be eligible  collateral.  In March 2005,  our lender  agreed to
permit  policies  written by Federated  National to be eligible  collateral  and
agreed to increase our total available  credit by $0.5 million from $2.0 million
to $2.5 million.  We currently  believe that this higher  available credit limit
will be sufficient based on our current  operations.  If policies written by our
insurance  subsidiaries  again do not qualify as eligible  collateral  under our
loan agreement and we are not able to obtain working capital from our operations
or other sources,  then we would have to restrict our growth and, possibly,  our
operations.

      Direct billing is when the insurance company accepts from the insured,  as
a receivable,  a promise to pay the premium,  as opposed to requiring payment of
the full  amount of the  policy,  either  directly  from the  insured  or from a
premium  finance  company.  We believe that the direct billing  program does not
increase our risk because the insurance policy,  which serves as collateral,  is
managed by our computer  system.  Underwriting  criteria are designed  with down
payment  requirements and monthly payments that create policyholder equity, also
called unearned premium,  in the insurance  policy.  The equity in the policy is
collateral  for the extension of credit to the insured.  Through our  monitoring
systems,  we track delinquent  payments and, in accordance with the terms of the
extension  of  credit,  cancel the policy  before the  policyholder's  equity is
extinguished. If any excess premium remains after cancellation of the policy and
deduction of applicable penalties,  this excess is refunded to the policyholder.
Similarly,  we  believe  that  the  premium  financing  that we offer to our own
insureds  involves  limited  credit  risk.  By  primarily   financing   policies
underwritten by our own insurance carriers, our credit risks are reduced because
we can more  securely  rely on the  underwriting  processes of our own insurance
carriers.  Furthermore, the direct bill program enables us to closely manage our
risk while providing credit to our insureds.

                                     - 12 -


                          21st Century Holding Company

      The  amount  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 5.71%,
4.83%  and  6.23%  for the  years  ended  December  31,  2004,  2003  and  2002,
respectively.

      Outstanding  borrowings  under the Revolving  Agreement as of December 31,
2004 were approximately $2.1 million.  Outstanding  borrowings under the line of
credit   agreement  as  previously  in  effect  as  of  December  31,  2003  was
approximately  $4.1.  Outstanding  borrowings  in excess of the $2.0 million and
$4.0  million  respective  credit  limits  totaled  $148,542  and  $98,786 as of
December 31, 2004 and 2003, respectively.  The excess amounts are permissible by
reason of a  compensating  cash balance of $156,095 and $200,430 for December 31
2004 and  2003,  respectively,  that was  held for the  benefit  of WPAC and was
included in other assets. Interest expense on this revolving credit line for the
years ended  December 31, 2004,  2003 and 2002 totaled  approximately  $178,000,
$203,000 and $342,000, respectively.

DISCONTINUED OPERATIONS

      TAX PREPARATION SERVICES AND ANCILLARY SERVICES

      During  2004,  we also offered  other  services at our  company-owned  and
franchised agencies,  including tax return preparation and electronic filing and
the issuance and renewal of license tags. On January 13, 2005, with an effective
date of January 1, 2005,  we sold our 80% interest in Express Tax Service,  Inc.
(along with its wholly owned subsidiary,  EXPRESSTAX  Franchise  Corporation) to
Robert J. Kluba, the president of Express Tax and the holder of the 20% minority
interest in Express Tax, and Robert H.  Taylor.  In exchange for our shares,  we
received a net cash payment of  $311,351.  which  reflected a purchase  price of
$660,000 less $348,649.  in intercompany  receivables we owed to Express Tax. In
addition,  we received a payment of $1,200,000 in exchange for our agreement not
to compete with the current  businesses  of Express Tax for five years after the
sale. For further information about this transaction,  please see Note 24 to our
Consolidated  Financial  Statements included under Item 8 of this Report on Form
10-K.

      FRANCHISE OPERATIONS

      On December 31, 2004, we sold most of the  non-current  assets  related to
our franchise  operations to Fed USA Retail, Inc. and Fed USA Franchising,  Inc.
We  retained  ownership  of the  current  assets and  liabilities.  For  further
information about this transaction,  please see "Recent  Developments" above and
Note 24 to our Consolidated  Financial  Statements included under Item 8 of this
Report on Form 10-K.

      At the  time of  sale,  we had 42  operating  franchises  and six  pending
franchises.  The form of franchise  agreement in effect  during 2004 granted the
franchisee  a  license  for the  operation  of an  agency  within  an  exclusive
territory  for a  10-year  period,  with  two  additional  10-year  options.  We
collected  from  the  franchisees  a  non-refundable  initial  franchise  fee of
$14,950,  royalty fees, advertising fees, and other fees. Our rights under these
franchise agreements were among the assets sold.

      In  addition,  at the time of the sale of our interest in Express Tax, 231
EXPRESSTAX  franchises  had  been  granted.  The  form of  EXPRESSTAX  franchise
agreement in effect during 2004 granted the franchisee a  non-exclusive  license
to open and operate a center for a 10-year period,  with two additional  10-year
options.  As a result of the sale of our  interest  in Express  Tax,  we will no
longer be entering into such franchise agreements.

MARKETING AND DISTRIBUTION

      During 2004, we marketed and distributed our own and third-party insurers'
products and other services  primarily in Central and South  Florida,  through a
network of 24 agencies owned by Federated Agency Group, Inc.  ("Federated Agency
Group"), a wholly owned subsidiary, 42 franchised agencies,  approximately 1,500
independent agents and a select number of general agents. Our independent agents
and  general  agents  are  primarily  responsible  for the  distribution  of our
homeowners'  insurance and commercial general liability  products.  As described
above,  on December 31,  2004,  we sold most of the  non-current  assets and the
deferred policy acquisition liability related to our network of 24 company-owned
agencies and 48 franchised agencies located in Florida,  including our franchise
operations. The company-owned agencies sold were located in Miami-Dade, Broward,
Palm Beach, Martin, Orange,  Osceola,  Volusia and Seminole counties in Florida.
The franchised  agencies sold were located in Miami-Dade,  Broward,  Palm Beach,
Martin, St. Lucie,  Orange, Lee and Collier counties in Florida. Our independent
agents are located primarily in South Florida.

      As a result  of this  sale,  we are  focusing  our  marketing  efforts  on
continuing  to  continue  to expand  our  distribution  network  and  market our
products  and  services  in  other  regions  of  Florida  and  other  states  by
establishing  relationships  with  additional  independent  agents  and  general
agents.  As this occurs,  we will seek to replicate our distribution  network in
those states. There can be no assurance, however, that we will be able to obtain
the required  regulatory  approvals to offer  additional  insurance  products or
expand into states other than Florida, Georgia , Kentucky, Louisiana and Texas.

                                     - 13 -


                          21st Century Holding Company

      Our agents  have the  authority  to sell and bind  insurance  coverage  in
accordance with procedures  established by Assurance MGA.  Assurance MGA reviews
all coverage  bound by the agents  promptly and  generally  accepts all coverage
that falls within stated  underwriting  criteria.  For automobile and commercial
general liability policies, Assurance MGA also has the right, within a period of
60 days from a policy's  inception,  to cancel any policy, upon 45 days' notice,
even if the risk falls within our underwriting criteria.

      Except  for the  period as  defined  by the  Florida  Office of  Insurance
Regulation,  which following the four Florida hurricanes in the third quarter of
2004 issued an emergency  order that imposed a moratorium on  cancellations  and
non-renewals of various types of insurance coverages, our homeowners' and mobile
home policies as underwritten by Assurance MGA provided for the right,  within a
period of 90 days from a  policy's  inception,  of  Assurance  MGA to cancel any
policy upon 25 days' notice or after 90 days from policy inception with 95 days'
notice, even if the risk falls within our underwriting criteria.

      We believe that our  integrated  computer  system,  which allows for rapid
automated  premium quotation and policy issuance by our agents, is a key element
in providing quality service to both our agents and insureds.  For example, upon
entering a customer's basic personal information,  the customer's driving record
is accessed  and a premium rate is quoted.  If the customer  chooses to purchase
the insurance, the system can generate the policy on-site.

      We believe that the management of our  distribution  system now centers on
our ability to capture and maintain  relevant data by producing  agent,  none of
whom will be affiliated with us. We believe that information management of agent
production   coupled   with  loss   experience   will   enable  us  to  maximize
profitability.

      The  following  table sets forth the amount and  percentages  of insurance
premiums  written  through  company-owned  agencies,   franchised  agencies  and
independent agents for the periods indicated:



                                             Years Ended December 31,
                                             ------------------------
                                2004                   2003                   2002
                        ====================   ====================   ====================
                         Premium    Percent     Premium    Percent     Premium    Percent
                                              (Dollars in Thousands)
                                                               
Company-owned agencies  $  11,421       11.4%  $  22,320       30.6%  $  20,403       32.3%
Franchised agencies         7,999        7.9%     11,630       15.9%     11,761       18.7%
Independent agencies       81,242       80.7%     39,041       53.5%     30,872       49.0%
                        ---------  ---------   ---------  ---------   ---------  ---------
     Total              $ 100,662      100.0%  $  72,991      100.0%  $  63,036      100.0%
                        =========  =========   =========  =========   =========  =========


REINSURANCE

      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 reinsurer assumes a portion of the
exposure in return for a portion,  or quota share, of the premium,  and pays the
ceding company a commission based upon the amount of insurance ceded. 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.

      Reinsurance  is ceded  under  separate  contracts  or  "treaties"  for the
separate  lines of  business  underwritten  and terms of  coverage.  The Company
collectively  ceded $15.5 million and $22.1 million in premiums  written for the
years ended December 31, 2004 and 2003, respectively.  During 2004, we primarily
reinsured Federated National's  homeowners'  insurance lines of business,  while
during  2003  we  primarily  reinsured  our  American  Vehicle's  and  Federated
National's automobile insurance lines of business. The Company's reinsurance for
homeowners' is with several participants,  all of which are AM Best rated "A" or
better.

      In August  and  September  2004,  the State of  Florida  experienced  four
hurricanes,  Charley,  Frances,  Ivan  and  Jeanne.  One  of  our  subsidiaries,
Federated National,  incurred significant losses relative to its homeowners' and
mobile   homeowners'   insurance   lines  of   business.   Approximately   8,500
policyholders have filed  hurricane-related  claims totaling an estimated $105.4
million,  of which we estimate that our share of the costs associated with these
hurricanes will be approximately  $43.5 million,  net of reinsurance  recoveries
and amortized reinstatement premiums.

                                     - 14 -


                          21st Century Holding Company

      For each catastrophic occurrence, the excess of loss treaty will insure us
for $24  million  with the company  retaining  the first $10 million of loss and
LAE. The treaty has a provision which,  for an additional  prorated premium will
insure us for  another $24  million of loss and LAE for  subsequent  occurrences
with the company retaining the first $10 million in loss and LAE. As a result of
the loss and LAE incurred in connection with the Hurricanes  Charles and Frances
the company has exhausted its  recoveries of $48 million under the terms of this
treaty.

      The excess of loss treaty also insures us for an additional $34 million in
excess of the  company's  $10  million  retention  plus the next $24  million as
described above. Accordingly,  loss and LAE incurred for Hurricanes Ivan, Jeanne
and any subsequent  catastrophic events through June 30, 2005, up to $34 million
each, are the responsibility of the company,  as illustrated in the accompanying
table.

                                             (in millions)
                                     Gross    Reinsurance    Net
   Hurricane                         Losses    Recoveries   Losses
   ---------                        ---------  ----------  ---------
Charley (August 13)                 $    44.2  $    34.2   $    10.0
Frances (September 3)                    37.7       27.7        10.0
Ivan (September 14)                      13.7       --          13.7
Jeanne (September 25)                     9.8       --           9.8
                                    ---------  ---------   ---------
Total Loss Estimate                 $   105.4  $    61.9   $    43.5
                                    =========  =========   =========

      Furthermore,  as a  result  of the  2004  hurricanes,  we  incurred  a net
reinstatement  insurance  premium  of $3.0  million  that is  amortized  through
operations from the reinstatement date of August 13, 2004 to June 30, 2005.

      We  continue to  participate  in the Florida  Hurricane  Catastrophe  Fund
("FCAT") and we subscribe to an excess of loss reinsurance policy to protect our
interest in the insurable  risks  associated  with our homeowner and mobile home
owner insurance  products.  Maximum coverage afforded from the combined policies
of our FCAT and excess of loss policies in effect for varying dates from June 1,
2004 to June 30, 2005 total  approximately  $200.0  million where we will retain
the  first  $10  million  of  insurable  losses  on each  event.  Our  amount of
reinsurance  coverage was  determined  by  subjecting  our  homeowner and mobile
homeowner  exposures  to  statistical  forecasting  models that are  designed to
quantify a  catastrophic  event in terms of the  frequency of a storm  occurring
once in every "n" years.  Our reinsurance  coverage  contemplated a catastrophic
event occurring once every 100 years.

      We are  selective in choosing a reinsurer and consider  numerous  factors,
the most important of which is the financial  stability of the reinsurer,  their
history of responding to claims and their  overall  reputation.  In an effort to
minimize  our  exposure  to the  insolvency  of a  reinsurer,  we  evaluate  the
acceptability  and review the  financial  condition  of the  reinsurer  at least
annually.  Our current policy is to use only  reinsurers  that have an A.M. Best
rating of "A" (Excellent) or better.

      The  Company's   reinsurance  for  automobile  insurance  was  ceded  with
Transatlantic  Reinsurance  Company  ("Transatlantic"),  an A+ rated reinsurance
company.  During 2004, Federated National did not reinsure any of its automobile
insurance.  In 2003 and 2002,  Federated  National  ceded 40% of its  automobile
premiums  written and losses  incurred to  Transatlantic.  Beginning in November
2001, and continuing  through December 31, 2003,  American Vehicle reinsured all
of its automobile  insurance with  Transatlantic at various levels.  During 2004
American Vehicle did not reinsure any of its products.

      The  automobile  quota-share  reinsurance  treaties  for 2003 include loss
corridors with varying layers of coverage based on ultimate  incurred loss ratio
results  whereby  the two  insurance  companies  will  retain 100% of the losses
between  incurred loss ratios of 66% and 86% for policies with an effective date
of 2003. Despite the loss corridor,  the reinsurer assumes significant insurance
risk under the reinsured portions of the underlying  insurance  contracts and it
is reasonably  possible  that the reinsurer may realize a significant  loss from
the  transaction.  Our  ultimate  incurred  loss ratios for these  treaties  are
estimated to be 69.2% and 72.5% for  Federated  National  and American  Vehicle,
respectively.

      During 2002,  Federated National entered into a 10% quota-share  agreement
with our affiliate American Vehicle.  The agreement ceded 10% of its premium and
losses  on all  policies  with an  effective  date  of  2002.  For  presentation
purposes, and in accordance with the principles of consolidation,  the agreement
between the two affiliated insurance companies has been eliminated.

                                     - 15 -


                          21st Century Holding Company


LIABILITY FOR UNPAID LOSSES AND LAE

      We are  directly  liable  for  loss and loss  adjustment  expense  ("LAE")
payments under the terms of the insurance  policies that we write. In many cases
there may be a time lag between the  occurrence and reporting of an insured loss
and our  payment  of  that  loss.  As  required  by  insurance  regulations  and
accounting  rules,  we reflect the  liability  for the  ultimate  payment of all
incurred  losses and LAE by establishing a liability for those unpaid losses and
LAE for both reported and unreported claims, which represent estimates of future
amounts needed to pay claims and related expenses.

      When a claim, other than personal automobile, involving a probable loss is
reported, we establish a liability for the estimated amount of our ultimate loss
and LAE payments.  The estimate of the amount of the ultimate loss is based upon
such factors as the type of loss,  jurisdiction of the occurrence,  knowledge of
the circumstances surrounding the claim, severity of injury or damage, potential
for ultimate  exposure,  estimate of liability on the part of the insured,  past
experience with similar claims and the applicable policy provisions.

      All newly  reported  claims  received with respect to personal  automobile
policies are set up with an initial average liability. The average liability for
these  claims is  determined  no less than  annually by  dividing  the number of
reported claims into the total amount paid during the same period. If a claim is
open more than 45 days,  that open case liability is evaluated and the liability
is adjusted upward or downward  according to the facts and circumstances of that
particular claim.

      In addition,  management provides for a liability on an aggregate basis to
provide for losses incurred but not reported  ("IBNR").  We utilize  independent
actuaries  to help  establish  liability  for unpaid  losses and LAE.  We do not
discount  the  liability  for  unpaid  losses  and LAE for  financial  statement
purposes.

      The  estimates of the  liability  for unpaid losses and LAE are subject to
the  effect of  trends in claims  severity  and  frequency  and are  continually
reviewed.  As part of this  process,  we  review  historical  data and  consider
various factors, including known and anticipated legal developments,  changes in
social attitudes,  inflation and economic conditions. As experience develops and
other data become available, these estimates are revised, as required, resulting
in increases or decreases to the existing  liability  for unpaid losses and LAE.
Adjustments  are  reflected in results of operations in the period in which they
are made and the liabilities  may deviate  substantially  from prior  estimates.
Among our classes of insurance,  the automobile and homeowners' liability claims
historically  tend to have  longer time lapses  between  the  occurrence  of the
event, the reporting of the claim and the final  settlement,  than do automobile
physical damage and homeowners' property claims.  Liability claims often involve
parties  filing suit and  therefore  may result in  litigation.  By  comparison,
property  damage  claims tend to be reported in a relatively  shorter  period of
time and settled in a shorter time frame with less occurrence of litigation.  We
do not experience changes in payment patterns due to portfolio loss transfers or
structured settlements.

      There can be no assurance  that our  liability  for unpaid  losses and LAE
will be adequate to cover actual losses.  If our liability for unpaid losses and
LAE proves to be inadequate,  we will be required to increase the liability with
a  corresponding  reduction  in our  net  income  in the  period  in  which  the
deficiency is  identified.  Future loss  experience  substantially  in excess of
established  liability for unpaid  losses and LAE could have a material  adverse
effect on our business, results of operations and financial condition.

      The following  table sets forth a  reconciliation  of beginning and ending
liability  for  unpaid  losses  and LAE as shown in our  consolidated  financial
statements for the periods indicated.


                                     - 16 -


                          21st Century Holding Company

                                              For the years ending December 31,
                                              ---------------------------------
                                                 2004       2003        2002
                                                 ----       ----        ----
                                                   (Dollars in Thousands)
Balance at January 1:                         $  24,570   $  16,984   $  11,005
    Less reinsurance recoverables                (9,761)     (7,848)     (4,798)
                                              ---------   ---------   ---------
      Net balance at January 1                $  14,809   $   9,136   $   6,207
                                              =========   =========   =========

Incurred related to:
    Current year                              $  76,423   $  26,275   $  15,896
    Prior years                                  (1,430)      1,234          91
                                              ---------   ---------   ---------
      Total incurred                          $  74,993   $  27,509   $  15,987
                                              =========   =========   =========

Paid related to:
    Current year                              $  42,304   $  14,205   $   8,148
    Prior years                                  10,342       7,631       4,910
                                              ---------   ---------   ---------
      Total paid                              $  52,646   $  21,836   $  13,058
                                              =========   =========   =========

Net balance at year-end                       $  37,156   $  14,809   $   9,136
    Plus reinsurance recoverables                 9,415       9,761       7,848
                                              ---------   ---------   ---------
      Balance at year-end                      $ 46,571   $  24,570   $  16,984
                                              =========   =========   =========


      As shown above,  and as a result of our review of liability for losses and
LAE, which includes a re-evaluation  of the adequacy of reserve levels for prior
year's claims,  we decreased the liability for loss and LAE for claims occurring
in prior  years  by  $1,431,000  for the year  ended  December  31,  2004 and we
increased the liability for loss and LAE for claims  occurring in prior years by
$1,234,000  and  $91,000  for the  years  ended  December  31,  2003  and  2002,
respectively.  There  can  be no  assurance  concerning  future  adjustments  of
reserves, positive or negative, for claims through December 31, 2004.

      Based upon  discussions  with our  independent  actuarial  consultants and
their statements of opinion on losses and LAE, we believe that the liability for
unpaid  losses and LAE is  currently  adequate  to cover all claims and  related
expenses which may arise from incidents reported and IBNR.

      The  following  table  presents  total unpaid loss and LAE, net, and total
reinsurance  recoverables due (to) or from our automobile  reinsures as shown in
our consolidated financial statements for the periods indicated.



                                                                                                    As of December 31,
                                                                                                    ------------------
                                                                                                   2004           2003
                                                                                                   ----           ----
Transatlantic Reinsurance Company (A+ A.M. Best Rated):
                                                                                                       
              Unearned premiums                                                                $      2,559  $  7,823,374
              Reinsurance recoverable on paid losses and loss adjustment expenses                 1,661,751     2,457,228
              Unpaid losses and loss adjustment expenses                                          2,507,403     9,761,353
                                                                                               ------------  ------------
                                                                                               $  4,171,713  $ 20,041,955
                                                                                               ============  ============
Amounts due from reinsurers consisted of amounts related to:
              Unpaid losses and loss adjustment expenses                                       $  2,507,403  $  9,761,353
              Reinsurance recoverable on paid losses and loss adjustment expenses                 1,661,751     2,457,228
              Reinsurance receivable (payable)                                                      11,301     (1,339,162)
                                                                                               ------------  ------------
                                                                                               $  4,180,455  $ 10,879,419
                                                                                               ============  ============



      In addition to our reinsurance recoverable from our automobile reinsurers,
we also  have  reinsurance  recoveries  due  from our  catastrophic  reinsurance
companies  relating to the four hurricanes that occurred in August and September
of 2004. The following  table presents total unpaid loss and LAE, net, and total
reinsurance  recoverables due from our  catastrophic  reinsurers as shown in our
consolidated financial statements.

                                     - 17 -


                          21st Century Holding Company



                                                                        As of December 31,
                                                                        ------------------
                                                                        2004          2003
                                                                        ----          ----
Catastrophe Excess of Loss (Various participants)
and Florida Hurricane Catastrophe Fund:
                                                                             

        Reinsurance recoverable on paid losses and loss adjustment
        expenses                                                    $ 18,191,799   $        --
        Unpaid losses and loss adjustment expenses                     6,907,390
                                                                    ------------

                                                                    $ 25,099,189   $        --
                                                                    ============   ============
Amounts due from reinsurers consisted of amounts related to:

        Unpaid losses and loss adjustment expenses                  $  6,907,390   $        --
        Reinsurance recoverable on paid losses and loss adjustment
        expenses                                                      18,191,799            --
        Reinsurance receivable (payable)                              (3,371,458)
                                                                    ------------

                                                                    $ 21,727,731   $        --
                                                                    ============   ============



                                     - 18 -


                          21st Century Holding Company

      The following  table  presents the liability for unpaid losses and LAE for
the years ended  December 31, 1995 through 2004. The top line of the table shows
the  estimated  net  liabilities  for unpaid losses and LAE at the balance sheet
date for each of the periods  indicated.  These figures  represent the estimated
amount of unpaid losses and LAE for claims  arising in all prior years that were
unpaid at the balance  sheet date,  including  losses that had been incurred but
not yet reported. The portion of the table labeled "Cumulative paid as of" shows
the net  cumulative  payments  for losses and LAE made in  succeeding  years for
losses  incurred prior to the balance sheet date. The lower portion of the table
shows the  re-estimated  amount of the previously  recorded  liability  based on
experience as of the end of each succeeding year.


                            Years Ended December 31,


                              2004     2003      2002      2001     2000     1999      1998      1997       1996      1995
                              ----     ----      ----      ----     ----     ----      ----      ----       ----      ----
                                                                   Dollars in Thousands
                                                                                       
Balance Sheet Liability   $37,156   $14,809    $9,136    $6,207    $6,976    $4,428    $5,366    $4,635    $4,532    $3,688

Cumulative paid as of:

      One year later                  9,969     7,622     5,275     8,228     4,289     3,460     2,694     2,850     3,250
      Two years later                           9,401     7,222     9,568     5,799     4,499     3,533     3,539     3,898
      Three years later                                   7,711    10,101     6,328     5,111     3,972     3,882     4,164
      Four years later                                             10,352     6,408     5,387     4,241     4,107     4,300
      Five years later                                                        6,542     5,227     4,325     4,223     4,404
      Six years later                                                                   5,216     4,121     4,262     4,493
      Seven years later                                                                           4,035     3,985     4,423
      Eight years later                                                                                     3,746     3,786
      Nine years later                                                                                                3,800


                           2004      2003      2002      2001      2000      1999      1998      1997      1996      1995
                           ----      ----      ----      ----      ----      ----      ----      ----      ----      ----

Re-estimated net liability as of:
                                                                                     
      End of year        $ 37,156  $ 14,809  $  9,136  $  6,207  $  6,976  $  4,428  $  5,366  $  4,635  $  4,532  $  3,688
      One year later                 14,256    10,897     6,954     9,445     5,872     4,676     4,360     4,332     4,728
      Two years later                          10,625     7,842    10,200     6,284     5,157     4,063     4,255     4,867
      Three years later                                   8,069    10,425     6,605     5,352     4,314     4,102     4,872
      Four years later                                             10,616     6,561     5,515     4,386     4,304     4,748
      Five years later                                                        6,664     5,384     4,395     4,321     4,899
      Six years later                                                                   5,396     4,277     4,321     4,808
      Seven years later                                                                           4,284     4,189     4,792
      Eight years later                                                                                     4,191     4,796
      Nine years later                                                                                                4,796


Cumulative redundancy
(deficiency)                       $    553  $ (1,489) $ (1,862) $ (3,640) $ (2,236) $    (30) $    351  $    341  $ (1,108)

Cumulative redundancy
-deficiency as a % of
reserves originally
established                             3.7%    -16.3%    -30.0%    -52.2%    -50.5%     -0.6%      7.6%      7.5%    -30.0%




      The cumulative redundancy or deficiency represents the aggregate change in
the  estimates  over all prior  years.  A deficiency  indicates  that the latest
estimate of the liability  for losses and LAE is higher than the liability  that
was originally estimated and a redundancy indicates that such estimate is lower.
It should be  emphasized  that the table  presents a run-off  of  balance  sheet
liability  for the  periods  indicated  rather  than  accident  or  policy  loss
development for those periods.  Therefore, each amount in the table includes the
cumulative effects of changes in liability for all prior periods. Conditions and
trends that have affected  liabilities in the past may not necessarily  occur in
the future.

      The table below sets forth the  differences  between loss and LAE reserves
as disclosed for GAAP basis compared to Statutory Accounting  Principles ("SAP")
basis of presentation for the years ended 2004 and 2003.

                                     - 19 -


                          21st Century Holding Company

                                                       Years Ended December 31,
                                                       ------------------------
                                                         2004           2003
                                                        -------        -------
GAAP basis Loss and LAE reserves                        $46,571        $24,570
Less unpaid Losses and LAE ceded                          9,415          9,761
                                                        -------        -------
    Balance Sheet Liability                              37,156         14,809
Add Insurance Apportionment Plan                            234            505
                                                        -------        -------
    SAP basis Loss and LAE reserves                     $37,390        $15,314
                                                        =======        =======

      The table below sets forth the  differences  between loss and LAE incurred
as disclosed  for GAAP basis  compared to SAP basis  presentation  for the years
ended 2004, 2003 and 2002.

                                                    Years Ended December 31,
                                                    ------------------------
                                                    2004      2003      2002
                                                  --------  --------  --------
                                                      (Dollars in Thousands)
GAAP basis Loss and LAE incurred                  $ 74,993  $ 27,509  $ 15,987
Intercompany adjusting and other expenses            5,597     3,579     2,484
Insurance apportionment plan                           185     1,940       700
                                                  --------  --------  --------
SAP basis Loss and LAE incurred                   $ 80,775  $ 33,028  $ 19,171
                                                  ========  ========  ========

      Underwriting  results of insurance  companies are  frequently  measured by
their Combined  Ratios.  However,  investment  income,  federal income taxes and
other  non-underwriting  income or expense  are not  reflected  in the  Combined
Ratio. The profitability of property and casualty insurance companies depends on
income  from  underwriting,  investment  and  service  operations.  Underwriting
results are  considered  profitable  when the  Combined  Ratio is under 100% and
unprofitable when the Combined Ratio is over 100%.

      The following  table sets forth Loss Ratios,  Expense  Ratios and Combined
Ratios  for the  periods  indicated  for the  insurance  business  of  Federated
National and American Vehicle for 2004, 2003 and 2002. The ratios,  inclusive of
unallocated loss adjustment expenses ("ULAE"), are shown in the table below, and
are computed based upon SAP.

                                                Years Ended December 31,
                                                ------------------------
                                            2004           2003          2002
                                           ------         ------         ------

Loss Ratio                                 117.7%          67.4%          59.6%
Expense Ratio                               23.1%          25.7%          24.7%
                                           ------         ------         ------
Combined Ratio                             140.8%          93.1%          84.3%
                                           ======         ======         ======


      The  47.8%  increase  in the  SAP  loss  ratio  from  2004 to 2003 in part
reflects our experience  relating to the four hurricanes that occurred in August
and September of 2004, net of improved non-catastrophic loss ratio experience as
the following table reflects.

                                                   Calendar year 2004
                                                   ------------------
                                            Non-
                                        Catastrophic    Catastrophic
                                         experience     experience      Total
                                         ----------     ----------      -----
Net Written Premiums             (a)      $  83,660     $   3,000     $  86,660
Net Earned  Premiums             (b)      $  67,293     $   1,308     $  68,601
Net Incurred Losses & LAE        (c)      $  39,791     $  40,984     $  80,775
Net Underwriting Expense         (d)      $  18,743     $   1,286     $  20,029

Loss Ratio                       (c/b)         59.1%       3132.4%        117.7%

Expense Ratio                    (d/a)         22.4%         42.9%         23.1%
                                          ---------     ---------     ---------
Combined Ratio                                 81.5%       3175.3%        140.8%
                                          =========     =========     =========

      Main factors for the  improved, non-catastrophic  ratios  between 2004 and
2003 include,  but are not limited to, the termination  of  unprofitable  agency
relations,  increased  scrutiny over fraudulently  asserted claims,  streamlined
paperless claims processing system, new claims management supervision,  in house
legal counsel, as well as overall stricter underwriting guidelines.

                                     - 20 -



                          21st Century Holding Company

      An increase in severity  primarily  associated  with the  personal  injury
protection  line of  automobile  insurance can be attributed to the $1.2 million
adverse  development  incurred in 2003 relative to accidents that occurred prior
to 2003.  Main factors for the 2003 loss ratio  include  unanticipated  severity
associated with adjusting personal injury protection claims which were mitigated
by favorable loss experience associated with the property and commercial general
liability lines of insurance.  Additionally,  during 2003, both of the insurance
companies   revised  their   respective   automobile  rates  and  the  available
deductibles limits.

COMPETITION

      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 instead
tend to compete on the basis of underwriting  criteria, our distribution network
and superior  service to our agents and  insureds.  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 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.  Comparable companies which compete with
us in the homeowners' market include Florida Family Insurance  Company,  Florida
Select Insurance  Company,  Atlantic  Preferred  Insurance  Company and Vanguard
Insurance  Company.  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.  Competition could have a material adverse effect
on our business, results of operations and financial condition.

REGULATION

GENERAL

      We are subject to the laws and regulations in Florida, Georgia,  Kentucky,
Louisiana  and Texas,  and will be subject  to the laws and  regulations  of any
other states in which we seek to conduct business in the future. The regulations
cover all  aspects of our  business  and are  generally  designed to protect the
interests  of  insurance   policyholders,   as  opposed  to  the   interests  of
shareholders.  Such regulations relate to authorized lines of business,  capital
and  surplus  requirements,  allowable  rates  and forms  (particularly  for the
nonstandard  auto segment),  investment  parameters,  underwriting  limitations,
transactions with affiliates,  dividend limitations,  changes in control, market
conduct,  maximum amount allowable for premium  financing  service charges and a
variety of other  financial and  non-financial  components of our business.  Our
failure to comply with  certain  provisions  of  applicable  insurance  laws and
regulations  could have a material  adverse  effect on our business,  results of
operations  or financial  condition.  In addition,  any changes in such laws and
regulations,  including  the adoption of consumer  initiatives  regarding  rates
charged for automobile or other insurance coverage,  could materially  adversely
affect our operations or our ability to expand. We are, however,  unaware of any
consumer initiatives which could have a material adverse effect on our business,
results of operations or financial condition.

      Many  states  have  also   enacted   laws  which   restrict  an  insurer's
underwriting  discretion,  such as the ability to terminate policies,  terminate
agents or reject insurance coverage applications, and many state regulators have
the power to reduce, or to disallow  increases in, premium rates. These laws may
adversely  affect the ability of an insurer to earn a profit on its underwriting
operations.

      Most states have  insurance  laws  requiring that rate schedules and other
information be filed with the state's  insurance  regulatory  authority,  either
directly or through a rating  organization with which the insurer is affiliated.
The regulatory authority may disapprove a rate filing if it finds that the rates
are  inadequate,  excessive  or unfairly  discriminatory.  Rates,  which are not
necessarily uniform for all insurers, vary by class of business, hazard covered,
and size of risk.  Certain states have recently  adopted laws or are considering
proposed  legislation which, among other things,  limit the ability of insurance
companies to effect rate increases or to cancel,  reduce or non-renew  insurance
coverage with respect to existing  policies,  particularly  personal  automobile
insurance.

                                     - 21 -


                          21st Century Holding Company

The  Company's  experience in Florida to date,  however,  has been that although
legislative  proposals of this type have been considered from time to time, none
have yet been adopted.  Nevertheless,  the Florida legislature may adopt laws of
this type in the future, which could adversely affect the Company's business.

      Most  states  require  licensure  or  regulatory  approval  prior  to  the
marketing  of  new   insurance   products.   Typically,   licensure   review  is
comprehensive  and  includes a review of a company's  business  plan,  solvency,
reinsurance,  character  of  officers  and  directors,  rates,  forms  and other
financial and non-financial aspects of a company. The regulatory authorities may
not allow  entry into a new market by not  granting a license or by  withholding
approval.

      All insurance  companies  must file quarterly and annual  statements  with
certain regulatory agencies and are subject to regular and special  examinations
by those agencies. The last regulatory examination of Federated National covered
the  three-year   period  ended  on  December  31,  2001.  The  last  regulatory
examination of American Vehicle covered the three-year  period ended on December
31, 2002. No material  deficiencies  were found during either of the  regulatory
examinations.  In some instances,  various states routinely  require deposits of
assets for the  protection  of  policyholders  either in those states or for all
policyholders.  As of December 31, 2004, Federated National and American Vehicle
held investment securities with a fair value of approximately  $1,024,000,  each
as deposits  with the State of Florida.  Additionally,  as of December 31, 2004,
American  Vehicle has a $100,000  deposit with the State of Louisiana  and is in
the process of funding a $400,000  deposit in  connection  with its  approval in
Alabama.

      Under  Florida  law,  a  domestic  insurer  may not pay  any  dividend  or
distribute cash or other property to its shareholders except out of that part of
its  available  and  accumulated  capital  surplus  funds which is derived  from
realized net operating profits on its business and net realized capital gains. A
Florida  domestic  insurer may not make dividend  payments or  distributions  to
shareholders   without  prior  approval  of  the  Florida  Office  of  Insurance
Regulation  if the dividend or  distribution  would exceed the larger of (i) the
lesser of (a) 10.0% of its  capital  surplus or (b) net  income,  not  including
realized  capital  gains,  plus a two-year  carryforward,  (ii) 10.0% of capital
surplus with  dividends  payable  constrained  to unassigned  funds minus 25% of
unrealized  capital gains or (iii) the lesser of (a) 10.0% of capital surplus or
(b) net investment income plus a three-year  carryforward with dividends payable
constrained  to  unassigned  funds  minus  25.0% of  unrealized  capital  gains.
Alternatively,  a Florida  domestic  insurer may pay a dividend or  distribution
without the prior written approval of the Florida Office of Insurance Regulation
(i) if the  dividend  is equal to or less than the  greater  of (a) 10.0% of the
insurer's  capital  surplus as regards  policyholders  derived from realized net
operating  profits on its  business and net  realized  capital  gains or (b) the
insurer's  entire net  operating  profits and realized net capital gains derived
during the  immediately  preceding  calendar  year,  (ii) the insurer  will have
policy  holder  capital  surplus  equal to or  exceeding  115.0% of the  minimum
required statutory capital surplus after the dividend or distribution, (iii) the
insurer files a notice of the dividend or  distribution  with the Florida Office
of Insurance Regulation at least ten business days prior to the dividend payment
or distribution  and (iv) the notice  includes a certification  by an officer of
the insurer  attesting that,  after the payment of the dividend or distribution,
the insurer will have at least 115% of required  statutory capital surplus as to
policyholders.  Except as provided above, a Florida  domiciled  insurer may only
pay a dividend  or make a  distribution  (i)  subject to prior  approval  by the
Florida Office of Insurance  Regulation or (ii) 30 days after the Florida Office
of Insurance Regulation has received notice of such dividend or distribution and
has not disapproved it within such time.

      Under  these  laws,  based on their  respective  2004  surplus and income,
Federated  National and American Vehicle would not be permitted to pay dividends
in 2004.  No dividends  were paid by Federated  National or American  Vehicle in
2003, 2002 or 2001, and none are  anticipated in 2005.  Although we believe that
amounts  required  to meet  our  financial  and  operating  obligations  will be
available from sources other than dividends from insurance  subsidiaries,  there
can be no assurance in this regard.  Further, there can be no assurance that, if
requested,  the Florida Office of Insurance  Regulation will allow any dividends
in excess of the amount available, to be paid by Federated National and American
Vehicle to us in the future.  The maximum  dividends  permitted by state law are
not  necessarily  indicative of an insurer's  actual ability to pay dividends or
other  distributions  to a parent  company,  which  also may be  constrained  by
business  and  regulatory  considerations,  such as the impact of  dividends  on
capital  surplus,  which could affect an  insurer's  competitive  position,  the
amount of premiums that can be written and the ability to pay future  dividends.
Further, state insurance laws and regulations require that the statutory capital
surplus of an insurance  company following any dividend or distribution by it be
reasonable  in relation to its  outstanding  liabilities  and  adequate  for its
financial needs.

      While the non-insurance  company  subsidiaries are not subject directly to
the dividend  and other  distribution  limitations,  insurance  holding  company
regulations  govern the amount that any  affiliate  within the  holding  company
system may charge any of the insurance  companies for service (e.g.,  management
fees and  commissions).  In order to enhance the regulation of insurer solvency,
the  National  Association  of  Insurance   Commissioners  ("NAIC")  established
risk-based  capital  requirements  for insurance  companies that are designed to
assess  capital  adequacy and to raise the level of  protection  that  statutory
surplus  provides for policy  holders.  These  requirements  measure three major
areas of risk facing property and casualty  insurers:  (i)  underwriting  risks,
which encompass the risk of adverse loss  developments  and inadequate  pricing;
(ii) declines in asset values arising from credit risk; and

                                     - 22 -


                          21st Century Holding Company

(iii) other  business  risks from  investments.  Insurers  having less statutory
surplus than required will be subject to varying  degrees of regulatory  action,
depending  on the level of capital  inadequacy.  Based  upon the 2004  statutory
financial  statements  for  American  Vehicle,  statutory  surplus  exceeded all
regulatory action levels  established by the NAIC. Based upon the 2004 statutory
financial  statements for Federated  National,  statutory surplus did not exceed
regulatory action levels established by the NAIC.  Federated  National's results
required  us to  submit a plan  containing  corrective  actions.  Federated  has
submitted its plan for corrective  action and is currently in  discussions  with
the Florida  Office of Insurance  Regulation  regarding the merits of the action
plan points.  The  regulatory  action level permits the insurance  regulators to
perform an examination or other analysis and issue a corrective order. Federated
National is scheduled to have its  statutorily  required  triennial  examination
during 2005 for the three years ended  December  31, 2004 to be performed by the
Florida Office of Insurance Regulation. We may be subject of additional targeted
examinations  or analysis.  These  examinations or analysis may result in one or
more  corrective  orders  being  issued  by  the  Florida  Office  of  Insurance
Regulation.

      The  Florida   Office  of  Insurance   Regulation,   which  follows  these
requirements,  could  require  Federated  National or American  Vehicle to cease
operations in the event they fail to maintain the required statutory capital.

      Based  on Risk  Based  Capital  requirements,  the  extent  of  regulatory
intervention and action increases as the ratio of an insurer's statutory surplus
to its  Authorized  Control  Level  ("ACL"),  as  calculated  under  the  NAIC's
requirements,  decreases.  The first action  level,  the Company  Action  Level,
requires  an insurer  to submit a plan of  corrective  actions to the  insurance
regulators if statutory surplus falls below 200.0% of the ACL amount. The second
action level, the Regulatory Action Level,  requires an insurer to submit a plan
containing corrective actions and permits the insurance regulators to perform an
examination or other analysis and issue a corrective order if statutory  surplus
falls below 150.0% of the ACL amount.  The Authorized  Control Level,  the third
action level,  allows the regulators to  rehabilitate or liquidate an insurer in
addition to the aforementioned  actions if statutory surplus falls below the ACL
amount.  The fourth action level is the Mandatory Control Level,  which requires
the  regulators to  rehabilitate  or liquidate the insurer if statutory  surplus
falls below 70.0% of the ACL amount.  Federated  National's  ratio of  statutory
surplus to its ACL was 125.5%,  434.2% and 274.2% at December 31, 2004, 2003 and
2002, respectively. American Vehicle's ratio of statutory surplus to its ACL was
545.1%, 585.2% and 401.6% at December 31, 2004, 2003 and 2002, respectively.

      The NAIC has  also  developed  Insurance  Regulatory  Information  Systems
("IRIS")  ratios to assist state insurance  regulators in identifying  companies
which may be  developing  performance  or  solvency  problems,  as  signaled  by
significant  changes  in  the  companies'  operations.   Such  changes  may  not
necessarily result from any problems with an insurance  company,  but may merely
indicate  changes in certain  ratios outside the ranges defined as normal by the
NAIC.  When an insurance  company has four or more ratios falling outside "usual
ranges,"  state  regulators  may  investigate  to determine  the reasons for the
variance and whether corrective action is warranted.

      As of December  31,  2004,  Federated  National  was outside  NAIC's usual
ranges with  respect to its IRIS tests on seven out of twelve  ratios.  With the
exception of two of these test results, all of test results can be attributed to
the significant  degradation of policyholders'  surplus stemming from the losses
incurred in its  homeowners'  line of  business as a result of the four  Florida
hurricanes in 2004. The change in net writings and two-year reserve  development
to  policyholders'  surplus  resulted from test ratio results that do not employ
current  year  policyholders'  surplus,  and were unusual due to the increase in
written  premiums from 2004 compared to 2003 and the increased  estimates of the
costs to settle private  passenger  automobile  liability  claims in relation to
Federated National's surplus level as of December 31, 2002.

      As of December  31,  2003,  Federated  National  was outside  NAIC's usual
ranges with  respect to its IRIS tests on five out of twelve  ratios.  The first
ratio relates to a larger than expected change in net writings, the second ratio
relates to higher  surplus  growth  that  stemmed  from 21st  Century's  capital
contributions  totaling $3.9 million during the year and the third ratio relates
to an investment yield that was less than expected.  The fourth and fifth ratios
involved the one and two year reserve development to policyholder surplus ratios
that were in excess of the "usual  ranges"  and relate to modest,  but  adverse,
development which incurred in 2003 relating to 2002 and 2001 loss reserves.

      As of December 31, 2004,  American Vehicle was outside NAIC's usual ranges
for  three out of  twelve  ratios.  The first  ratio  relates  to a larger  than
anticipated  change in net writings,  the second ratio relates to higher surplus
growth that stemmed from the Parent  company's  capital  contributions  totaling
$4.3 million during the year and the third ratio relates to an investment  yield
that was slightly less than expected.

      As of December 31, 2003,  American Vehicle was outside NAIC's usual ranges
for  three out of  twelve  ratios.  The first  ratio  relates  to a larger  than
anticipated  change in net writings,  the second ratio relates to higher surplus
growth that stemmed from the Parent  company's  capital  contributions  totaling
$5.9 million during the year and the third ratio relates to an investment  yield
that was slightly less than expected.

                                     - 23 -


                          21st Century Holding Company

      We  do  not  currently  believe  that  the  Florida  Office  of  Insurance
Regulation will take any significant  action with respect to Federated  National
or  American  Vehicle  regarding  the  IRIS  ratios,  although  there  can be no
assurance that will be the case.

INSURANCE HOLDING COMPANY REGULATION

      We are subject to laws governing  insurance  holding  companies in Florida
where Federated  National and American Vehicle are domiciled.  These laws, among
other  things,  (i)  require us to file  periodic  information  with the Florida
Office of Insurance  Regulation,  including  information  concerning our capital
structure,  ownership, financial condition and general business operations, (ii)
regulate  certain  transactions  between us and our  affiliates,  including  the
amount of dividends and other  distributions  and the terms of surplus notes and
(iii)  restrict the ability of any one person to acquire  certain  levels of our
voting securities without prior regulatory approval. Any purchaser of 5% or more
of the outstanding  shares of our Common Stock will be presumed to have acquired
control of Federated  National and American Vehicle unless the Florida Office of
Insurance Regulation, upon application, determines otherwise.

FINANCE COMPANY REGULATION

      Our  financing  program  is also  subject to certain  laws  governing  the
operation of premium  finance  companies.  These laws pertain to such matters as
books and records that must be kept,  forms,  licensing,  fees and charges.  For
example,  in Florida,  the maximum late payment fee Federated Premium may charge
is the greater of $10 per month or 5% of the amount of the overdue payment.

UNDERWRITING AND MARKETING RESTRICTIONS

      During the past several years,  various  regulatory and legislative bodies
have adopted or proposed new laws or regulations to address the cyclical  nature
of the  insurance  industry,  catastrophic  events and  insurance  capacity  and
pricing. These regulations include (i) the creation of "market assistance plans"
under which insurers are induced to provide certain coverages, (ii) restrictions
on the ability of insurers to rescind or otherwise  cancel  certain  policies in
mid-term,  (iii) advance notice  requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted to
be charged.

LEGISLATION

      From time to time, new  regulations  and legislation are proposed to limit
damage awards, to control  plaintiffs' counsel fees, to bring the industry under
regulation by the Federal government,  to control premiums,  policy terminations
and  other  policy  terms and to impose  new  taxes and  assessments.  It is not
possible to predict whether, in what form or in what jurisdictions, any of these
proposals might be adopted, or the effect, if any, on us.

INDUSTRY RATINGS SERVICES

      In August 2004, A.M. Best Company notified us that Federated  National and
American Vehicle were being placed under review with negative implications. A.M.
Best in 2003 had assigned  Federated  National a B rating  ("Fair," which is the
seventh of 14 rating  categories) and American Vehicle a B+ rating ("Very Good,"
which is the sixth of 14 rating categories).  In connection with this review, we
requested  that A.M.  Best cease its ratings of these  subsidiaries  "NR-4 - Not
rated,  company's request". The withdrawal of our ratings could limit or prevent
us from writing or renewing  desirable  insurance  policies,  obtaining adequate
reinsurance or borrowing on our line of credit.  Federated National and American
Vehicle are currently rated "A"  ("Unsurpassed,"  which is first of six ratings)
by Demotech,  Inc. A.M. Best's and Demotech's  ratings are based upon factors of
concern to agents,  reinsurers and policyholders and are not primarily  directed
toward the protection of investors.

EMPLOYEES

      As of December 31, 2004,  and  subsequent to the sale of our  discontinued
operations (see "Recent  Developments" and  "Discontinued  Operations" above and
Note 24 to our Consolidated  Financial  Statements included under Item 8 of this
Report  on  Form  10-K)  we had  approximately  135  employees,  including  four
executive officers.  We are not a party to any collective  bargaining  agreement
and we have not  experienced  work  stoppages  or  strikes  as a result of labor
disputes. We consider relations with our employees to be satisfactory.

                                     - 24 -


                          21st Century Holding Company

SENIOR MANAGEMENT

      Set forth below is certain  information  concerning our executive officers
who are not also directors:

      James Gordon Jennings,  III was appointed Chief Financial  Officer of 21st
Century in August 2002. Mr.  Jennings  became our Controller in May 2000 and for
approximately 10 years prior thereto was employed by American Vehicle,  where he
was formally involved with all aspects of property and casualty  insurance.  Mr.
Jennings',  formerly a certified public accountant,  also holds a Certificate in
General  Insurance  and an Associate in Insurance  Services as designated by the
Insurance Institute of America.

      Kent M. Linder  assumed the  position of Chief  Operating  Officer of 21st
Century in September 2003 and was  designated an executive  officer by our Board
of Directors  in March 2005.  Prior to this  position,  Mr.  Linder  served 21st
Century  as  Director  of  Franchise  Development  and  previous  to that as the
President of Federated Agency Group,  Inc. Prior to joining our management team,
Mr.  Linder owned and operated a group of 18 insurance  agencies in the Orlando,
Florida area. Mr. Linder  acquired his management  experience  while spending 12
years with  United  Parcel  Service,  in which he served in  various  management
positions.  Mr.  Linder holds a bachelor's  degree from the  University of South
Florida in Finance and is a licensed 220  property  and  casualty  agent and 215
life agent.

GLOSSARY OF SELECTED TERMS

CEDE                To  transfer to an insurer or  reinsurer  all or part of the
                    insurance written by an insurance entity.

CEDING COMMISSION   A payment by a reinsurer to the ceding company, generally on
                    a proportional  basis,  to compensate the ceding company for
                    its policy acquisition costs.

COMBINED RATIO      The total of the Loss Ratio plus the Expense Ratio on either
                    SAP or GAAP basis.

EXPENSE RATIO       Under SAP, the ratio of underwriting expenses to net written
                    premiums.  Using  GAAP  basis,  the  ratio  of  underwriting
                    expenses to net premiums earned.

GENERALLY ACCEPTED
ACCOUNTING
PRINCIPLES
("GAAP")            Accounting practices and principles,  as defined principally
                    by the American  Institute of Certified Public  Accountants,
                    the Financial Accounting Standards Board. GAAP is the method
                    of accounting typically used by the Company for reporting to
                    persons  or  entities   other  than   insurance   regulatory
                    authorities.

GROSS PREMIUMS
WRITTEN             The  total  of  premiums  received  or  to be  received  for
                    insurance  written by an insurer during a specific period of
                    time without any reduction for reinsurance ceded.

HARD
MARKET              The portion of the market cycle of the property and casualty
                    insurance  industry  characterized  by constricted  industry
                    capital and underwriting capacity,  increasing premium rates
                    and, typically, enhanced underwriting performance.

INCURRED BUT
NOT REPORTED
LOSSES ("IBNR")     The estimated  liability of an insurer,  at a given point in
                    time, with respect to losses that have been incurred but not
                    yet  reported  to the  insurer,  and  for  potential  future
                    developments on reported claims.

INSURANCE
REGULATORY
INFORMATION
SYSTEM ("IRIS")     A system of ratio  analysis  developed by the NAIC primarily
                    intended  to  assist  the  state  insurance   Department  of
                    Financial  Services in executing their statutory mandates to
                    oversee the financial condition of insurance companies.

LOSS ADJUSTMENT
EXPENSE ("LAE")     The expense of investigating and settling claims,  including
                    legal fees,  outside  adjustment  expenses and other general
                    expenses of  administering  the claims  adjustment  process.

LOSS RATIO          Under  both  SAP and  GAAP,  net  losses  and LAE  incurred,
                    divided by net premiums  earned,  expressed as a percentage.

                                     - 25 -


                          21st Century Holding Company


LOSS RESERVES       The estimated  liability of an insurer,  at a given point in
                    time,  with  respect to unpaid  incurred  losses,  including
                    losses, which are IBNR and related LAE.

LOSSES
INCURRED            The total of all policy  losses  sustained  by an  insurance
                    company  during a period,  whether paid or unpaid.  Incurred
                    losses include a provision for claims that have occurred but
                    have not yet been reported to the insurer.

NATIONAL
ASSOCIATION OF
INSURANCE
COMMISSIONERS
("NAIC")            A voluntary  organization of state insurance  officials that
                    promulgates  model laws  regulating the insurance  industry,
                    values  securities owned by insurers,  develops and modifies
                    insurer   financial   reporting,   statements   and  insurer
                    performance   criteria  and  performs  other  services  with
                    respect to the insurance industry.

NET PREMIUMS
EARNED              The amount of net premiums written  allocable to the expired
                    period of an insurance policy or policies.

NET PREMIUMS
WRITTEN             The gross premiums written during a specific period of time,
                    less the portion of such premiums  ceded to  (reinsured  by)
                    other insurers.

NONSTANDARD         Risks  that  generally  have  been  found   unacceptable  by
                    standard lines insurers for various underwriting reasons.

REINSURANCE         A procedure whereby a primary insurer transfers (or "cedes")
                    a portion of its risk to a reinsurer in  consideration  of a
                    payment of premiums by the primary  insurer to the reinsurer
                    for  their   assumption   of  such   portion  of  the  risk.
                    Reinsurance  can be affected by a treaty or individual  risk
                    basis.  Reinsurance  does not legally  discharge the primary
                    insurer from its liabilities with respect to its obligations
                    to the insured.

REINSURERS          Insurers  (known as the  reinsurer or assuming  company) who
                    agree to indemnify  another  insurer (known as the reinsured
                    or ceding  company)  against  all or part of a loss that the
                    latter may incur under a policy or policies it has issued.

RISK-BASED CAPITAL
REQUIREMENTS
("RBC")             Capital  requirements  for property  and casualty  insurance
                    companies  adopted  by the NAIC to  assess  minimum  capital
                    requirements  and to  raise  the  level of  protection  that
                    statutory surplus provides for policy holder obligations.

SOFT MARKET         The portion of the market cycle of the property and casualty
                    insurance industry  characterized by heightened premium rate
                    competition among insurers,  increased underwriting capacity
                    and, typically, depressed underwriting performance.

STANDARD
AUTOMOBILE
INSURANCE           Personal automobile  insurance written for those individuals
                    presenting an average risk profile in terms of loss history,
                    driving record, type of vehicle driven and other factors.

STATUTORY
ACCOUNTING
PRACTICES ("SAP")   Those accounting  principles and practices which provide the
                    framework for the preparation of financial  statements,  and
                    the recording of transactions,  in accordance with the rules
                    and procedures adopted by regulatory authorities,  generally
                    emphasizing  solvency  consideration  rather  than  a  going
                    concern  concept of  accounting.  The principal  differences
                    between SAP and GAAP are as follows:  (a) under SAP, certain
                    assets (non-admitted assets) are eliminated from the balance
                    sheet; (b) under SAP, policy  acquisition costs are expensed
                    upon policy  inception,  while under GAAP they are  deferred
                    and amortized  over the term of the policies;  and (c) under
                    SAP,   certain   reserves  are  recognized   which  are  not
                    recognized under GAAP.

                                     - 26 -


                          21st Century Holding Company


UNDERWRITING        The  process  whereby an  underwriter  reviews  applications
                    submitted for insurance  coverage and determines  whether it
                    will  provide all or part of the coverage  being  requested,
                    and the price of such premiums.  Underwriting  also includes
                    an ongoing review of existing policies and their pricing.

UNDERWRITING
EXPENSE             The aggregate of policy  acquisition  costs,  including that
                    portion of general and administrative  expenses attributable
                    to underwriting operations.

UNEARNED PREMIUMS   The  portion  of  premiums  written  representing  unexpired
                    policy terms as of a certain date.


ITEM 2. PROPERTIES

      As of December 31, 2004, Federated National owned and partially occupied a
three-story  building with  approximately  39,250 square feet of office space in
Lauderdale  Lakes,   Florida.   During  2004,  our  executive  offices  and  our
underwriting  and  mailroom  departments   relocated  to  the  Lauderdale  Lakes
property, joining our other operations, including claims, accounting and premium
finance, which had relocated in 2003 to that building.  Approximately 55% of the
Lauderdale  Lakes  building is occupied by our  operations  and 45% is leased to
third parties or is vacant.

      Effective  March 1, 2005,  Federated  National  sold its  interest  in the
Lauderdale  Lakes property to 21st Century at the  property's  net book value of
approximately $2.9 million.

      We believe that this building is adequate for our current needs.

ITEM 3. LEGAL PROCEEDINGS

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

      In June  2000,  a lawsuit  was filed  against  us, our  directors  and our
executive officers seeking  compensatory damages in an undisclosed amount on the
basis of allegations that our amended  registration  statement dated November 4,
1998 was inaccurate and misleading  concerning the manner in which we recognized
ceded  insurance  commission  income,  in violation of Sections 11 and 15 of the
Securities Act of 1933 and Sections  10(b) and 20(a) of the Securities  Exchange
Act of 1934.  The lawsuit was filed in the United States  District Court for the
Southern  District  of  New  York.  The  plaintiff  class  purportedly  includes
purchasers of our common stock between November 5, 1998 and August 13, 1999.

      Specifically,  the plaintiffs  allege that we recognized  ceded commission
income on a written  basis,  rather  than  amortized  on a pro rata  basis.  The
plaintiffs  allege  that  this  was  contrary  to  the  Statement  of  Financial
Accounting  Concepts Nos. 1, 2 and 5. We believe,  however,  that the lawsuit is
without merit and we have vigorously defended the action,  because we reasonably
relied upon outside subject matter experts to make these  determinations  at the
time. We have also since accounted for ceded  commission on a pro rata basis and
have  done so  since  these  matters  were  brought  to our  attention  in 1998.
Nevertheless,  we have also  continued  to actively  participate  in  settlement
negotiations  with  the  plaintiffs  and  have  agreed  to  settle  the case for
$525,000.  The Court has issued a Preliminary Order approving the settlement and
the full amount was funded in  February  2005.  Notices  have been sent to class
members and the Court has set the Final Settlement Hearing for July 26, 2005. We
anticipate our active involvement with this matter to be concluded.

      We had reserved and charged  against forth quarter 2003 earnings  $600,000
for the potential settlement and associated costs.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None


                                     - 27 -


                          21st Century Holding Company

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      (A) MARKET INFORMATION

      Our common stock has been listed for trading on the Nasdaq National Market
under the symbol  "TCHC"  since  November  5, 1998.  For the  calendar  quarters
indicated,  the table below sets forth the high and low closing prices per share
of the common stock based on published financial resources.

Quarter Ended           High            Low
-------------           ----            ---
March 31, 2004          $25.00          $19.00
June 30, 2004           $23.19          $18.58
September 30, 2004      $24.84          $9.04
December 31, 2004       $14.68          $9.91

March 31, 2003          $9.33           $6.00
June 30, 2003           $11.17          $6.97
September 30, 2003      $12.50          $9.27
December 31, 2003       $15.73          $9.33

      (B) HOLDERS

      As of March 29, 2005, there were approximately 36 holders of record of our
common  stock.  We believe  that the number of  beneficial  owners of our common
stock is in excess of 3,000.

      (C) DIVIDENDS

      During 2003, we paid quarterly  dividends of $0.05, $0.06, $0.07 and $0.08
per share for the first, second, third and fourth quarters, respectively. During
2004, we paid quarterly dividends of $0.08 per share for each quarter.  Although
we continued the $0.08 per share dividend for the first quarter of 2005, payment
of dividends in the future will depend on our  earnings and  financial  position
and such other factors, as our Board of Directors deems relevant.  Moreover, our
ability to continue to pay dividends  may be restricted by regulatory  limits on
the amount of  dividends  that  Federated  National  and  American  Vehicle  are
permitted to pay to the parent company.  All of the foregoing  per-share amounts
reflect our three-for-two stock split in September 2004.

      (D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The  following  table  summarizes  our  equity  compensation  plans  as of
December 31, 2004. We do not currently  have any equity  compensation  plans not
approved by security holders.


                      EQUITY COMPENSATION PLAN INFORMATION


------------------------------------------------------------------------------------------------------
                                                                                NUMBER OF SECURITIES
                                                                               REMAINING AVAILABLE FOR
                                                                                FUTURE ISSUANCE UNDER
                            NUMBER OF SECURITIES TO      WEIGHTED-AVERAGE        EQUITY COMPENSATION
                            BE ISSUED UPON EXERCISE     EXERCISE PRICE OF         PLANS (EXCLUDING
                            OF OUTSTANDING OPTIONS,    OUTSTANDING OPTIONS,    SECURITIES REFLECTED IN
                              WARRANTS AND RIGHTS      WARRANTS AND RIGHTS           COLUMN (A))
                                                                             

      PLAN CATEGORY                   (A)                      (B)                       (C)
------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders*                           1,119,575                  $9.954                  1,527,864
------------------------------------------------------------------------------------------------------


        *    Includes options from the 1998 Stock Option Plan, 2001 Franchise
             Program Stock Option Plan and the 2002 Stock Option Plan.

                                     - 28 -


                          21st Century Holding Company


      For additional  information  concerning our capitalization please see Note
16 to our Consolidated Financial Statements included under Item 8 of this Report
on Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA



                                                                     As of or for the year ended December 31,
                                                                     ----------------------------------------
                                                         2004         2003           2002          2001         2000
                                                         ----         ----           ----          ----         ----
BALANCE SHEET DATA
                                                                                             
Total assets                                         163,601,372   106,695,593    75,318,011    56,228,577    55,412,969

        Investments                                   84,382,173    47,290,420    25,377,796    17,507,422    18,965,798
        Finance contracts, consumer loans and pay
        advances receivable, net                       8,289,356     9,891,642     7,217,873    10,813,881    13,792,791

Total liabilities                                    138,624,637    74,649,217    57,220,348    42,019,446    40,456,972

        Unpaid losses and loss adjustment expenses    46,570,679    24,570,198    16,983,756    11,005,337     9,765,848
        Unearned premiums                             50,152,711    34,122,663    28,934,486    14,951,228    13,038,417
        Revolving credit outstanding                   2,148,542     4,098,786     4,312,420     6,676,817     8,091,034

Total shareholders' equity                          $ 24,976,735  $ 32,046,376  $ 18,097,664  $ 14,209,131    14,955,997

Book value per share                                $       4.15  $       5.89  $       4.03  $       3.13  $       2.99



                                     - 29 -

                          21st Century Holding Company



                                                                        As of or for the year ended December 31,
                                                                        ----------------------------------------

                                                       2004              2003            2002           2001             2000
                                                       ----              ----            ----           ----             ----
OPERATIONS DATA:
                                                                                                    
Revenue:
        Gross premiums written                      $ 100,662,025   $  72,991,434   $  63,036,468   $  34,271,338   $  32,073,768
        Gross premiums ceded                          (15,485,917)    (22,090,644)    (27,765,267)    (12,789,404)     (7,625,095)
                                                    -------------   -------------   -------------   -------------   -------------

             Net premiums written                      85,176,108      50,900,790      35,271,201      21,481,934      24,448,673

        Increase (decrease) in prepaid
         reinsurance premiums                          (2,904,716)     (3,427,818)      5,691,283         686,438         874,000

        (Increase) decrease in unearned premiums      (16,030,048)     (5,188,177)    (14,047,919)     (1,912,811)     (5,001,334)
                                                    -------------   -------------   -------------   -------------   -------------
             Net change in prepaid reinsurance
               premiums and unearned premiums         (18,934,764)     (8,615,995)     (8,356,636)     (1,226,373)     (4,127,334)
                                                    -------------   -------------   -------------   -------------   -------------

             Net premiums earned                       66,241,344      42,284,795      26,914,565      20,255,561      20,321,339
        Commission income                                      --              --              --              --              --
        Finance revenue                                 3,667,837       4,327,675       4,452,626       5,267,523       5,709,848
        Managing general agent fees                     2,039,783       2,328,681       1,970,226       5,871,388       5,410,500
        Net investment income                           3,171,620       1,624,216       1,253,765       1,066,641       1,225,413
        Net realized investment gains (losses)            688,676       2,231,333      (1,369,961)     (2,911,658)       (109,256)
        Other income                                      762,164         791,718         769,915       1,378,631         786,145
                                                    -------------   -------------   -------------   -------------   -------------

             Total revenue                             76,571,424      53,588,418      33,991,136      30,928,086      33,343,989
                                                    -------------   -------------   -------------   -------------   -------------

Expenses:
        Loss and loss adjustment expenses              74,992,781      27,508,979      15,987,125      16,154,902      14,990,118
        Operating and underwriting expenses             8,139,812       7,249,440       6,367,633       9,358,031       9,231,053
        Salaries and wages                              6,134,168       5,425,538       4,562,115       4,673,772       5,142,391
        Interest expense                                1,087,494         606,910         353,225         587,654         662,809
        Amortization of deferred acquisition
          costs, net                                    8,422,808        (854,279)     (2,064,314)      1,467,238       1,673,754
        Amortization of goodwill                               --              --              --         540,010         606,653
                                                    -------------   -------------   -------------   -------------   -------------

             Total expenses                            98,777,063      39,936,588      25,205,784      32,781,607      32,306,778
                                                    -------------   -------------   -------------   -------------   -------------
Income (loss) from continuing operations
   before provision (benefit for income
   tax expense)                                       (22,205,639)     13,651,830       8,785,252      (1,853,521)      1,037,211
Provision (benefit) for income tax expense             (8,600,911)      4,357,961       3,685,572        (630,553)       (462,396)
                                                    -------------   -------------   -------------   -------------   -------------
             Net income (loss) from continuing
               operation before extraordinary gain    (13,604,728)      9,293,869       5,099,781      (1,222,968)      1,499,607


Extraordinary gain                                             --              --              --         1,185,895            --
                                                    -------------   -------------   -------------   -------------   -------------
             Net income (loss) from continuing
               operations and extraordinary gain      (13,604,728)      9,293,869       5,099,781         (37,073)      1,499,607
                                                    -------------   -------------   -------------   -------------   -------------
Discontinued operations:

        Income (loss) on discontinued operations         (900,473)     (1,364,605)       (912,303)       (955,017)     (2,022,481)
        Gain on sale or disposal                        5,384,050              --              --              --              --
                                                    -------------   -------------   -------------   -------------   -------------
Income on discontinued operations before tax
   provision  (benefit)                                 4,483,577      (1,364,605)       (912,303)       (955,017)     (2,022,481)
Provision (benefit) for income tax expense              1,736,624        (435,611)       (382,723)           --              --
                                                    -------------   -------------   -------------   -------------   -------------
             Income (loss) on discontinued
                 operations                             2,746,953        (928,994)       (529,580)       (955,017)     (2,022,481)
                                                    -------------   -------------   -------------   -------------   -------------
Net income (loss)                                   $ (10,857,775)  $   8,364,875   $   4,570,201   $    (992,090)  $    (522,874)
                                                    =============   =============   =============   =============   =============

Basic net income (loss) per share from
   continuing operations                            $       (2.34)  $        1.96   $        1.13   $       (0.26)  $        0.30
                                                    =============   =============   =============   =============   =============

Extraordinary gain                                             --              --              --            0.25              --
                                                    =============   =============   =============   =============   =============

Basic net income (loss) per share
   from discontinued operations                     $        0.47   $       (0.20)  $       (0.12)  $       (0.20)  $       (0.40)
                                                    =============   =============   =============   =============   =============
Basic net income (loss) per share                   $       (1.86)  $        1.76   $        1.01   $       (0.21)  $       (0.10)
Fully diluted net income (loss) per share
  from continuing operations                        $       (2.34)  $        1.85   $        1.13   $       (0.26)  $        0.30
                                                    =============   =============   =============   =============   =============
Fully diluted extraordinary gain                    $          --   $          --     $        --   $        0.25   $          --
                                                    =============   =============   =============   =============   =============
Fully diluted net income (loss) per share from
discontinued operations                             $        0.47   $       (0.18)  $       (0.12)  $       (0.20)  $       (0.40)
                                                    =============   =============   =============   =============   =============
Fully diluted net income (loss) per share           $       (1.86)  $        1.67   $        1.01   $       (0.21)  $       (0.10)
                                                    =============   =============   =============   =============   =============
Cash dividends declared per share                   $        0.32   $        0.25   $        0.10   $        0.05   $        0.01
                                                    =============   =============   =============   =============   =============



                                     - 30 -



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

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

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

      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  policy fee income and other  administrative  fees from the marketing of
companies' products through our distribution network.

      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.

      The most  significant  events  affecting  our  results of  operations  and
financial  condition in 2004 were the four  hurricanes  that struck the State of
Florida in the third quarter.  Since then, we have been receiving and processing
claims made under our  homeowners' and mobile home owners'  policies,  a process
that is expected to be  substantially  completed  during the first half of 2005.
Federated  National  incurred  significant  losses  relative to its  homeowners'
insurance  line of  business.  As of  December  31,  2004,  approximately  8,500
policyholders  had filed  hurricane-related  claims totaling an estimated $105.4
million,  of which we currently  estimate that our share of the costs associated
with  these  hurricanes  will  be  approximately  $43.5  million,   net  of  our
reinsurance  recoveries  and  amortized  reinstatement  premiums.  For a further
discussion of our reinsurance please see our section titled "REINSURANCE"

      Since our initial  preliminary  provision for losses from these hurricanes
of $33 million,  net of  reinsurance  recoveries,  as of September  30, 2004, we
revised our provision for losses as described above. Because the storms occurred
during  the  third  quarter  of  2004,  we were not  able to  complete  physical
inspections  of a  sufficiently  large  percentage of claims,  nor were complete
repair  estimates  available.  During the fourth  quarter of 2004,  as  physical
property inspections and repair estimates were completed,  our initial estimates
of losses for these  storms were  increased  to reflect  increased  estimates of
claim  severity on our  homeowners'  policies in  Florida.  We do not  currently
anticipate  further  materials  increases  to our loss  estimates  from the 2004
hurricanes.

      We have operated in a competitive  market and face  competition  from both
national and regional insurance companies, although the number of competitors in
the  homeowners'  line of  business  has been  somewhat  reduced  because of the
effects  of the 2004  hurricanes.  Many of our  competitors  are larger and have
greater  financial and other  resources,  have better industry ratings and offer
more diversified  insurance  coverage.  Our competitors  include other 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  instead  tend to  compete  on the  basis of  underwriting
criteria,  our  distribution  network  and  superior  service  to our agents and
insureds.  Competition  could have a material  adverse  effect on our  business,
results of operations and financial condition.


                                     - 31 -


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


CRITICAL ACCOUNTING POLICIES

      Our  accounting  policies  are more fully  described in Note 2 of Notes to
Consolidated  Financial  Statements.  As disclosed  therein,  the preparation of
financial  statements  in  conformity  with  GAAP  requires  management  to make
estimates and assumptions  about future events that affect the amounts  reported
in the financial  statements  and  accompanying  notes.  Future events and their
effects  cannot  be  determined   with  absolute   certainty.   Therefore,   the
determination  of estimates  requires the exercise of judgment.  Actual  results
inevitably  will  differ  from  those  estimates,  and such  differences  may be
material to the financial statements.

      The most significant  accounting  estimates inherent in the preparation of
our  financial   statements  include  estimates   associated  with  management's
evaluation  of the  determination  of  liability  for  unpaid  losses  and  loss
adjustment expense,  the recoverability of goodwill and 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 losses and
loss  adjustment  expense,  an  actuarial   valuation.   Management   constantly
reevaluates  these  significant  factors and makes  adjustments  where facts and
circumstances  dictate.  See  Note  2 of the  Notes  to  Consolidated  Financial
Statements.

ACCOUNTING CHANGES

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123,  Share-Based  Payments  (revised  2004)  ("SFAS No.  123R").  This
statement  eliminates  the  option  to apply  the  intrinsic  value  measurement
provisions  of 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  will be
effective for 21st Century's fiscal quarter  beginning July 1, 2005. We have not
yet determined the effect on us of the adoption of SFAS No. 123R.

      In January 2003, the FASB issued  Interpretation No. 46,  Consolidation of
Variable  Interest  Entities  ("FIN 46"),  which requires the  consolidation  of
certain entities considered to be variable interest entities ("VIEs"). An entity
is  considered  to  be  a  VIE  when  it  has  equity  investors  who  lack  the
characteristics of having a controlling  financial  interest,  or its capital is
insufficient  to  permit  it  to  finance  its  activities   without  additional
subordinated  financial  support.  Consolidation  of a  VIE  by an  investor  is
required when it is  determined  that the investor will absorb a majority of the
VIE's expected losses if they occur, receive a majority of the entity's expected
residual returns if they occur, or both. The adoption of  Interpretation  No. 46
did not have any impact on our Consolidated Financial Statements.

      In May 2003, the FASB issued  Statement of Financial  Accounting  Standard
Number 150, Accounting for Certain Financial Instruments with Characteristics of
both  Liabilities and Equity.  This Statement  establishes  standards for how an
issuer   classifies   and   measures   certain   financial    instruments   with
characteristics  of both  liabilities  and equity and it requires that an issuer
classify a financial  instrument that is within its scope as a liability because
the financial instrument embodies an obligation of the issuer. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective in the first interim period  beginning after June 15,
2003. In July 2003 and September 2004, we completed private placements of our 6%
Senior  Subordinated  Notes. These notes fall within the definition of financial
instruments as described in Financial  Accounting  Standard  Number 150 and were
originally  presented as a liability in conformity  with  Statement of Financial
Accounting  Standard Number 150. As such, the adoption of this Statement did not
have any impact on our Consolidated Financial Statements.


                                     - 32 -



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

ANALYSIS OF FINANCIAL  CONDITION AS OF DECEMBER 31, 2004 AS COMPARED TO
DECEMBER 31, 2003

INVESTMENTS.
      Investments  increased  $37.1  million  or 78.4% to  $84.4  million  as of
December  31, 2004 from $47.3  million as of December  31, 2003  primarily  as a
result an increase in written insurance premiums.

      As a result of the  adverse  market  conditions  which  occurred  in 2002,
management  more  carefully  monitors its  concentrations,  industries and asset
allocations. There were no other instances of large concentrations of investment
securities  requiring  write-downs.  We did not hold any  non-traded  investment
securities during 2004 or 2003.

      Below is a summary of unrealized losses loss at December 31, 2004 and 2003
by category.

                                                  Net Unrealized Gains (Losses)
                                                      Years Ended December 31,
                                                      ------------------------

                                                          2004           2003
                                                          ----           ----
Fixed maturities:
     U.S. government obligations                        $(582,310)    $(793,613)
     Obligations of states and political
        subdivisions                                       (4,501)       (4,840)
                                                        ---------     ---------
                                                         (586,811)     (798,453)
                                                        ---------     ---------
Corporate securities:
     Communications                                        23,299       209,226
     Financial                                            (11,220)       14,694
     Other                                                 64,377        45,475
                                                        ---------     ---------
                                                           76,456       269,395
                                                        ---------     ---------
Equity securities:
     Preferred stocks                                        --             400
     Common stocks                                       (312,410)        3,154
                                                        ---------     ---------
                                                         (312,410)        3,554
                                                        ---------     ---------
Total fixed, corporate and equity securities            $(822,765)    $(525,504)
                                                        =========     =========

RECEIVABLE FOR INVESTMENTS SOLD.
      Receivable  for  investments in 2003 were realized in 2004. The receivable
is a result of investment  trading  activity that occurred in late December 2003
and did not settle until early January 2004.

FINANCE CONTRACTS.
      Finance  contracts  receivable  decreased  $1.6 million or 16.2% from $8.3
million as of December  31, 2004 as compared to $9.9  million as of December 31,
2003. The decrease of the finance  contracts  receivable is primarily the result
of our requested credit reduction.

PREPAID REINSURANCE PREMIUMS.
      Prepaid  reinsurance  premiums decrease was $2.9 million,  net or 34.5% to
$5.5  million as of December 31, 2004 from $8.4 million as of December 31, 2003.
The decrease in Federated  National's and American  Vehicle's ceded  quota-share
reinsurance totaled $4.0 million and $3.8 million,  respectively.  This decrease
was mitigated by an increase in ceded  unearned  premiums  relative to Federated
National's homeowners' and mobile homeowners' insurance products.

                                     - 33 -


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

PREMIUMS RECEIVABLE.
      Premiums receivable decreased $1.3 million, or 17.8% to $6.0 million as of
December 31, 2004, from $7.3 million as of December 31, 2003. The decline can be
attributed to the decline in automobile written premiums and the diversification
of our  product  lines.  The  predominate  user of the  finance  products is the
automobile  customer.  There is less of a tendency to finance homeowner premiums
due to  policyholder  mortgage  escrow  arrangements  and only a modest  need to
finance commercial general liability insurance.

REINSURANCE RECOVERABLE - NET.
      Reinsurance recoverable increased $14.4 million or 130.6% to $25.5 million
as of  December  31,  2004 from $11.1  million as of  December  31,  2003.  This
increase  is the result of the  increase  in loss and loss  adjustment  expenses
incurred  relative to the four  hurricanes  that affected  Florida in August and
September  2004 and,  to a lesser  extent,  the timing of  settlements  with our
reinsurers. All amounts are considered current and are primarily associated with
the catastrophic weather events.

DEFERRED ACQUISITION COSTS - NET.
      Deferred  acquisition  costs  increased $5.3 million to $7.0 million as of
December 31, 2004 from $1.7  million as of December  31,  2003.  At December 31,
2004,  commission  expense  net of  commissions  income was  approximately  $6.1
million and expenses connected with the writing of premiums such as salaries and
premium taxes, net of policy fees totaled  approximately $0.9 million.  Deferred
policy  acquisition  costs,  net,  increased  primarily  due to a  $2.5  million
increase of deferred  commission  expenses and a $2.3 million  decrease in ceded
unearned  commissions  income  during  the year ended  December  31,  2004.  The
increase of deferred  commission  expenses  continues to be primarily related to
the increase in lines of insurance other than automobile,  which are not subject
to quota-share agreements.  The decrease in ceded commissions income is due to a
$7.8 million decline of ceded commissions.

      At December 31, 2003,  commission  expense net of  commissions  income was
approximately  $1.2 million and expenses  connected with the writing of premiums
such as salaries and premium  taxes,  net of policy fees  totaled  approximately
$0.5 million. Deferred policy acquisition costs, net, increased primarily due to
a $0.84  million  increase of deferred  commission  expenses and a $0.82 million
decrease in ceded unearned commissions income during the year ended December 31,
2003.  The increase of deferred  commission  expenses  primarily  related to the
increase in lines of insurance other than  automobile,  which are not subject to
quota-share  agreements.  The decrease in ceded  commissions  income is due to a
$3.4 million decline of ceded commissions.

INCOME TAX RECOVERABLE.
      Income tax recoverable increased by 887.5% to $7.9 as of December 31, 2004
as compared to $0.8 million as of December 31, 2003 and is primarily  due to the
effects of the current year net operating loss.  Income tax provisions allows us
to carry back our current  year net  operating  loss two years and receive a tax
refund for taxes paid in  profitable  years.  The tax benefit is recognized as a
receivable  for the  refundable  amount.  Further,  the tax benefit  reduces the
current  year's tax  expense  based on the tax rates in effect in the  carryback
period.

GOODWILL.
      Goodwill declined by approximately $1.6 million, or 91.2% to approximately
$154,000 as of December 31, 2004 as compared to  approximately  $1,740,000 as of
December  31,  2003 due to the sale of our captive  and  franchised  agencies on
December 31, 2004.  Goodwill otherwise remained unchanged during 2004 due to the
adoption of SFAS 142, wherein our assessment of goodwill indicated no impairment
of the  remaining  goodwill  associated  with  Express  Tax.  Please see "Recent
Developments"   and   "Discontinued   Operations"  above  and  Note  24  to  our
Consolidated  Financial  Statements included under Item 8 of this Report on Form
10-K for a  description  of our January 1, 2005 sale of our  interest in Express
Tax.

OTHER ASSETS.
      Other assets  increased by $2.5  million,  or 108.7% to $4.8 million as of
December  31, 2004 as compared to $2.3  million as of  December  31,  2003.  The
largest  contribution  to the  increase in other assets is  associated  with our
receivable  due in  connection  with our  sale in  December  2004 of our  assets
related to our  non-standard  automobile  insurance  agency  business in Florida
(please see "Recent  Developments" and "Discontinued  Operations" above and Note
24 to our Consolidated Financial Statements included under Item 8 of this Report
on Form 10-K for a description of this  transaction).  Major components of other
assets are as follows:

                                     - 34 -


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

                                                              December 31,
                                                              ------------

                                                            2004          2003
                                                            ----          ----
Accrued interest income                                 $  605,484    $  680,017
Notes receivable                                            64,320       460,145
Unamortized loan costs                                     837,665       430,803
Compensating cash balances                                 156,070       200,430
Due from sale of discontinued operations (see
note 24)                                                 2,587,343          --
Other                                                      572,060       568,261
                                                        ----------    ----------
Total                                                   $4,822,942    $2,339,656
                                                        ==========    ==========

UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES.
      Unpaid  losses and loss  adjustment  expenses  increased  $22.0 million or
89.5% to $46.6  million as of December 31, 2004 as compared to $24.6  million as
of December 31, 2003.  The  increase is most  notably  associated  with the four
hurricanes that occurred in August and September of 2004.

      Federated  National's  reserves  increased  by  $23.0  million  in 2004 as
compared to 2003 and American  Vehicle's  reserves  decreased by $1.4 million in
2004 as compared to 2003.  Factors,  other than the four  hurricanes that struck
Florida  in August  and  September  2004,  that  affect  unpaid  losses and loss
adjustment  expenses include the estimates made on a claim-by-claim  basis known
as case  reserves  coupled  with  bulk  estimates  known  as  "incurred  but not
reported"  (IBNR).  Periodic  estimates  by  management  of the  ultimate  costs
required  to settle  all claim  files are  based on the  Company's  analysis  of
historical  data and  estimations of the impact of numerous  factors such as (i)
per claim  information;  (ii) company and industry  historical loss  experience;
(iii) legislative  enactments,  judicial  decisions,  legal  developments in the
awarding of  damages,  and changes in  political  attitudes;  and (iv) trends in
general  economic  conditions,  including the effects of  inflation.  Management
revises its estimates based on the results of its analysis. This process assumes
that past  experience,  adjusted  for the  effects of current  developments  and
anticipated  trends,  is  an  appropriate  basis  for  estimating  the  ultimate
settlement of all claims. There is no precise method for subsequently evaluating
the impact of any specific  factor on the adequacy of the reserves,  because the
eventual  redundancy or deficiency is affected by multiple factors.  For further
discussion, see "Losses and LAE."

UNEARNED PREMIUM.
      Unearned premiums  increased by $16.0 million or 47.0% to $50.1 million as
of December 31, 2004 as compared to $34.1  million as of December 31, 2003.  The
increase was due to a $18.9 million increase in unearned  homeowner's  insurance
premiums and $2.7 million in unearned  premiums  associated  with the commercial
liability  program.  Offsetting  these increases was a $5.5 million  decrease in
automobile  unearned  premiums.  These changes reflect our continued emphasis in
2004 on property and commercial general liability insurance products.

BANK OVERDRAFT.
      Bank overdraft increased $14.3 million to $14.8 million for the year ended
December  31, 2004 as compared to $0.6  million for the year ended  December 31,
2003. The significant increase primarily relates to  hurricane-related  loss and
LAE checks issued but not yet paid by the bank.

DEFERRED INCOME FROM SALE OF AGENCY OPERATIONS.
      Deferred  income  from sale of agency  operations  was $2.5  million as of
December 31, 2004 as compared to zero as of December 31, 2003. This reflects the
contractual  provisions  associated  with  the  December  31,  2004  sale of our
non-standard  automobile insurance agency business in Florida that provide for a
post-closing  payment of up to $2.5 million  provided  that certain  performance
criteria are met. The company  believes it will meet these criteria during 2005.
For further information about this transaction, please see "Recent Developments"
above and Note 24 to our Consolidated Financial Statements included under Item 8
of this Report on Form 10-K.

SUBORDINATED DEBT.
      On  September  30,  2004,  we  completed a private  placement of 6% Senior
Subordinated  Notes due September 30, 2007 (the "September  2004 Notes").  These
notes were offered and sold to accredited  investors as units  consisting of one
September  2004 Note with a principal  amount of $1,000 and warrants to purchase
shares of our Common Stock (the "2004 Warrants"), the terms of which are similar
to our subordinated  notes and warrants sold in our July 2003 private  placement
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.  By  comparison,  the
subordinated  notes that we sold in 2003 (the "July 2003 Notes") resulted in net
proceeds to us of $6,938,498.  Please see Note 22 to our Consolidated  Financial
Statements  included  under  Item 8 of this  Report on Form  10-K,  for  further
discussion.

                                     - 35 -


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


RESULTS OF  OPERATIONS  YEAR ENDED  DECEMBER  31,  2004  COMPARED  TO YEAR ENDED
DECEMBER 31, 2003

GROSS PREMIUMS WRITTEN.
      Gross  premiums  written  increased  $27.7  million,  or 37.9%,  to $100.7
million for the year ended  December 31, 2004,  as compared to $73.0 million for
the  comparable  period in 2003.  The following  table  denotes  gross  premiums
written by major product line.

                                               Year eneded December 31,
                                               ------------------------
                                              2004                 2003
                                              ----                 ----
Automobile                            $ 24,239,001   24.1%  $ 49,297,915   67.5%
Homeowners'                             62,400,283   62.0%    16,804,497   23.0%
Commercial liability                    12,509,942   12.4%     5,149,944    7.1%
Mobile home owners'                      1,512,799    1.5%     1,739,078    2.4%
                                      ------------  -----   ------------  -----
Gross written premiums                $100,662,025  100.0%  $ 72,991,434  100.0%
                                      ============  =====   ============  =====

      This  table  reflects  the  success  of our  efforts to expand our line of
insurance products to include products other than automobile insurance.

GROSS PREMIUMS CEDED.
      Gross premiums ceded  decreased $6.6 million or 29.9% to $15.5 million for
the year ended December 31, 2004, from $22.1 million for the year ended December
31,  2003.  The  decrease  due to decline in our ceded  quota-share  reinsurance
associated with our automobile insurance totaled $20.5 million and was offset by
a $13.9 million increase in ceded premiums associated with our property lines of
business.

INCREASE (DECREASE) IN PREPAID REINSURANCE PREMIUMS.
      Prepaid  reinsurance  premiums  decreased $0.5 million or 15.3%, to ($2.9)
million as of December 31, 2004, from ($3.4) million for the year ended December
31, 2003. The decrease is due primarily to our decreased reliance on quota-share
reinsurance on its automobile insurance products.

INCREASE IN UNEARNED PREMIUMS.
      The  increase in unearned  premiums  rose by $10.8  million,  or 209.0% to
($16.0)  million as of December  31, 2004,  as compared to ($5.2)  million as of
December 31, 2003.  The unearned  premium  liability  increase of $16.0  million
during 2004 is net of  homeowner  and  commercial  liability  unearned  premiums
increases  of $18.9  million and $2.7  million,  respectively,  and is offset by
automobile  unearned premiums  decreases of $5.5 million.  These changes reflect
our  continued  emphasis in 2004 on property and  commercial  general  liability
insurance products.

MANAGING GENERAL AGENT FEES.
      Managing General Agent Fees decreased modestly by $0.2 million or 11.0% to
$2.1 million as compared to $2.3  million as of December 31, 2003.  The decrease
reflects an overall decrease in the production of insurance  policies  mitigated
by policies with higher rates and volume of one-year term policies.

NET INVESTMENT INCOME.
      Net investment  income  increased by $1.6 million or 95.3% to $3.2 million
for the year ended  December 31, 2004,  as compared to $1.6 million for the year
ended  December 31, 2003.  The increase in investment  income is a result of the
additional amounts of invested assets. Our overall investment yield increased by
.35%,  from 4.47% for the year  ended  December  31,  2003 to 4.82% for the year
ended December 31, 2004.

NET REALIZED INVESTMENT GAINS (LOSSES).
      Net realized investment gains decreased by $1.5 million, or 69.1%, to $0.7
million for the year ended  December  31, 2004 as compared  $2.2 million for the
year ended  December 31, 2003.  The table below reflects the gains and losses by
investment category.


                                       36


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


                                                For the year ending December 31,
                                                --------------------------------
                                                      2004                2003
                                                      ----                ----
Realized gains:
     Fixed securities                             $    62,513       $ 1,590,937
     Equity securities                                894,883         1,230,118
                                                  -----------       -----------
          Total realized gains                        957,396         2,821,055
                                                  -----------       -----------
Realized losses:
     Fixed securities                                 (42,911)         (508,299)
     Equity securities                               (225,809)          (81,422)
                                                  -----------       -----------
          Total realized losses                      (268,720)         (589,721)
                                                  -----------       -----------
Net realized gains (losses) on
investments                                       $   688,676       $ 2,231,334
                                                  ===========       ===========


LOSSES AND LAE.
      Loss and loss adjustment  expenses increased by $47.5 million,  or 172.6%,
to $75.0  million for the year ended  December  31,  2004,  as compared to $27.5
million as of December 31,  2003.  The increase is due to the impact of the 2004
hurricane  season  wherein  August and  September of 2004,  the State of Florida
experienced  four  hurricanes,  Charley,  Frances,  Ivan and Jeanne.  One of our
subsidiaries,  Federated National,  incurred  significant losses relative to its
homeowners' insurance line of business.  The Company's loss ratio, as determined
in  accordance  with GAAP,  for the year ended  December  31,  2004 was  113.21%
compared with 61.30% for the same period in 2003.  The table below  reflects the
loss ratios by product line.

                             For the year ending December 31,
                             --------------------------------
                                  2004               2003
                                  ----               ----
Automobile                       73.24%             79.51%
Home owners                     166.54%             21.30%
Commercial liability             18.74%             18.50%
Mobile home owners              238.79%             28.74%
All Product Lines               113.21%             61.30%


      Approximately  8,500  policyholders  have filed  hurricane-related  claims
totaling an estimated $105.4 million, of which we estimate that our share of the
costs associated with these  hurricanes will be approximately  $39.1 million and
$4.4  million  for  homeowners'  and mobile  homeowners',  respectively,  net of
reinsurance recoveries and amortized reinstatement premiums. As of September 30,
2004  approximately  7,500  policyholders  had  filed  hurricane-related  claims
totaling an estimated $62.0 million, of which we estimated that our share of the
costs associated with these hurricanes will be approximately $33.0 million,  net
of reinsurance recoveries and amortized reinstatement premiums.

      For each catastrophic occurrence, the excess of loss treaty will insure us
for $24  million  with the company  retaining  the first $10 million of loss and
LAE. The treaty has a provision which,  for an additional  prorated premium will
insure us for  another $24  million of loss and LAE for  subsequent  occurrences
with the company retaining the first $10 million in loss and LAE. As a result of
the loss and LAE incurred in connection with the Hurricanes  Charles and Frances
the company has exhausted its  recoveries of $48 million under the terms of this
treaty.

      The excess of loss treaty also insures us for an additional $34 million in
excess of the  company's  $10  million  retention  plus the next $24  million as
described above. Accordingly,  loss and LAE incurred for Hurricanes Ivan, Jeanne
and any subsequent  catastrophic events through June 30, 2005, up to $34 million
each, are the responsibility of the company,  as illustrated in the accompanying
table.

                                       37


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

                                           (in millions)
                                Gross       Reinsurance        Net
         Hurricane              Losses       Recoveries       Losses
         ---------              ------       ----------       ------
Charley (August 13)         $        44.2  $        34.2  $        10.0
Frances (September 3)                37.7           27.7           10.0
Ivan (September 14)                  13.7           --             13.7
Jeanne (September 25)                 9.8           --              9.8
                            -------------  -------------  -------------
Total Loss Estimate         $       105.4  $        61.9  $        43.5
                            =============  =============  =============

      Furthermore,  as a  result  of the  2004  hurricanes,  we  incurred  a net
reinstatement  insurance  premium  of $3.0  million  that is  amortized  through
operations from the reinstatement date of August 13, 2004 to June 30, 2005.

      The All Products Lines loss ratio of 113.21% as of December 31, 2004 would
have been  47.42%  without  the  impact  of the four  hurricanes  in August  and
September of 2004. The four hurricanes in August and September of 2004 increased
our  homeowners' and mobile  homeowners'  loss ratio for the year ended December
31, 2004 by approximately 129.14 percentage points and 205.67 percentage points,
respectively.

      Losses  and loss  adjustment  expenses,  the  Company's  most  significant
expense, represent actual payments made and changes in estimated future payments
to be made to or on behalf of its 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.

      The  Company  attributes  the  overall  increase  in the loss  ratio to be
clearly  related to the four  hurricanes  in August and September of 2004. If we
were to segregate the affects of the four  hurricanes in August and September of
2004 we  estimate  that our All  Products  Lines  loss  ratio  would  have  been
approximately  47.42%  as of  December  31,  2004 as  compared  to  61.30% as of
December 31, 2003 and attribute  that decrease to the  increasingly  significant
operational contributions made by our lines of business other than automobile.

SALARIES AND WAGES.
      Salaries and wages  increased $0.7 million,  or 13.0%, to $6.1 million for
the year ended December 31, 2004, as compared to $5.4 million for the year ended
December 31, 2003.  Management  believes that the increase in salaries and wages
is  consistent  with  retaining   quality   management  and  increased   premium
production.

INTEREST EXPENSE.
      Interest expense increased by $0.5 million,  or 79.2%, to $1.1 million for
the year ended December 31, 2004, as compared to $0.6 million as of December 31,
2003.  The  increase in interest  expense is  attributable  to our July 2003 and
September 2004 Notes. For further discussion  relative to the Notes see footnote
22 titled Subordinated Debt.

POLICY ACQUISITION COSTS, NET OF AMORTIZATION.
      Policy acquisition costs, net of amortization,  increased by $9.3 million,
charging  earnings by $8.4  million for the year ended  December  31,  2004,  as
compared to a credit of $0.9 million as of December 31, 2003. 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.

      During the year ended December 31, 2004, the difference  between the ceded
commissions  earned of $1.5 million and amortized costs of $9.9 million resulted
in a charge to earnings of $8.4  million.  The $9.3  million  increase in policy
acquisition  costs, net of  amortization,  in the 2004 period as compared to the
2003 period is attributable to the decrease in ceded  commissions  earned during
the year ended December 31, 2004 totaling $5.2 million, netted against amortized
costs of $4.1 million during the same period.

RESULTS OF  OPERATIONS  YEAR ENDED  DECEMBER  31,  2003  COMPARED  TO YEAR ENDED
DECEMBER 31, 2002

GROSS PREMIUMS WRITTEN.
      Gross premiums written increased $10.0 million, or 15.8%, to $73.0 million
for the year ended  December  31,  2003,  as compared  to $63.0  million for the
comparable period in 2002. The following table denotes gross premiums written by
major product line.

                                       38


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

                                             Year eneded December 31,
                                             ------------------------
                                         2003                              2002
                                         ----                              ----
Automobile                        $49,297,915     67.5%    $52,586,436     83.4%
Homeowners'                        16,804,497     23.0%      8,669,642     13.8%
Commercial liability                5,149,944      7.1%           --        0.0%
Mobile home owners'                 1,739,078      2.4%      1,780,390      2.8%
                                  -----------    -----     -----------    -----
Gross written premiums            $72,991,434    100.0%    $63,036,468    100.0%
                                  ===========    =====     ===========    =====


      This  table  reflects  the  success  of our  efforts to expand our line of
insurance products to include products other than automobile insurance.

GROSS PREMIUMS CEDED.
      Gross premiums ceded  decreased $5.7 million or 25.8% to $22.1 million for
the year ended December 31, 2003, from $25.3 million for the year ended December
31, 2002. The decrease is primarily due to the decline in our ceded  quota-share
reinsurance associated with our automobile insurance.

INCREASE (DECREASE) IN PREPAID REINSURANCE PREMIUMS.
      Prepaid  reinsurance  premiums decreased $9.1 million or 160.2%, to ($3.4)
million as of December 31, 2003,  from $5.7 million for the year ended  December
31, 2002. The decrease is due primarily to American Vehicle's decreased reliance
on quota-share reinsurance on its automobile insurance products.

INCREASE IN UNEARNED PREMIUMS.
      The increase in unearned  premiums  declined by $8.8 million,  or 63.1% to
($5.2)  million as of December  31, 2003,  as compared to ($14.0)  million as of
December  31,  2002.  The unearned  premium  liability  increase of $5.2 million
during 2003 is net of  homeowner  and  commercial  liability  unearned  premiums
increases  of $5.7  million  and $3.8  million,  respectively,  and is offset by
automobile  unearned premiums  decreases of $4.3 million.  These changes reflect
our  emphasis in 2003 on property and  commercial  general  liability  insurance
products.

MANAGING GENERAL AGENT FEES.
      Managing  General Agent Fees increased  modestly from $2.0 million for the
year ended  2002 to $2.3  million  for the year ended  December  31,  2003.  The
increase reflects an overall increase in the production of insurance policies.

NET INVESTMENT INCOME.
      Net investment  income  increased by $0.3 million or 29.5% to $1.6 million
for the year ended  December 31, 2003,  as compared to $1.3 million for the year
ended  December 31, 2002.  The increase in investment  income is a result of the
additional  amounts of invested  assets.  Although the Company's net  investment
income has increased during 2003 compared to 2002, our overall  investment yield
declined by 1.5%, from 4.9% for the year ended December 31, 2002 to 3.4% for the
year ended December 31, 2003.

NET REALIZED INVESTMENT GAINS (LOSSES).
      Net realized  investment  gains  increased by $3.6 million to $2.2 million
for the year ended  December  31, 2003 as compared to a loss of $1.4 million for
the year ended  December 31, 2002. The table below reflects the gains and losses
by investment category.

                                       39


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

                                                For the year ending December 31,
                                                --------------------------------

                                                       2003              2002
                                                       ----              ----
Realized gains:
     Fixed securities                             $   1,590,937   $     774,931
     Equity securities                                1,230,118         123,232
                                                  -------------   -------------

          Total realized gains                        2,821,055         898,163
                                                  -------------   -------------

Realized losses:

     Fixed securities                                  (508,299)     (2,164,790)
     Equity securities                                  (81,422)       (103,334)
                                                  -------------   -------------
          Total realized losses                        (589,721)     (2,268,124)
                                                  -------------   -------------

Net realized gains (losses) on
investments                                       $   2,231,334   $  (1,369,961)
                                                  =============   =============

LOSSES AND LAE.

      Loss and loss adjustment expenses increased by $11.5 million, or 72.1%, to
$27.5 million for the year ended December 31, 2003, as compared to $16.0 million
as of December 31, 2002.  The increase is  predominantly  due to the increase in
net premiums earned.  The Company's loss ratio, as determined in accordance with
GAAP, for the year ended December 31, 2003 was 60.8% compared with 54.4% for the
same period in 2002. The table below reflects the loss ratios by product line.

                            For the year ending December 31,
                            --------------------------------
                                2003               2002
                                ----               ----
Automobile                     79.51%             70.55%
Home owners                    21.30%             21.64%
Commercial liability           18.50%              0.00%
Mobile home owners             28.74%             33.37%
All Product Lines              61.30%             54.39%


      Losses  and loss  adjustment  expenses,  the  Company's  most  significant
expense, represent actual payments made and changes in estimated future payments
to be made to or on behalf of its 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.  The
Company  attributes  the  overall  increase in the loss ratio  primarily  to its
liability lines of insurance  associated with automobile  claims and the related
estimates of the costs  necessary to settle the claims.  The  estimated  cost to
close all claim  files,  for  accidents  that  occurred  in years other than the
accidents  that occurred in the current year ended  December 31, 2003 and net of
reinsurance  recoveries,  has  increased  by a total  of $1.2  million  over the
ultimate estimates made as of December 31, 2002,  primarily due to a decrease of
claim frequency and claim severity and periodic  estimates made by management of
the  ultimate  costs  required to settle all claims,  both  reported and not yet
reported.

SALARIES AND WAGES.
      Salaries and wages  increased $0.8 million,  or 18.9%, to $5.4 million for
the year ended December 31, 2003, as compared to $4.6 million for the year ended
December 31, 2002.  Management  believes that the increase in salaries and wages
is  consistent  with  retaining   quality   management  and  increased   premium
production.

POLICY ACQUISITION COSTS, NET OF AMORTIZATION.
      Policy acquisition costs, net of amortization,  increased by $1.2 million,
or 58.6%,  to a credit of $0.9 million for the year ended  December 31, 2003, as
compared to a credit of $2.1 million as of December 31, 2002. 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.

      During the year ended December 31, 2003, the difference  between the ceded
commissions  earned of $6.7 million and amortized costs of $5.8 million resulted
in a credit to earnings of $0.9  million.  The $1.2  million  increase in policy
acquisition  costs, net of  amortization,  in the 2003 period as compared to the
2002 period is attributable to the increase in ceded  commissions  earned during
the year ended December 31, 2003 totaling $1.0 million, netted against amortized
costs of $2.2 million during the same period.

                                       40


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

LIQUIDITY AND CAPITAL RESOURCES

      Our  primary  sources  of  capital in 2004 were  revenues  generated  from
operations,  including our investment  portfolios,  issuance of debt securities,
sale of certain assets related to our non-standard  automobile  agency insurance
business in Florida,  and  borrowings  under our Revolving  Loan  Agreement (the
"Revolving Agreement"), as described below. Because we are a holding company, we
are largely dependent upon fees from our subsidiaries for cash flow.

      For the years ended December 31, 2004 and 2003,  operations  generated net
operating cash flow of $18.6 million and $12.3 million, respectively. During the
year  ended  December  31,  2004,  gross  cash  flow from  operations  generated
approximately  $62.3  million,  due  to an increase  in  unpaid  loss  and  loss
adjustment   expenses  totaling  $22.0  million,   increased  unearned  premiums
liability  totaling  $16.0  million,   increased  prepaid  reinsurance  premiums
totaling $2.9 million and increased bank overdrafts totaling $14.1 million,  all
in conjunction with a net loss of $10.9 million.

      Operations  for the year ended  December  31,  2004 used $32.9  million of
gross  cash  flow  primarily  for  a  $14.4  million   increase  to  reinsurance
recoverable,  net and a $7.1 million increase income taxes recoverable, and $5.2
million gain on sale of agency operations.  Additionally,  $5.2 million was used
to pay agent  commissions  where the  underlying  policy term is unexpired as of
December 31, 2004.

      Net operating  cash flow is currently  expected to be positive in both the
short-term and the reasonably foreseeable future.

      For the year ended December 31, 2003,  operations generated a cash flow of
$12.3  million as  compared  to $14.5  million in 2002.  Cash flow  provided  by
financing  activities  was $12.2 million in 2003,  as we generated  $6.9 million
through  exercised  stock options and $7.5 million  through the sale of our July
2003 Notes.

      In addition,  our  investment  portfolio  is highly  liquid as it consists
almost  entirely  of  readily  marketable  securities.  Cash  flow  used  in net
investing  activities was $30.9 million for the year ended December 31, 2004, as
we invested the cash flow from  operating and financing  activities.  While in a
period in which written premiums are increasing,  it is reasonably expected that
cash from  premiums  will be used for investing  activities.  In the future,  we
expect a continued  cash flow deficit from  investing  activities,  as we invest
cash from operations.

      Net cash  generated  from  financing  activities was $11.7 million for the
year ended December 31, 2004.  The source of cash from  financing  activities is
primarily  reflected  by the  receipt  of $12.5  million  from the  issuance  of
additional  6% Senior  Subordinated  Notes and  proceeds  from  exercised  stock
options totaling $3.0 million, offset by $1.9 million paid in dividends and $2.0
million used to reduce revolving credit outstanding.

      The 2003 Warrants  issued 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 $12.7435  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  408,050.  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  believes  that the July 2003  Warrants had zero
value at the date of issuance.

      On September 30, 2004,  we completed a private  placement of 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.

                                       41


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

      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  believes  that the
September 2004 Warrants had zero value at the date of issuance. The terms of the
2004 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.

      Federated Premium's  operations are funded by the 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
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.  During September 2004, we negotiated a new revolving loan agreement
in which the  maximum  credit  commitment  available  to us was  reduced  at our
request to $2.0  million with  built-in  options to  incrementally  increase the
maximum credit  commitment up $4.0 million over the next three years. We believe
that this available credit is sufficient based on our current operations.

      The Revolving Agreement,  which was amended and revised in September 2001,
allowed  for a  maximum  credit  commitment  of $7.0  million  plus  an  initial
additional  amount of $700,000 for the  transition  from September 30, 2001 when
the  previous  agreement  expired.  The line  declined  by  $100,000  each month
beginning  November 1, 2001. In September  2002 the line was amended and revised
allowing for a maximum credit commitment of $4.0 million.

      The  amount  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  is 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.  As of December 31, 2004,  our interest rate was 7.00% as
compared to our interest rate as of December 31, 2003 of 5.75%

      The  Revolving   Agreement   contains  various   operating  and  financial
covenants,  with which we were in  compliance  at December 31, 2004 and December
31, 2003.  Outstanding  borrowings under the Revolving  Agreement as of December
31, 2004 and December 31, 2003 were $2.1 million and $4.1 million, respectively.
Outstanding borrowings in excess of the $2.0 million commitment totaled $148,542
as of  December  31,  2004.  The  excess  amount,  permissible  by  reason  of a
compensating  cash balance of $156,070  for December 31, 2004,  was held for the
benefit of WPAC and is  included  in other  assets.  Outstanding  borrowings  in
excess of the $4.0 million  commitment  totaled $98,786 as of December 31, 2003.
The excess  amount,  permissible  by reason of a  compensating  cash  balance of
$200,430 for December 31, 2003,  was held for the benefit of FPF and is included
in other assets.  Interest  expense on this revolving  credit line for the years
ended December 31, 2004, 2003 and 2002 totaled approximately $178,000,  $203,000
and $342,000, respectively.

      The annual interest rate on advances under the Revolving  Agreement is 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 worse to total contracts receivable.  The effective
interest  rate  on  this  line  of  credit,  based  on our  average  outstanding
borrowings  under the Revolving  Agreement,  was 5.71%,  4.83% and 6.23% for the
years ended December 31, 2004, 2003 and 2002, respectively.

      In September 2002,  FlatIron  reduced the maximum credit  commitment under
the Revolving  Agreement  due to the A.M. Best ratings of third party  insurance
carriers  with which we were  financing  policies  at the time.  Simultaneously,
however,  we ceased  financing  policies  underwritten  by third party insurance
carriers altogether and began financing only those policies  underwritten by our
insurance  carriers  (in 2003 we began  again to finance  policies  from a small
number of independent  agents whose customer base and  operational  history meet
our  strict  criteria  for  credit  worthiness).   Additionally,   in  2002,  we
implemented  a direct bill program for policies  underwritten  by our  carriers.
These  changes  markedly  decreased  credit  risks and made our  reliance on the
higher credit commitment previously offered by FlatIron unnecessary.

                                       42


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

      As an  alternative  to premium  finance we offer direct  billing 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,  including the net proceeds
from the sale of our agency operations, the Express Tax sale and the issuance of
our Notes  described  above,  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.

      At December  31,  2004 and 2003,  we did not have any  relationships  with
unconsolidated  entities  or  financial  partnerships,  such as  entities  often
referred to as "structured  finance" or "special purpose"  entities,  which were
established  for the purpose of facilitating  off-balance-sheet  arrangements or
other  contractually  narrow or limited purposes.  As such,  management believes
that we currently are not exposed to any financing,  liquidity, market or credit
risks that could arise if we had engaged in  transactions of that type requiring
disclosure herein.

IMPACT OF INFLATION AND CHANGING PRICES

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

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


                                       43



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

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



                                                                                Year Ended December 31, 2004
                                                                 --------------------------------------------------------
                                                                    First        Second          Third          Fourth
                                                                   Quarter       Quarter        Quarter        Quarter
                                                                 ------------  ------------   ------------   ------------
                                                                                                 
Continuing Operations:
Revenue:
           Net premiums earned                                   $ 13,007,676  $ 16,929,178   $ 25,290,962   $ 11,013,528
           Other revenue                                            2,463,357     2,436,982      2,355,004      3,074,737
                                                                 ------------  ------------   ------------   ------------
                 Total revenue                                     15,471,033    19,366,160     27,645,966     14,088,265
                                                                 ------------  ------------   ------------   ------------

Expenses:
           Losses and loss adjustment expenses                      6,474,833     7,618,159     42,292,556     18,607,233
           Other expenses                                           4,818,353     5,899,996     11,292,297      1,773,636
                                                                 ------------  ------------   ------------   ------------
                 Total expenses                                    11,293,186    13,518,155     53,584,853     20,380,869
                                                                 ------------  ------------   ------------   ------------

Income (loss) from continuing operations before provision
(benefit) for income tax expense                                    4,177,847     5,848,005    (25,938,887)    (6,292,604)
Provision (benefit for income tax expense                           1,546,817     2,110,216     (9,338,535)    (4,328,814)
                                                                 ------------  ------------   ------------   ------------

                 Net income (loss) from continuing operations       2,631,030     3,737,789    (16,600,352)    (1,963,790)

Discontinued Operations:
Revenue:
           Other revenue                                            2,101,268     1,207,108        787,171        855,156
                                                                 ------------  ------------   ------------   ------------
                 Total revenue                                      2,101,268     1,207,108        787,171        855,156
                                                                 ------------  ------------   ------------   ------------

Expenses:
           Other expenses                                           1,636,046     1,305,692      1,327,667      1,581,771
                 Total expenses                                     1,636,046     1,305,692      1,327,667      1,581,771

Gain on sale of discontinued operations                                    --            --             --      5,384,050
                                                                 ------------  ------------   ------------   ------------

Income (loss) from discontinued operations before provision
(benefit) for income tax expense                                      465,222       (98,584)      (540,496)     4,657,435
Provision (benefit) for income tax expense                            172,245       (35,573)      (194,590)     3,203,947
                                                                 ------------  ------------   ------------   ------------

                 Net income (loss) from discontinued operations       292,977       (63,011)      (345,906)     1,453,488

Income (loss) before provision for income tax expense               4,643,069     5,749,421    (26,479,383)    (1,635,169)
Provision for income tax expense                                    1,719,062     2,074,643     (9,533,125)    (1,124,867)
                                                                 ------------  ------------   ------------   ------------
                 Net income (loss)                               $  2,924,007  $  3,674,778   $(16,946,258)  $   (510,302)
                                                                 ============  ============   ============   ============

Basic net income (loss) per share from continuing operations     $       0.47  $       0.65   $      (2.80)  $      (0.32)
                                                                 ============  ============   ============   ============

Basic net income (loss) per share from discontinued operations   $       0.05  $      (0.01)  $      (0.06)  $       0.24
                                                                 ============  ============   ============   ============

Basic net income (loss) per share                                $       0.52  $       0.63   $      (2.86)  $      (0.08)
                                                                 ============  ============   ============   ============

Fully diluted net income (loss) per share from continuing
operations                                                       $       0.43  $       0.61   $      (2.80)  $      (0.32)
                                                                 ============  ============   ============   ============

Fully diluted net income (loss) per share from discontinued
operations                                                       $       0.05  $      (0.01)  $      (0.06)  $       0.24
                                                                 ============  ============   ============   ============

Fully diluted net income (loss) per share                        $       0.48  $       0.60   $      (2.86)  $      (0.08)
                                                                 ============  ============   ============   ============


                                       44


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




                                                                                Year Ended December 31, 2003
                                                                 --------------------------------------------------------
                                                                    First        Second          Third          Fourth
                                                                   Quarter       Quarter        Quarter        Quarter
                                                                 ------------  ------------   ------------   ------------
                                                                                                 
Continuing Operations:
Revenue:
           Net premiums earned                                   $ 10,456,944  $ 10,949,001   $ 11,850,497   $ 11,620,788
           Other revenue                                            2,632,346     3,361,987      2,479,655      2,829,634
                                                                 ------------  ------------   ------------   ------------
                 Total revenue                                     13,089,290    14,310,988     14,330,152     14,450,422
                                                                 ------------  ------------   ------------   ------------

Expenses:
           Losses and loss adjustment expenses                      6,787,709     7,493,747      6,322,281      6,905,242
           Other expenses                                           3,025,855     2,958,918      4,322,351      4,712,920
                                                                 ------------  ------------   ------------   ------------
                 Total expenses                                     9,813,564    10,452,665     10,644,632     11,618,162
                                                                 ------------  ------------   ------------   ------------

Income from continuing operations before provision for income
tax expense                                                         3,275,726     3,858,323      3,685,520      2,832,260
Provision for income tax expense                                    1,179,257     1,268,215      1,297,602        584,024
                                                                 ------------  ------------   ------------   ------------

                 Net income (loss) from continuing operations       2,096,469     2,590,108      2,387,918      2,248,236

Discontinued Operations:
Revenue:
           Other revenue                                            1,772,720       633,791        691,269        837,668
                                                                 ------------  ------------   ------------   ------------
                 Total revenue                                      1,772,720       633,791        691,269        837,668

Expenses:
           Other expenses                                           1,441,577     1,343,118      1,304,134      1,211,222
                                                                 ------------  ------------   ------------   ------------
                 Total expenses                                     1,441,577     1,343,118      1,304,134      1,211,222

Income (loss) from discontinued operations before provision
(benefit) for income tax expense                                      331,143      (709,327)      (612,865)      (373,554)
Provision (benefit) for income tax expense                            119,211      (233,153)      (215,778)       (77,028)
                                                                 ------------  ------------   ------------   ------------

                 Net income (loss) from discontinued operations       211,932      (476,174)      (397,087)      (296,526)

Income before provision for income tax expense                      3,606,869     3,148,996      3,072,655      2,458,706
Provision for income tax expense                                    1,298,468     1,035,062      1,081,824        506,996
                                                                 ------------  ------------   ------------   ------------
                 Net income                                      $  2,308,401  $  2,113,934   $  1,990,831   $  1,951,710
                                                                 ============  ============   ============   ============

Basic net income (loss) per share from continuing operations     $       0.47  $       0.56   $       0.50   $       0.44
                                                                 ============  ============   ============   ============

Basic net income (loss) per share from discontinued operations   $       0.04  $      (0.10)  $      (0.08)  $      (0.06)
                                                                 ============  ============   ============   ============

Basic net income (loss) per share                                $       0.51  $       0.46   $       0.42   $       0.38
                                                                 ============  ============   ============   ============

Fully diluted net income (loss) per share from continuing
operations                                                       $       0.46  $       0.54   $       0.45   $       0.40
                                                                 ============  ============   ============   ============

Fully diluted net income (loss) per share from discontinued
operations                                                       $       0.04  $      (0.10)  $      (0.08)  $      (0.05)
                                                                 ============  ============   ============   ============

Fully diluted net income (loss) per share                        $       0.50  $       0.44   $       0.38   $       0.35
                                                                 ============  ============   ============   ============


                                       45


                          21st Century Holding Company


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      Our investment objective is to maximize total rate of return after Federal
income  taxes while  maintaining  liquidity  and  minimizing  risk.  Our current
investment  policy limits  investment  in  non-investment  grade fixed  maturity
securities  (including  high-yield  bonds),  and  limits  total  investments  in
preferred stock, common stock and mortgage notes receivable. We also comply with
applicable laws and regulations,  which further  restrict the type,  quality and
concentration  of investments.  In general,  these laws and  regulations  permit
investments,  within specified limits and subject to certain qualifications,  in
Federal, state and municipal obligations,  corporate bonds, preferred and common
equity securities and real estate mortgages.

      Our  investment  policy is  established  by the Board of  Directors or the
Investment  Committee  and is  reviewed  on a regular  basis.  Pursuant  to this
investment policy, as of December 31, 2004,  approximately  82.6% of investments
were in fixed income securities and short-term investments, which are considered
to be available for sale,  based upon our intent at the time of purchase.  Fixed
maturities are considered available for sale and are marked to market. We may in
the future also consider fixed  maturities to be held to maturity and carried at
amortized  cost. We do not use any material swaps,  options,  futures or forward
contracts to hedge or enhance our investment portfolio.

      The investment portfolio is managed by the Investment Committee consisting
of  our  President,   independent  directors  and  our  affiliated  director  in
accordance  with  guidelines  established  by the  Florida  Office of  Insurance
Regulation.

      The table below sets forth investment results for the periods indicated.


                                              Years Ended December 31,
                                       -----------------------------------
                                         2004         2003          2002
                                       -------       -------       -------
                                               (Dollars in Thousands)
Interest on fixed maturities           $ 2,437       $ 1,463       $ 1,190
Dividends on equity securities             165           109            18
Interest on short-term securities           23            27            59
Other                                      555           118            17
                                       -------       -------       -------

Total investment income                  3,180         1,717         1,284
Investment expense                          (8)          (93)          (30)
                                       -------       -------       -------
Net investment income                  $ 3,172       $ 1,624       $ 1,254
                                       =======       =======       =======
Net realized gain (loss)               $   689       $ 2,231       $(1,370)
                                       =======       =======       =======

      The following  table  summarizes,  by type, our investments as of December
31, 2004 and 2003.



                                                            December 31, 2004         December 31, 2003
                                                            -----------------         -----------------
                                                          Carrying     Percent      Carrying     Percent
                                                           Amount      of Total      Amount      of Total
                                                           -------      ------       -------      ------
                                                         (Dollars in               (Dollars in
                                                          Thousands)                Thousands)

                                                                                       
Fixed maturities, at market:
     U.S. government agencies and authorities              $54,114       64.13%      $25,544       54.02%
     Obligations of states and political subdivisions        9,502       11.26%        7,634       16.14%
     Corporate securities                                    5,971        7.08%       10,311       21.80%
                                                           -------      ------       -------      ------
          Total fixed maturities                            69,587       82.47%       43,489       91.96%
     Equity securities, at market                           14,795       17.53%        3,663        7.75%
     Mortgage notes receivable                                  --        0.00%          138        0.29%
                                                           -------      ------       -------      ------
          Total investments                                $84,382      100.00%      $47,290      100.00%
                                                           =======      ======       =======      ======


                                       46


                          21st Century Holding Company

Fixed  maturities  are carried on the balance  sheet at market.  At December 31,
2004 and 2003,  fixed  maturities had the following  quality ratings (by Moody's
Investors Service,  Inc. ("Moody's") and for securities not assigned a rating by
Moody's, by Standard and Poor's Corporation)

                               December 31, 2004         December 31, 2003
                               -----------------         -----------------
                          Carrying        Percent        Carrying       Percent
                           Amount         of Total        Amount        of Total
                          -------         ------         -------         ------
                        (Dollars in                   (Dollars in
                         Thousands)                    Thousands)

AAA                       $62,487          89.80%        $31,485          72.40%
AA                            425           0.61%            226           0.52%
A                           2,532           3.64%          7,135          16.41%
BBB                         3,840           5.52%          3,925           9.03%
BB++                          303           0.43%            300           0.69%
Not rated                      --           0.00%            419           0.95%
                          -------         ------         -------         ------
                          $69,587         100.00%        $43,490         100.00%
                          =======         ======         =======         ======

      The following table  summarizes,  by maturity,  the fixed maturities as of
December 31, 2004 and 2003.

                               December 31, 2004         December 31, 2003
                               -----------------         -----------------
                          Carrying        Percent        Carrying       Percent
                           Amount         of Total        Amount        of Total
                          -------         ------         -------         ------
                        (Dollars in                   (Dollars in
                         Thousands)                    Thousands)

Matures In:
One year or less           $   390         0.56%         $ 4,038          9.29%
One year to five years       6,892         9.90%           6,078         13.97%
Five years to 10 years      50,263        72.24%          22,373         51.44%
More than 10 years          12,042        17.30%          11,001         25.30%
                           -------       ------          -------        ------
 Total fixed maturities   $69,587       100.00%         $43,490        100.00%
                           =======       ======          =======        ======


      At  December  31,  2004,  the  weighted  average  maturity  of  the  fixed
maturities portfolio was approximately 9 years.

      The following table provides  information about the financial  instruments
as of December  31, 2004 that are  sensitive to changes in interest  rates.  The
table presents  principal cash flows and the related  weighted  average interest
rate by expected maturity date:




                                                          2005        2006       2007        2008         2009
                                                        ---------    -------    -------    ---------    ---------
                                                                             (Dollars in Thousands)
                                                                                         
Principal amount by expected maturity:
     U.S. government agencies and authorities           $   2,000    $    --    $    --    $      --    $   2,000
     Obligations of states and political subdivisions          --        350        950        1,180        1,345
     Corporate securities                                     907        500         --        2,200          250
     Collateralized mortgage obligations                       --         --         --           --           --
     Equity securities, at market                              --         --         --           --           --
     Mortgage notes receivable                                 --         --         --           --           --
                                                        ---------    -------    -------    ---------    ---------
               All investments                          $   2,907    $   850    $   950    $   3,380    $   3,595
                                                        =========    =======    =======    =========    =========

Weighted average interest rate by expected maturity:
     U.S. government agencies and authorities                4.00%      0.00%      0.00%        0.00%        4.12%
     Obligations of states and political subdivisions        0.00%      5.75%      4.17%        4.74%        4.40%
     Corporate securities                                    7.25%      4.00%      0.00%        6.08%        7.51%
     Collateralized mortgage obligations                     0.00%      0.00%      0.00%        0.00%        0.00%
     Equity securities, at market                            0.00%      0.00%      0.00%        0.00%        0.00%
     Mortgage notes receivable                               0.00%      0.00%      0.00%        0.00%        0.00%
               All investments                               5.01%      4.72%      4.17%        5.61%        4.46%



                                                                                      Carrying
                                                           Thereafter      Total       Amount
                                                           ----------    ----------    -------
                                                                  (Dollars in Thousands)
                                                                              
Principal amount by expected maturity:
     U.S. government agencies and authorities              $   49,200    $   53,200    $54,114
     Obligations of states and political subdivisions           5,375         9,200      9,502
     Corporate securities                                       2,000         5,857      5,971
     Collateralized mortgage obligations                           --            --         --
     Equity securities, at market                                  --            --     14,795
     Mortgage notes receivable                                     --            --         --
                                                           ----------    ----------    -------
               All investments                             $   56,575    $   68,257    $84,382
                                                           ==========    ==========    =======

Weighted average interest rate by expected maturity:
     U.S. government agencies and authorities                    4.75%         4.70%
     Obligations of states and political subdivisions            4.13%         4.31%
     Corporate securities                                        3.38%         5.22%
     Collateralized mortgage obligations                         0.00%         0.00%
     Equity securities, at market                                0.00%         0.00%
     Mortgage notes receivable                                   0.00%         0.00%
               All investments                                   4.65%         4.69%




                                       47


                          21st Century Holding Company

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                  PAGE

Independent Auditors' Reports................................      49
Consolidated Balance Sheets
  as of December 31, 2004 and 2003...........................      50
Consolidated Statements of Operations
  For the years ended December 31, 2004, 2003 and 2002.......      51
Consolidated Statements of Changes in Shareholders' Equity
  and Comprehensive Income (Loss) For the years ended
  December 31, 2004, 2003 and 2002...........................      52
Consolidated Statements of Cash Flows
  For the years ended December 31, 2004, 2003 and 2002.......      53
Notes to Consolidated Financial Statements...................      55


                                       48



                          21st Century Holding Company


             Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
21st Century Holding Company

We have audited the  accompanying  consolidated  balance  sheets of 21st Century
Holding Company and Subsidiaries (the "Company"),  a Florida corporation,  as of
December  31,  2004  and  2003,  and  the  related  consolidated  statements  of
operations,  changes  in  stockholders'  equity,  and cash flows for each of the
years  in the  three-year  period  ended  December  31,  2004.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  Our audit included consideration of internal control over financial
reporting as a basis for designing audit  procedures that are appropriate in the
circumstances  but  not  for  the  purpose  of  expressing  an  opinion  on  the
effectiveness  of the  Company's  internal  control  over  financial  reporting.
Accordingly,  we express no such opinion.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of 21st Century Holding Company
and  Subsidiaries  at  December  31,  2004  and 2003  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended December 31, 2004 in conformity with U.S.  generally  accepted  accounting
principles.

De Meo, Young, McGrath, CPA

Boca Raton, Florida

March 31, 2005


                                       49


                  21st Century Holding Company and Subsidiaries
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2004 AND 2003



                                                                     December 31, 2004       December 31, 2003
                                                                     -----------------       -----------------
                                                                                         
                 ASSETS

Investments
    Fixed maturities, available for
      sale, at fair value                                              $  69,587,030           $  43,489,598
      Equity securities                                                   14,795,143               3,663,251
      Mortgage loans                                                              --                 137,571
                                                                       -------------           -------------

           Total investments                                              84,382,173              47,290,420
                                                                       -------------           -------------

Cash and cash equivalents                                                  6,127,706               6,770,169
Receivable for investments sold                                                   --               2,118,595
Finance contracts, net of allowance for credit
  losses of $475,788 in 2004 and $562,558 in 2003                          8,289,356               9,891,642
Prepaid reinsurance premiums                                               5,510,379               8,415,095
Premiums receivable, net of allowance
   for credit losses of $541,851 and
   $123,000, respectively                                                  6,024,913               7,328,256
Reinsurance recoverable, net                                              25,488,956              11,053,747
Deferred policy acquisition costs                                          6,957,168               1,739,685
Income taxes recoverable                                                   7,915,424                 824,787
Deferred income taxes                                                      3,656,076               3,030,183
Property, plant and equipment, net                                         4,272,733               4,153,643
Goodwill, net                                                                153,546               1,739,715
Other assets                                                               4,822,942               2,339,656
                                                                       -------------           -------------
           Total assets                                                $ 163,601,372           $ 106,695,593
                                                                       =============           =============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Unpaid losses and loss adjustment expenses                             $  46,570,679           $  24,570,198
Unearned premiums                                                         50,152,711              34,122,663
Premiums deposits                                                          1,871,683                 621,777
Revolving credit outstanding                                               2,148,542               4,098,786
Bank overdraft                                                            14,832,698                 567,553
Subordinated debt                                                         16,875,000               6,875,000
Deferred income from sale of agency operations                             2,500,000                      --
Accounts payable and accrued expenses                                      3,673,324               3,793,240
                                                                       -------------           -------------
           Total liabilities                                             138,624,637              74,649,217
                                                                       -------------           -------------

Commitments and contingencies

Shareholders' equity:
      Common stock, $0.01 par value
        Authorized 37,500,000 shares;
        issued 6,744,791 and 6,133,386
        shares, respectively;
        Outstanding 6,048,842 and
        5,437,587, respectively                                               67,448                  61,333
      Additional paid-in capital                                          26,310,147              20,434,473
      Accumulated other comprehensive income (deficit)                      (504,972)               (324,881)
      Retained earnings                                                      883,757              13,643,225
      Treasury stock, 696,849 shares and
        695,799 shares, at cost,
        respectively                                                      (1,779,645)             (1,767,774)
                                                                       -------------           -------------
           Total shareholders' equity                                     24,976,735              32,046,376
                                                                       -------------           -------------
           Total liabilities and shareholders' equity                  $ 163,601,372           $ 106,695,593
                                                                       =============           =============


See accompanying notes to consolidated financial statements.


                                       50



                  21st Century Holding Company and Subsidiaries
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002



                                                                                 2004                2003               2002
                                                                            -------------       -------------       -------------
                                                                                                           
Revenue:
   Gross premiums written                                                   $ 100,662,025       $  72,991,434       $  63,036,468
   Gross premiums ceded                                                       (15,485,917)        (22,090,644)        (27,765,267)
                                                                            -------------       -------------       -------------

      Net premiums written                                                     85,176,108          50,900,790          35,271,201
                                                                            -------------       -------------       -------------

   Increase (decrease) in prepaid reinsurance premiums                         (2,904,716)         (3,427,818)          5,691,283
   Decrease (increase) in unearned premiums                                   (16,030,048)         (5,188,177)        (14,047,919)
                                                                            -------------       -------------       -------------

      Net change in prepaid reinsurance
        premiums and unearned premiums                                        (18,934,764)         (8,615,995)         (8,356,636)

      Net premiums earned                                                      66,241,344          42,284,795          26,914,565
   Finance revenue                                                              3,667,837           4,327,675           4,452,626
   Managing general agent fees                                                  2,039,783           2,328,681           1,970,226
   Net investment income                                                        3,171,620           1,624,216           1,253,765
   Net realized investment gains                                                  688,676           2,231,333          (1,369,961)
   Other income                                                                   762,164             791,718             769,915
                                                                            -------------       -------------       -------------

      Total revenue                                                            76,571,424          53,588,418          33,991,136
                                                                            -------------       -------------       -------------

Expenses:
   Loss and loss adjustment expenses                                           74,992,781          27,508,979          15,987,125
   Operating and underwriting expenses                                          8,139,812           7,249,440           6,367,632
   Salaries and wages                                                           6,134,168           5,425,538           4,562,115
   Interest expense                                                             1,087,494             606,910             353,225
   Policy acquisition costs, net of amortization                                8,422,808            (854,279)         (2,064,314)
                                                                            -------------       -------------       -------------

      Total expenses                                                           98,777,063          39,936,588          25,205,783

Income (loss) from continuing operations
before provision (benefit) for income
tax expense                                                                   (22,205,639)         13,651,830           8,785,353

Provision (benefit) for income tax expense                                     (8,600,911)          4,357,960           3,685,572
                                                                            -------------       -------------       -------------

      Net income (loss) from continuing operations                            (13,604,728)          9,293,870           5,099,781

Discontinued operations:

   Income (loss) from discontinued
     operations (including gain on
     disposal of $5,384,050 for 2004)                                           4,483,577          (1,364,605)           (912,303)
   Provision (benefit) for income tax expense                                   1,736,624            (435,611)           (382,723)
                                                                            -------------       -------------       -------------
      Income (loss) on discontinued operations                                  2,746,953            (928,994)           (529,580)
                                                                            -------------       -------------       -------------


      Net income (loss)                                                     $ (10,857,775)      $   8,364,876       $   4,570,201
                                                                            =============       =============       =============


Basic net income (loss) per share from continuing operations                $       (2.34)      $        1.96       $        1.13
                                                                            =============       =============       =============

Basic net income (loss) per share from discontinued operations              $        0.47       $       (0.20)      $       (0.12)
                                                                            =============       =============       =============

Basic net income (loss) per share                                           $       (1.86)      $        1.76       $        1.01
                                                                            =============       =============       =============

Fully diluted net income (loss) per share from continuing operations        $       (2.34)      $        1.85       $        1.13
                                                                            =============       =============       =============

Fully diluted net income (loss) per share from discontinued operations      $        0.47       $       (0.18)      $       (0.12)
                                                                            =============       =============       =============

Fully diluted net income (loss) per share                                   $       (1.86)      $        1.67       $        1.01
                                                                            =============       =============       =============

Weighted average number of common shares outstanding                            5,847,102           4,756,972           4,508,439
                                                                                =========           =========           =========

Weighted average number of common shares outstanding (assuming dilution)        5,847,102           5,022,938           4,508,439
                                                                                =========           =========           =========

Dividends declared per share                                                $        0.32       $        0.25       $        0.10
                                                                            =============       =============       =============


See accompanying notes to consolidated financial statements.


                                       51



                  21st Century Holding Company and Subsidiaries
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                        AND COMPREHENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002



                                                                                                 Accumulated
                                                                                   Additional       Other
                                                    Comprehensive    Common         Paid-in     Comprehensive      Retained
                                                      Income         Stock          Capital        Deficit         Earnings
                                                   -------------   --------   -------------   -----------    -------------
                                                                                              
Balance as of December 31, 2001                                    $ 51,161   $  12,816,092   ($  218,137)   $   2,400,301

Net Income                                         $   4,570,201                                                 4,570,201
   Cash Dividends                                                                                                 (449,475)
   Acqusition of common shares
   Stock options exercised                                               15          22,392
   Net unrealized change in investments,                                                           (8,954)
       net of tax effect of $4,613                        (8,954)
                                                   -------------
Comprehensive income                               $   4,561,247
                                                   =============
                                                                   --------   -------------   -----------    -------------
Balance as of December 31, 2002                                    $ 51,176   $  12,838,484   $  (227,091)   $   6,521,027
                                                                   --------   -------------   -----------    -------------

Net Income                                         $   8,364,876                                                 8,364,876
    Cash Dividends                                                                                              (1,242,678)
    Acqusition of common shares
    Stock options exercised                                           9,539       6,859,107
    Stock issued in lieu of cash payment for                            618         736,882
      principal and interest associated with our
      notes
    Net unrealized change in investments,                                                         (97,790)
      net of tax effect of $196,012                      (97,790)
                                                   -------------
Comprehensive income                               $   8,267,086
                                                   =============
                                                                   --------   -------------   -----------    -------------
Balance as of December 31, 2003                                    $ 61,333   $  20,434,473   $  (324,881)   $  13,643,225
                                                                   --------   -------------   -----------    -------------

Net Loss                                           ($ 10,857,775)                                              (10,857,775)
    Cash Dividends                                                                                              (1,879,585)
    Acqusition of common shares
    Stock options exercised                                           3,729       2,774,716
    Warrants exercised                                                  117         224,869
    Stock issued in lieu of cash payment for                          2,269       2,853,981
      principal and interest associated with our
      notes
    Net unrealized change in investments,
      net of tax effect of $304,667                     (180,091)                                (180,091)
                                                   -------------
Comprehensive loss                                 ($ 11,037,866)
                                                   =============
                                                                   --------   -------------   -----------    -------------
Balance as of December 31, 2004                                    $ 67,448   $  26,288,039   $  (504,972)   $     905,865
                                                                   ========   =============   ===========    =============


                                                                        Total
                                                        Treasury      Shareholder'
                                                         Stock         Equity
                                                   -------------    -------------
                                                              
Balance as of December 31, 2001                    ($    840,286)   $  14,209,131

Net Income                                                              4,570,201
   Cash Dividends                                                        (449,475)
   Acqusition of common shares                          (253,446)        (253,446)
   Stock options exercised                                 7,800           30,207
   Net unrealized change in investments,                                   (8,954)
       net of tax effect of $4,613

Comprehensive income                                                           --

                                                   -------------    -------------
Balance as of December 31, 2002                    $  (1,085,932)   $  18,097,664
                                                   -------------    -------------

Net Loss                                                                8,364,876
    Cash Dividends                                                     (1,242,678)
    Acqusition of common shares                         (681,842)        (681,842)
    Stock options exercised                                             6,868,646
    Stock issued in lieu of cash payment for                              737,500
      principal and interest associated with our
      notes
    Net unrealized change in investments,                                 (97,790)
      net of tax effect of $196,012

Comprehensive income                                                           --

                                                   -------------    -------------
Balance as of December 31, 2003                    $  (1,767,774)   $  32,046,376
                                                   -------------    -------------

Net Loss                                                              (10,857,775)
    Cash Dividends                                                     (1,879,585)
    Acqusition of common shares                          (11,871)         (11,871)
    Stock options exercised                                             2,778,445
    Warrants exercised                                                    224,986
    Stock issued in lieu of cash payment for                            2,856,250
      principal and interest associated with our
      notes
    Net unrealized change in investments,
      net of tax effect of $304,667                                      (180,091)

Comprehensive income                                                           --

                                                   -------------    -------------
Balance as of December 31 2004                     $  (1,779,645)   $  24,976,735
                                                   =============    =============


See accompanying notes to consolidated financial statements.


                                       52



                  21st Century Holding Company and Subsidiaries
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002



                                                                                  For the year ended December 31,
                                                                                2004             2003             2002
                                                                            -------------    -------------    -------------
                                                                                                     
Cash flow from operating activities:
   Net income (loss)                                                        $ (10,857,775)   $   8,364,876    $   4,570,201
   Adjustments to reconcile net income (loss) to net cash provided by
     operating activities:
       Amortization of investment premium, net                                   (190,777)         290,987           84,360
       Depreciation and amortization of property plant and equipment, net         490,048          437,356          376,516
       Deferred income tax expense                                               (625,893)        (338,874)      (1,107,092)
       Net realized investment gains (loss)                                       743,772       (2,042,607)       1,369,961
       Common Stock issued for interest on Notes                                  356,250          112,500               --
       Provision for credit losses, net                                           646,166          819,868        1,036,092
       Provision for uncollectible premiums receivable                            311,073           45,424           33,663
       Gain on sale of agency operations                                       (5,299,274)              --               --
       Other                                                                           --               --           30,207
   Changes in operating assets and liabilities:
       Premiums receivable                                                        992,270          999,424       (6,845,853)
       Prepaid reinsurance premiums                                             2,904,716        3,427,819       (5,691,284)
       Due from reinsurers, net                                               (14,435,209)      (3,788,496)        (803,643)
       Income taxes recoverable                                                (7,090,637)              --
       Policy acquisition costs, net of amortization                           (5,217,483)      (1,731,964)           4,231
       Goodwill                                                                        --         (242,746)              --
       Finance contracts receivable                                               956,120       (3,493,637)       2,559,916
       Other assets                                                                44,597         (532,533)         640,212
       Unpaid losses and loss adjustment expenses                              22,000,481        7,586,442        5,978,419
       Unearned premiums                                                       16,030,048        5,188,177       13,983,258
       Premium deposits                                                         1,249,906          (33,936)        (478,264)
       Income taxes payable                                                            --       (1,676,020)       1,907,042
       Bank overdraft                                                          14,832,698         (277,394)      (2,677,565)
       Accounts payable and accrued expenses                                     (736,699)         (19,765)        (475,019)
                                                                            -------------    -------------    -------------
Net cash provided by operating activities                                      18,577,796       12,270,114       14,495,358
                                                                            -------------    -------------    -------------
Cash flow (used in) provided by investing activities:
   Proceeds from sale of investment securities available for sale              81,245,978      167,978,275       41,293,545
   Purchases of investment securities available for sale                     (119,153,291)    (188,055,815)     (51,088,365)
   Receivable for investments sold                                              2,118,595       (2,118,595)              --
   Collection of mortgage loans                                                   137,571            7,472          451,314
   Purchases of property and equipment                                           (719,332)      (1,289,108)        (308,936)
   Proceeds from sale of agency operations                                      5,488,489               --               --
   Proceeds from sale of assets                                                        --        1,621,384          199,687
                                                                            -------------    -------------    -------------
Net cash used in investing activities                                         (30,881,990)     (21,856,387)      (9,452,755)
                                                                            -------------    -------------    -------------
Cash flow (used in) provided by financing activities:
   Subordinated debt                                                           12,500,000        7,500,000
   Exercised stock options                                                      2,778,444        6,868,646               --
   Exercised warrants                                                             224,987               --               --
   Dividends paid                                                              (1,879,585)      (1,242,678)        (449,475)
   Purchases of treasury stock                                                    (11,871)        (681,842)        (253,446)
   Revolving credit outstanding                                                (1,950,244)        (213,634)      (2,364,397)
                                                                            -------------    -------------    -------------
Net cash provided by financing activities                                      11,661,731       12,230,492       (3,067,318)
                                                                            -------------    -------------    -------------
Net (decrease) increase in cash and cash equivalents                             (642,463)       2,644,219        1,975,285
Cash and cash equivalents at beginning of period                                6,770,169        4,125,950        2,150,665
                                                                            -------------    -------------    -------------
Cash and cash equivalents at end of period                                  $   6,127,706    $   6,770,169    $   4,125,950
                                                                            =============    =============    =============


See accompanying notes to consolidated financial statements.


                                       53



                  21st Century Holding Company and Subsidiaries
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002



                                                                                    For the year ended December 31,
                                                                                    2004          2003          2002
                                                                                -----------   -----------   -----------
                                                                                                   
(Continued)
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
       Interest                                                                 $   188,118   $   393,729   $   354,572
       Income taxes                                                             $   733,748   $ 4,784,502   $ 1,565,069
   Non-cash investing and finance activities:
       Accrued dividends payable                                                $   442,183   $   422,890   $   179,947
       Retirement of subordinated debt by Common Stock issuance                 $ 3,125,000   $   625,000   $        --
       Stock issued to employees                                                $        --   $        --   $     7,800
       Notes reveivable, net of deferred gains, received for sale of agencies   $   187,402   $   187,790   $   (35,523)


See accompanying notes to consolidated financial statements

                                       54


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002

(1) ORGANIZATION AND BUSINESS

      The accompanying consolidated financial statements include the accounts of
21st Century Holding Company and its subsidiaries.  All significant intercompany
balances and transactions have been eliminated in consolidation.

      On September 7, 2004, we completed a three-for-two stock split in the form
of a stock dividend,  whereby shareholders received three shares of common stock
for every two shares of our common stock held on the record date.  Just prior to
the   three-for-two   stock  split,  we  had   approximately   3,957,000  shares
outstanding,  and  following  the stock split,  we had  approximately  5,936,000
shares outstanding.

      We are an insurance holding company,  which,  through our subsidiaries and
our contractual relationships with our independent agents, control substantially
all aspects of the insurance  underwriting,  distribution and claims process. We
underwrite  personal   automobile   insurance,   general  liability   insurance,
homeowners'  insurance  and mobile  home  property  and  casualty  insurance  in
Florida, Georgia and Louisiana through our wholly owned subsidiaries,  Federated
National Insurance Company ("Federated National") and American Vehicle Insurance
Company ("American  Vehicle").  American Vehicle has recently been authorized to
write  commercial  general  liability  policies in Kentucky and expects to begin
writing  policies in that state in the near future.  American Vehicle is a fully
admitted insurance carrier in Florida,  Louisiana and Texas and is admitted as a
surplus lines carrier in Georgia and Kentucky.

      During the year ended December 31, 2004,  24.1%,  62.0%, 1.5% and 12.4% of
the policies we underwrote were for personal automobile  insurance,  homeowners'
property and casualty  insurance,  mobile home property and casualty  insurance,
and commercial general liability,  respectively.  During the year ended December
31, 2003,  67.5%,  23.0%,  2.4% and 7.1% of the policies we underwrote  were for
personal  automobile  insurance,  homeowners'  property and casualty  insurance,
mobile home property and casualty  insurance,  and commercial general liability,
respectively.  We  internally  process  claims  made by our own and third  party
insureds through our wholly owned claims adjusting company,  Superior Adjusting,
Inc.("Superior").  We also offer  premium  financing to our own and  third-party
insureds through our wholly owned subsidiary,  Federated  Premium Finance,  Inc.
("Federated Premium").

      During 2004, we marketed and distributed our own and third-party insurers'
products and our other services primarily in Central and South Florida,  through
a network of 24 agencies  owned by  Federated  Agency  Group,  Inc.  ("Federated
Agency Group"), a wholly owned subsidiary, 42 franchised agencies, approximately
1,500 independent  agents and a select number of general agents. Our independent
agents and general agents are primarily  responsible for the distribution of our
homeowner  insurance and  commercial  general  liability  products.  Through our
wholly owned subsidiary,  FedUSA, Inc.  ("FedUSA"),  we franchise agencies under
the FedUSA name. As of December 31, 2004,  franchises were granted for 48 FedUSA
agencies, of which 42 were operating and 6 were pending.

      On  December  31,  2004,  we sold most of the  non-current  assets and the
deferred policy acquisition liability related to our network of 24 Company-owned
agencies,  48  franchised  agencies  located in Florida  including our franchise
operations  to Fed USA Retail,  Inc. and Fed USA  Franchising,  Inc. We retained
ownership of the current assets and liabilities.  For further discussion of this
transaction see footnote 24, Discontinued Operations.

      The  Company-owned  agencies  were located in  Miami-Dade,  Broward,  Palm
Beach,  Martin,  Orange,  Osceola,  Volusia and Seminole Counties,  Florida. The
franchised agencies are located in Miami-Dade,  Broward, Palm Beach, Martin, St.
Lucie,  Orange,  Lee and Collier Counties,  Florida.  The independent agents are
located throughout Florida.

      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, American Vehicle and our agencies, and
participates  in  the  negotiation  of  reinsurance  contracts.   Assurance  MGA
generates revenue through policy fee income and other  administrative  fees from
the marketing of companies' products through the Company's distribution network.
Assurance MGA plans to establish  relationships with additional carriers and add
additional insurance products in the future.

      We  also  offered  other  services  at our  Company-owned  and  franchised
agencies,  including  tax  return  preparation  and  electronic  filing  and the
issuance  and  renewal of license  tags.  In August  1999,  we  acquired  an 80%
interest in Express Tax Service,  Inc ("Express Tax").  Express Tax licenses tax
return preparation  software to business locations  throughout the United States
and also earns fees on all  electronically  filed returns.  Express Tax licenses
its software to the Company's  agencies.  On January 13, 2005, with an effective
date of January 1, 2005,  we sold our 80% interest in Express Tax Service,  Inc.


                                       55


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


(along with its wholly owned subsidiary,  EXPRESSTAX  Franchise  Corporation) to
Robert J. Kluba, the president of Express Tax and the holder of the 20% minority
interest in Express Tax, and Robert H.  Taylor.  In exchange for our shares,  we
received a net cash payment of  $311,351,  which  reflected a purchase  price of
$660,000 less $348,649.  in intercompany  receivables we owed to Express Tax. In
addition,  we received a payment of $1,200,000 in exchange for our agreement not
to compete with the current  businesses  of Express Tax for five years after the
sale. For further discussion see our Subsequent Events section.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

      (A) CASH AND CASH EQUIVALENTS

            We consider all short-term  highly liquid  investments with original
maturities of three months or less to be cash equivalents.

      (B) INVESTMENTS

            Our investment securities have been classified as available-for-sale
because  all of the  securities  are  available  to be sold in  response  to our
liquidity needs, changes in market interest rates and asset-liability management
strategies,  among other reasons.  Investments  available-for-sale are stated at
fair value on the balance sheet.  Unrealized  gains and losses are excluded from
earnings and are reported as a component of other  comprehensive  income  within
shareholders' equity, net of related deferred income taxes.

            A decline in the fair value of an available-for-sale  security below
cost  that is  deemed  other  than  temporary  results  in a charge  to  income,
resulting in the  establishment  of a new cost basis for the security.  Premiums
and  discounts  are  amortized or accreted,  respectively,  over the life of the
related  fixed  maturity  security as an adjustment to yield using a method that
approximates the effective  interest  method.  Dividends and interest income are
recognized  when earned.  Realized gains and losses are included in earnings and
are derived using the specific-identification method for determining the cost of
securities sold.

      (C) PREMIUM REVENUE

            Premium  revenue on property and  casualty  insurance is earned on a
pro rata basis over the life of the policies.  Unearned  premiums  represent the
portion of the premium related to the unexpired policy term.

      (D) DEFERRED ACQUISITION COSTS

            Deferred  acquisition costs represent primarily  commissions paid to
outside  agents  at the  time  of  policy  issuance  (to  the  extent  they  are
recoverable from future premium income) net of ceded premium  commission  earned
from  reinsurers,  salaries  and  premium  taxes  net of  policy  fees,  and are
amortized  over the life of the  related  policy in  relation  to the  amount of
premiums earned.  The method followed in computing  deferred  acquisition  costs
limits the amount of such deferred costs to their  estimated  realizable  value,
which  gives  effect to the  premium to be earned,  related  investment  income,
unpaid losses and loss  adjustment  expenses and certain other costs expected to
be incurred as the premium is earned.  There is no  indication  that these costs
will not be fully recoverable in the near term.

            An analysis of deferred acquisition costs follows:

                                            Year Ended December 31,
                                            -----------------------
                                       2004            2003           2002
                                   ------------    ------------   ------------
Balance, beginning of year         $  1,739,685    $      7,721   $     11,952
Acquisition costs deferred           13,640,291         877,685     (2,068,545)
Amortization expense during year     (8,422,808)        854,279      2,064,314
                                   ------------    ------------   ------------
Balance, end of year               $  6,957,168    $  1,739,685   $      7,721
                                   ============    ============   ============
      (E) PREMIUM DEPOSITS


                                       56


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


            Premium  deposits  represent  premiums  received on policies not yet
written. We take approximately 30 working days to issue the policy from the date
the cash and policy application are received.

      (F) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

            Unpaid  losses  and  loss  adjustment  expenses  are  determined  by
establishing  liabilities in amounts estimated to cover incurred losses and loss
adjustment  expenses.  Such liabilities are determined based upon our assessment
of claims  pending and the  development  of prior years' loss  liability.  These
amounts  include  liabilities  based upon individual case estimates for reported
losses and loss  adjustment  expenses  and  estimates  of such  amounts that are
incurred but not  reported.  Changes in the  estimated  liability are charged or
credited to  operations  as the  estimates  are revised.  Unpaid losses and loss
adjustment  expenses are reported net of estimates  for salvage and  subrogation
recoveries,  which totaled approximately $889,000, $859,000 and $550,000, net of
reinsurance, at December 31, 2004, 2003 and 2002, respectively.

            The  estimates  of unpaid  losses and loss  adjustment  expenses are
subject  to the  effect  of  trends in claims  severity  and  frequency  and are
continually  reviewed.  As part of the process,  we review  historical  data and
consider various factors,  including known and anticipated  legal  developments,
changes in social attitudes,  inflation and economic  conditions.  As experience
develops and other data  becomes  available,  these  estimates  are revised,  as
required,  resulting in increases or decreases to the existing unpaid losses and
loss adjustment expenses.  Adjustments are reflected in results of operations in
the period in which they are made and the liabilities may deviate  substantially
from prior estimates.

            There can be no assurance that our unpaid losses and loss adjustment
expenses will be adequate to cover actual losses.  If our unpaid losses and loss
adjustment expenses prove to be inadequate,  we will be required to increase the
liability  with a  corresponding  reduction  in our net  income in the period in
which the  deficiency is identified.  Future loss  experience  substantially  in
excess of the established unpaid losses and loss adjustment  expenses could have
a material  adverse effect on our business,  results of operations and financial
condition.

            We do not discount  unpaid losses and loss  adjustment  expenses for
financial statement purposes.

      (G) COMMISSION INCOME

            Commission  income  consists  of fees  earned  by the  Company-owned
agencies  placing  business  with third party  insurers and third party  premium
finance companies. Commission income is earned on a pro rata basis over the life
of the policies.  Unearned commissions  represent the portion of the commissions
related to unexpired  policy  terms.  During 2002  Assurance  MGA  completed its
program for underwriting insurance for an unaffiliated insurance company.

      (H) FINANCE REVENUE

            Interest  and  service  income,  resulting  from  the  financing  of
insurance premiums, is recognized using a method that approximates the effective
interest method. Late charges are recognized as income when chargeable.

      (I) CREDIT LOSSES

            Provisions  for credit losses are provided in amounts  sufficient to
maintain the allowance for credit losses at a level considered adequate to cover
anticipated  losses.  Generally,  accounts that are over 90 days old are written
off to the allowance for credit losses.  We have been increasing our reliance on
the direct  billing  our  policyholders  for their  insurance  premiums.  Direct
billing is when the insurance company accepts from the insured, as a receivable,
a promise to pay the premium, as opposed to requiring payment of the full amount
of the  policy,  either  directly  from the  insured  or from a premium  finance
company.  We believe that the direct billing  program does not increase our risk
because the  insurance  policy,  which serves as  collateral,  is managed by our
computer   system.   Underwriting   criteria  are  designed  with  down  payment
requirements and monthly payments that create  policyholder  equity, also called
unearned  premium,  in  the  insurance  policy.  The  equity  in the  policy  is
collateral  for the  extension  of credit to the  insured.  The  increase in the
allowance for credit losses can be primarily  attributed to homeowner and mobile
homeowner  policyholders and a cancellation moratorium in effect for non-payment
of insurance premiums.

            The  activity  in the  allowance  for  credit  losses  for  premiums
receivable was as follows:


                                       57


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002




                                                         Year Ended December 31,
                                                          -----------------------
                                                      2004          2003          2002
                                                    ---------     ---------     ---------
                                                                       
Allowance for credit losses at beginning of year    $ 123,000     $ 201,000     $ 235,000
Additions charged to bad debt expense                 462,365        11,259        34,710
Write-downs charged against the allowance             (43,514)      (89,259)      (68,710)
                                                    ---------     ---------     ---------
Allowance for credit losses at end of year          $ 541,851     $ 123,000     $ 201,000
                                                    =========     =========     =========


            See Note 4 for the activity in the  allowance  for credit losses for
finance contracts.

      (J) MANAGING GENERAL AGENT FEES

            If  substantially  all the costs  associated  with the MGA contracts
which do not involve  affiliated  insurers are incurred during the  underwriting
process,  then the MGA fees and the related  acquisition costs are recognized at
the time the policy is underwritten, net of estimated cancellations.  If the MGA
contract requires  significant  involvement  subsequent to the completion of the
underwriting  process,  then the MGA fees and related  acquisition costs are not
deferred and recognized over the life of the policy.

      (K) POLICY FEES

            Policy  fees  represent  a $25  non-refundable  application  fee for
insurance coverage, which are intended to reimburse us for the costs incurred to
underwrite the policy. The fees and related costs are recognized when the policy
is  underwritten.  These  fees are  netted  against  underwriting  costs and are
included as a component of deferred acquisition costs.

      (L) REINSURANCE

            We  recognize  the  income  and  expense  on  reinsurance  contracts
principally on a pro-rata basis over the life of the policies  covered under the
reinsurance  agreements.  We are reinsured under separate reinsurance agreements
for the different lines of business  underwritten.  Reinsurance contracts do not
relieve us from our  obligations to  policyholders.  We continually  monitor our
reinsurers  to minimize  our  exposure  to  significant  losses  from  reinsurer
insolvencies. We only cede risks to reinsurers whom we believe to be financially
sound.  At December  31,  2004,  all  reinsurance  recoverables  are  considered
collectible.

      (M) INCOME TAXES

            Income taxes are accounted for under the asset and liability method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases, and operating loss and tax-credit carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date.

      (N) CONTINGENT REINSURANCE COMMISSION

            Our reinsurance  contracts  provide ceding  commissions for premiums
written which are subject to  adjustment.  The amount of ceding  commissions  is
determined  by the loss  experience  for the  reinsurance  agreement  term.  The
reinsurer  provides  commissions  on a sliding  scale with  maximum  and minimum
achievable levels.  The reinsurer provides us with the provisional  commissions.
We have recognized the commissions  based on the current loss experience for the
policy year premiums. This results in establishing a liability for the excess of
provisional  commissions  retained  compared  to  amounts  recognized,  which is
subject to variation until the ultimate loss experience is  determinable.  There
were no contingent ceding commissions recognized for the year ended December 31,
2003 due to the provisions  contained in the reinsurance contract allowing for a
flat rate  commission  schedule.  For the year ended December 31, 2002 there was
$369,000 of contingent ceding commissions recognized.


                                       58


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



      (O) CONCENTRATION OF CREDIT RISK

            Financial instruments, which potentially expose us to concentrations
of credit risk, consist primarily of investments,  premiums receivable,  amounts
due from reinsurers on paid and unpaid losses, finance contracts, consumer loans
and pay advances receivable.  We have not experienced significant losses related
to premiums receivable from individual  policyholders or groups of policyholders
in a particular  industry or  geographic  area. We believe no credit risk beyond
the  amounts  provided  for  collection  losses  is  inherent  in  our  premiums
receivable or finance contracts,  consumer loans and pay advances receivable. In
order to reduce  credit  risk for  amounts  due from  reinsurers,  we seek to do
business with financially sound  reinsurance  companies and regularly review the
financial strength of all reinsurers used.

      (P) ACCOUNTING CHANGES

            In December 2004, the Financial  Accounting Standards Board ("FASB")
issued SFAS No. 123, Share-Based Payments (revised 2004) ("SFAS No. 123R"). This
statement  eliminates  the  option  to apply  the  intrinsic  value  measurement
provisions  of 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  will be
effective for 21st Century's fiscal quarter  beginning July 1, 2005. We have not
yet determined the effect on us of the adoption of SFAS No. 123R.

            In January 2003, the Financial  Accounting  Standards Board ("FASB")
issued  Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN
46"),  which requires the  consolidation  of certain  entities  considered to be
variable interest entities ("VIEs"). An entity is considered to be a VIE when it
has  equity  investors  who lack the  characteristics  of  having a  controlling
financial  interest,  or its capital is insufficient to permit it to finance its
activities without additional subordinated financial support. Consolidation of a
VIE by an investor is required  when it is  determined  that the  investor  will
absorb a majority of the VIE's expected losses if they occur, receive a majority
of the entity's  expected  residual returns if they occur, or both. The adoption
of Interpretation  No. 46 did not have any impact on our Consolidated  Financial
Statements.

            In May 2003,  the FASB  issued  Statement  of  Financial  Accounting
Standard  Number  150,  "Accounting  for  Certain  Financial   Instruments  with
Characteristics  of both  Liabilities  and Equity." This  Statement  establishes
standards  for  how  an  issuer   classifies  and  measures  certain   financial
instruments with  characteristics of both liabilities and equity and it requires
that an issuer  classify a  financial  instrument  that is within its scope as a
liability because the financial instrument embodies an obligation of the issuer.
This Statement is effective for financial  instruments  entered into or modified
after May 31, 2003,  and  otherwise is  effective  in the first  interim  period
beginning  after  June 15,  2003.  On July 31,  2003 , we  completed  a  private
placement of our 6% Senior  Subordinated  Notes (the "July 2003 Notes"),  and on
September  30, 2004 , we completed  another  private  placement of our 6% Senior
Subordinated Notes (the "September 2004 Notes"),  both of which were offered and
sold to  accredited  investors as units  consisting of one Note with a principal
amount of $1,000 and warrants (the  "Warrants") to purchase shares of our Common
Stock. These Notes which fall within the definition of financial  instruments as
described  in  Financial  Accounting  Standard  Number  150 are  presented  as a
liability in conformity with Statement of Financial  Accounting  Standard Number
150.  As such,  the  adoption of this  Statement  did not have any impact on our
Consolidated Financial Statements.

      (Q) USE OF ESTIMATES

            The  preparation  of  the  consolidated   financial   statements  in
conformity with GAAP requires  management to make estimates and assumptions that
affect the reported  financial  statement  balances as well as the disclosure of
contingent  assets and liabilities.  Actual results could differ materially from
those estimates used.

            Similar to other property and casualty  insurers,  our liability for
unpaid losses and LAE,  although  supported by actuarial  projections  and other
data,  is  ultimately  based on  management's  reasoned  expectations  of future
events.  Although  considerable  variability is inherent in these estimates,  we
believe that this  liability is adequate.  Estimates are reviewed  regularly and
adjusted as necessary.  Such adjustments are reflected in current operations. In
addition,  the  realization  of our  deferred  income tax assets is dependent on
generating  sufficient future taxable income. It is reasonably possible that the
expectations  associated  with these  accounts could change in the near term and
that the effect of such changes could be material to the Consolidated  Financial
Statements.


                                       59


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



      (R) NATURE OF OPERATIONS

            The following is a description of the most significant  risks facing
            us and how we mitigate those risks:

            (I)   LEGAL/REGULATORY   RISKS--the   risk  that   changes   in  the
                  regulatory  environment  in which  an  insurer  operates  will
                  create  additional  expenses not anticipated by the insurer in
                  pricing its products. That is, regulatory initiatives designed
                  to reduce insurer profits, restrict underwriting practices and
                  risk classifications, mandate rate reductions and refunds, and
                  new legal theories or insurance company  insolvencies  through
                  guaranty  fund  assessments  may create  costs for the insurer
                  beyond those recorded in the financial statements.  We attempt
                  to  mitigate  this  risk  by  monitoring  proposed  regulatory
                  legislation  and by  assessing  the impact of new laws.  As we
                  write  business  only in the  states  of  Florida,  Louisiana,
                  Texas,  Alabama and Georgia,  we are more exposed to this risk
                  than some of our more geographically balanced competitors.

                  As a result of the hurricanes  striking  Florida in August and
                  September   2004,  we  are  not  in  compliance  with  certain
                  regulatory   requirements.   To  retain  our  certificates  of
                  authority, Florida insurance laws and regulations require that
                  our insurance  company  subsidiaries,  Federated  National and
                  American  Vehicle,  maintain  capital  surplus  equal  to  the
                  greater  of 10%  of its  liabilities  or  the  2004  statutory
                  minimum  capital and surplus  requirement  of $4.00 million as
                  defined in the Florida  Insurance  Code.  As of  December  31,
                  2004,  Federated  National  was  not in  compliance  with  its
                  requirement  to maintain  minimum  capital  surplus  primarily
                  based  on  the  incurred  losses   associated  with  the  four
                  hurricanes that occurred in August and September  2004.  Under
                  the  provisions   afforded  Federated  National  according  to
                  Statement  of  Statutory  Accounting  Principles  No 72 titled
                  "Surplus  and  Quasi-reorganizations,"  compliance  with  this
                  provision was restored by way of a surplus  infusion from 21st
                  Century. American Vehicle remains in compliance with statutory
                  minimum  capital  and  surplus   requirement.   The  insurance
                  companies   are  also   required   to  adhere  to   prescribed
                  premium-to-capital  surplus  ratios.  As of December 31, 2004,
                  Federated   National  did  not  comply  with  the   prescribed
                  premium-to-capital  surplus  ratio,  primarily  based  on  the
                  incurred  losses  associated  with  the four  hurricanes  that
                  occurred in August and September  2004.  Under the  provisions
                  afforded   Federated   National   according  to  Statement  of
                  Statutory  Accounting  Principles No. 72, compliance with this
                  provision  was also  restored.  American  Vehicle  remains  in
                  compliance with statutory premium-to-capital surplus ratios.

            (II)  CREDIT  RISK--the risk that issuers of securities  owned by us
                  will default or that other  parties,  including  reinsurers to
                  whom business is ceded,  which owe us money,  will not pay. We
                  attempt to minimize  this risk by  adhering to a  conservative
                  investment strategy,  maintaining  reinsurance agreements with
                  financially sound reinsurers, and by providing for any amounts
                  deemed uncollectible.

            (III) INTEREST RATE  RISK--the  risk that interest rates will change
                  and cause a decrease in the value of an insurer's investments.
                  To the extent  that  liabilities  come due more  quickly  than
                  assets  mature,  an insurer might have to sell assets prior to
                  maturity and potentially recognize a gain or a loss.

            (IV)  CATASTOPHIC  EVENT  RISK--the  risk  associated  with  writing
                  insurance policies covering  automobile  owners,  home owners,
                  and business owners for losses that result from  catastrophes,
                  including  hurricanes,  tropical  storms,  tornadoes  or other
                  weather related  events.  We mitigate our risk of catastrophic
                  events  through  the  use of  reinsurance,  forecast  modeling
                  techniques and the monitoring of  concentrations  of risk, all
                  designed to protect  the  statutory  surplus of the  insurance
                  companies.

      (S) FAIR VALUE

            The fair  value of our  investments  is  estimated  based on  prices
published by financial  services or quotations  received from securities dealers
and is reflective of the interest rate  environment that existed as of the close
of business on December 31, 2004 and 2003.  Changes in interest rates subsequent
to December 31, 2004 may affect the fair value of our investments. Refer to Note
3(a) for details.

            The  carrying  amounts  for  the  following   financial   instrument
categories  approximate  their fair values at December 31, 2004 and 2003 because
of their short-term  nature:  cash and cash  equivalents,  premiums  receivable,
finance contracts,  due from reinsurers,  drafts payable to insurance companies,
revolving credit outstanding, bank overdraft, accounts payable, accrued expenses
and subordinated debt.


                                       60


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



      (T) GOODWILL

            In July 2001,  the FASB  issued  SFAS 141  "Business  Combinations,"
effective for all business combinations  initiated after June 30, 2001, and SFAS
142 "Accounting for Goodwill and Other Intangible  Assets," effective for fiscal
years  beginning  after December 15, 2001. SFAS 141 requires the purchase method
of   accounting   be  used  for  all   business   combinations.   Goodwill   and
indefinite-lived  intangible  assets will remain on the balance sheet and not be
amortized.  Intangible assets with a definite life will continue to be amortized
over their estimated useful lives.  SFAS 142 establishes a new method of testing
goodwill for impairment. On an annual basis, and when there is reason to suspect
that their values may have been  diminished  or  impaired,  these assets must be
tested for impairment.  The amount of goodwill determined to be impaired will be
expensed  to  current  operations.  Prior to the  adoption  of SFAS 141 and 142,
goodwill was amortized on a straight-line basis for financial statement purposes
over periods  ranging from 10 to 20 years.  Effective  December 31, 2004 we sold
our interest in the assets associated with approximately $1,586,000 of goodwill.
The  remaining  goodwill  as of  Decemeber 31, 2004 was sold on January 1, 2005.
According to these transactions it was determined that goodwill was not impaired
as of December 31, 2004. There was no amortization of goodwill  recorded in 2004
and 2003.

            Goodwill is stated  separately  on the  balance  sheet and totaled $
153,546 and  $1,739,715  at December  31,  2004 and 2003,  respectively,  net of
$61,419 and $1,726,530 of accumulated  amortization  as of December 31, 2004 and
2003,  respectively.  Our remaining  goodwill relates to our Express Tax Service
and EXPRESSTAX  franchise  subsidiaries which are included in our other segment.
The impairment  computation  for 2004 and 2003 indicated there was no impairment
of  goodwill  as of  December  31,  2004 and 2003.  Based  upon  this  valuation
analysis,  goodwill  does not appear to be impaired as of December  31, 2004 and
2003.

      (U) STOCK OPTION PLANS

            We account for  stock-based  compensation  using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to  Employees".  Compensation  cost for stock  options,  if any, is
measured  as the excess of the quoted  market  price of our stock at the date of
grant over the amount an employee must pay to acquire the stock.

            The FASB  Statement  of  Financial  Accounting  Standards  No.  123,
"Accounting  for  Stock-Based  Compensation"  (FAS  123)  establishes  financial
accounting  and  reporting  standards for  stock-based  compensation  plans.  As
permitted by FAS 123, we use the  accounting  method  prescribed  by  Accounting
Principles  Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB
25) to account for our stock-based  compensation  plans.  Companies using APB 25
are required to make pro forma  footnote  disclosures of net income and earnings
per share as if the fair value method of accounting,  as defined in FAS 123, had
been applied. See Note 2(e) "Accounting Changes" and Note 16 "Stock Compensation
Plans" for more information.

            As of December  31, 2002 we adopted the FASB  Statement of Financial
Accounting  Standards  No.  148,  "Accounting  for  Stock-Based  Compensation  -
Transition  and  Disclosure"  (FAS  148).  FAS 148  amends  FAS  123 to  provide
alternative  methods of  transition to FAS 123's fair value method of accounting
for stock-based  compensation.  FAS 148 also amends the disclosure provisions of
FAS 123 to require disclosure in the Summary of Significant  Accounting Policies
footnote  the  effects  of  an  entity's   accounting  policy  with  respect  to
stock-based employee compensation on reported net income and earnings per share.

            We  continue  to  account  for  stock-based  compensation  using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
under  which no  compensation  cost for stock  options is  recognized  for stock
option  awards  granted  to  employees  at  or  above  fair  market  value.  Had
compensation  expense for our stock compensation plan been determined based upon
fair values at the grant dates for awards under the plan in accordance with SFAS
No. 123, our net income  (loss) and net income  (loss) per share would have been
reduced  (increased) to the pro forma amounts indicated below.  Additional stock
option awards are anticipated in future years.


                                       61


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002





                                                 For the year ended December 31,
                                                --------------------------------
                                          2004                2003               2002
                                     --------------       -------------      -------------
                                                                    
Net Income (loss) as reported        $  (10,857,776)      $   8,364,876      $   4,570,201
Compensation, net of tax effect           7,277,028           4,783,080          1,750,528
                                     --------------       -------------      -------------
Pro forma net income (loss)          $  (18,134,804)      $   3,581,796      $   2,819,673
                                     ==============       =============      =============
Net income (loss) per share
As reported - Basic                  $        (1.86)      $        1.76      $        1.01
As reported - Diluted                $        (1.86)      $        1.67      $        1.01
Pro forma - Basic                    $        (3.10)      $        0.75      $        0.63
Pro forma - Diluted                  $        (3.10)      $        0.71      $        0.63


      (V) PROPERTY, PLANT AND EQUIPMENT

            Property,  plant and equipment  are stated at cost less  accumulated
depreciation.  Depreciation on property,  plant and equipment is calculated on a
straight-line  basis over the following  estimated  useful  lives:  building and
improvements  - 30 years and  furniture  and fixtures - 7 years.  We  capitalize
betterments and any other expenditure in excess of $500 if the asset is expected
to have a useful life  greater than one year.  The  carrying  value of property,
plant and  equipment  is  periodically  reviewed  based on the  expected  future
undiscounted  operating  cash  flows of the  related  item.  Based upon our most
recent analysis, we believe that no impairment of property,  plant and equipment
exists at December 31, 2004.

      (W) RECLASSIFICATIONS

            Certain 2003 financial  statement  amounts have been reclassified to
conform with the 2004 presentations.

(3) INVESTMENTS

      (A) FIXED MATURITIES AND EQUITY SECURITIES

            The following  table shows the realized gains (losses) for fixed and
equity securities for the years ended December 31, 2004 and 2003:



                                                                 Year Ended December 31,
                                   Gains (Losses)      Fair Value      Gains (Losses)     Fair Value
                                        2004            at Sale            2003             at Sale
                                    ------------      ------------     ------------      ------------
                                                                             
     Fixed income securities        $     62,513      $  6,418,287     $  1,590,936      $102,966,845
     Equity securities                   894,883        16,751,595        1,230,118        38,847,014
                                    ------------      ------------     ------------      ------------
          Total realized gains           957,396        23,169,882        2,821,054       141,813,859
                                    ------------      ------------     ------------      ------------


     Fixed income securities             (42,911)       38,133,986         (508,299)       17,213,554
     Equity securities                  (225,809)       16,997,269          (81,422)        7,555,755
                                    ------------      ------------     ------------      ------------
          Total realized losses         (268,720)       55,131,255         (589,721)       24,769,309
                                    ------------      ------------     ------------      ------------

Net realized gains on
investments                         $    688,676      $ 78,301,137     $  2,231,333      $166,583,168
                                    ============      ============     ============      ============



                                       62


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



         A summary of the amortized cost, estimated fair value, gross unrealized
gains and losses of fixed maturities and equity securities at December 31, 2004
and 2003 is as follows:



                                                               Gross            Gross
                                              Amortized       Unrealized       Unrealized      Estimated
                                                 Cost           Gains           Losses         Fair Value
                                              -----------     -----------     -----------     -----------
                                                                                  
December 31, 2004
     Fixed Maturities:
          U.S. government obligations         $54,695,914     $   154,809     $   737,119     $54,113,604
          Obligations of states and
            political subdivisions              9,506,161          63,179          67,681       9,501,659
          Corporate securities                  5,895,310         101,684          25,227       5,971,767
                                              -----------     -----------     -----------     -----------
                                              $70,097,385     $   319,672     $   830,027     $69,587,030
                                              ===========     ===========     ===========     ===========

     Equity securities - preferred stocks     $ 2,000,000     $        --     $        --     $ 2,000,000
                         common stocks         13,107,553         147,287         459,697      12,795,143
                                              -----------     -----------     -----------     -----------
                                              $15,107,553     $   147,287     $   459,697     $14,795,143
                                              ===========     ===========     ===========     ===========

December 31, 2003
     Fixed Maturities:
          U.S. government obligations         $26,337,724     $    63,038     $   856,651     $25,544,111
          Obligations of states and
            political subdivisions              7,639,293          60,501          65,342       7,634,452
          Corporate securities                 10,041,640         298,631          29,236      10,311,035
                                              -----------     -----------     -----------     -----------
                                              $44,018,657     $   422,170     $   951,229     $43,489,598
                                              ===========     ===========     ===========     ===========

     Equity securities - preferred stocks     $   250,000     $       400     $        --     $   250,400
                         common stocks          3,409,697           5,000           1,846       3,412,851
                                              -----------     -----------     -----------     -----------
                                              $ 3,659,697     $     5,400     $     1,846     $ 3,663,251
                                              ===========     ===========     ===========     ===========


         Below is a summary of fixed maturities at December 31, 2004 and 2003 by
contractual or expected maturity periods. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.



                                       December 31, 2004              December 31, 2003
                                       -----------------              -----------------
                                  Amortized       Estimated       Amortized       Estimated
                                    Cost         Fair Value         Cost          Fair Value
                                 -----------     -----------     -----------     -----------
                                                                     
Due in one year or less          $   386,076     $   389,648     $ 3,823,434     $ 4,039,356
Due after one year through
     five years                    6,876,095       6,892,451       5,975,696       6,077,534
Due after five years through
ten
     years                        50,509,441      50,263,305      22,835,339      22,372,081
Due after ten years               12,325,772      12,041,626      11,384,188      11,000,627
                                 -----------     -----------     -----------     -----------

                                 $70,097,384     $69,587,030     $44,018,657     $43,489,598
                                 ===========     ===========     ===========     ===========



                                       63


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



            United States Treasury Notes with a book value of $1,000,000,  each,
and  maturing  in 2012 were on  deposit  with the  Florida  Office of  Insurance
Regulation  as of December  31,  2004,  as  required  by law for both  Federated
National and American Vehicle.

            A summary of the sources of net investment income follows:

                                    Years Ended December 31,
                                    ------------------------
                                     2004              2003
                                  -----------       -----------
Fixed maturities                  $ 2,436,845       $ 1,462,919
Equity securities                     691,192           108,983
Cash and cash equivalents              49,178            26,676
Other                                   3,065           118,057
                                  -----------       -----------
     Total investment income        3,180,280         1,716,635
Less investment expenses               (8,660)          (92,419)
                                  -----------       -----------

     Net investment income        $ 3,171,620       $ 1,624,216
                                  ===========       ===========

            Proceeds from sales of fixed  maturities  and equity  securities for
the  years  ended   December  31,  2004,   2003  and  2002  were   approximately
$81.2 million, $168.0 million and $41.3 million, respectively.

            A summary of realized  investment  gains (losses) and (increases) in
net unrealized losses follows:

                                Years Ended December 31,
                                ------------------------
                                2004               2003
                             -----------       -----------
Net realized gains
(losses):
     Fixed maturities        $    19,602       $ 1,082,637
     Equity securities           669,074         1,148,696
                             -----------       -----------


Total                        $   688,676       $ 2,231,333
                             ===========       ===========
     *Includes a $2,000,000 impairment loss

 Net unrealized losses:
     Fixed maturities        $    18,701       $  (321,514)
     Equity securities          (315,964)           27,712
                             -----------       -----------


Total                        $  (297,263)      $  (293,802)
                             ===========       ===========
      (B) MORTGAGE LOANS

                                            Years Ended December 31,
                                            ------------------------
                                             2004             2003
                                           ---------       ---------
Mortgage receivable beginning of year      $ 137,571       $ 145,043
New mortgages                                     --              --
Principal payments received                 (137,571)         (7,472)
                                           ---------       ---------
Mortgage receivable end of year            $      --       $ 137,571
                                           =========       =========

            A portion of these  amounts  represents  outstanding  balances  from
related party transactions.  Refer to Note 13 for details.

(4) FINANCE CONTRACTS RECEIVABLE

      Below is a summary of the components of the finance  contracts  receivable
balance:


                                       64



                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



                                                               Years Ended December 31,
                                                                2004              2003
                                                           ------------       ------------
                                                                        
Finance contracts receivable                               $  9,218,631       $ 10,990,446
Less:
       Unearned income                                         (453,487)          (536,246)
       Allowance for credit losses                             (475,788)          (562,558)
                                                           ------------       ------------
Finance contracts, net of allowance for credit losses      $  8,289,356       $  9,891,642
                                                           ============       ============


      The activity in the allowance for credit losses was as follows:

                                                       Years Ended December 31,
                                                       ------------------------
                                                        2004            2003
                                                      ---------       ---------
Allowance for credit losses at beginning of year      $ 562,558       $ 404,356
Additions charged to bad debt expense                   559,396         819,868
Write-offs charged against the allowance               (646,166)       (661,666)
                                                      ---------       ---------
Allowance for credit losses at end of year            $ 475,788       $ 562,558
                                                      =========       =========

      As of December 31, 2004,  approximately  $2.6  million,  or 28.8%,  of the
gross premium finance  receivables  (before the allowances for credit losses and
unearned  premium  finance  charges) that  represent  policies from an unrelated
insurer. This unrelated insurance company currently is rated "B-" (Fair) by A.M.
Best.

      As security,  Federated Premium retains a contractual  right, if a premium
installment is not paid when due, to cancel the insurance  policy and to receive
the unearned premium from the insurer.

(5) PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consist of the following:

                                                    Years Ended December 31,
                                                    ------------------------
                                                     2004              2003
                                                  -----------       -----------
Land                                              $   625,000       $   632,144
Building and improvements                           3,114,300         2,823,400
Furniture and fixtures                              2,562,971         2,385,083
                                                  -----------       -----------
         Property, plant and equipment, gross       6,302,271         5,840,627
Accumulated depreciation                           (2,029,538)       (1,686,984)
                                                  -----------       -----------
         Property, plant and equipment, net       $ 4,272,733       $ 4,153,643
                                                  ===========       ===========

      Depreciation of property, plant, and equipment was $490,697,  $437,356 and
$376,516 during 2004, 2003 and 2002, respectively.

(6) REINSURANCE

      We reinsure (cede) a portion of written premiums on a quota-share basis
to nonaffiliated insurance companies in order to limit our loss exposure. We
also maintain coverages to limit losses from large exposures, which we believe
are adequate for current volume. To the extent that reinsuring companies are
unable to meet their obligations assumed under the reinsurance agreements, we
remain primarily liable to our policyholders.

      The impact of reinsurance on the financial statements is as follows:


                                       65


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



                                                                 Years Ended December 31,
                                                                 ------------------------
                                                       2004                2003                2002
                                                   -------------       -------------       -------------
                                                                                  
Premium written:
              Direct                               $ 100,662,025       $  72,991,434       $  63,036,468
              Ceded                                  (15,485,917)        (22,090,644)        (25,286,828)
                                                   -------------       -------------       -------------
                                                   $  85,176,108       $  50,900,790       $  37,749,640
                                                   =============       =============       =============
Premiums earned:
              Direct                               $  84,631,511       $  67,803,257       $  48,988,774
              Ceded                                  (18,390,167)        (25,518,462)        (19,595,770)
                                                   -------------       -------------       -------------
                                                   $  66,241,344       $  42,284,795       $  29,393,004
                                                   =============       =============       =============
Losses and loss adjustment expenses incurred:
              Direct                               $ 138,605,465       $  46,035,627       $  29,776,770
              Ceded                                  (63,612,684)        (18,526,648)        (13,789,645)
                                                   -------------       -------------       -------------
                                                   $  74,992,781       $  27,508,979       $  15,987,125
                                                   =============       =============       =============



                                                            As of December 31,
                                                            ------------------
                                                          2004               2003
                                                      ------------       ------------
                                                                   
Unpaid losses and loss adjustment expenses, net:
              Direct                                  $ 46,570,679       $ 24,570,198
              Ceded                                     (9,414,794)        (9,761,353)
                                                      ------------       ------------

                                                      $ 37,155,885       $ 14,808,845
                                                      ============       ============

Unearned premiums:
              Direct                                  $ 50,152,711       $ 34,122,663
              Ceded                                     (5,510,379)        (7,823,374)
                                                      ------------       ------------

                                                      $ 44,642,332       $ 26,299,289
                                                      ============       ============


      We earned  approximately  $1.5  million,  $6.7 million and $6.8 million in
commissions on premiums ceded during the years ended December 31, 2004, 2003 and
2002,  respectively.  Had all of our  reinsurance  agreements  been cancelled at
December  31, 2004 we would have  returned  no  reinsurance  commissions  to our
reinsurers and in turn,  our reinsurers  would have nothing to return to us from
unearned  premiums.  Had all of our  reinsurance  agreements  been  canceled  at
December 31, 2003, we would have returned a total of approximately  $2.5 million
in reinsurance commissions to our reinsurers; in turn, our reinsurers would have
returned approximately $7.8 million in unearned premiums to us.


                                       66


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      At December  31, 2004 and 2003,  the  Company had an  unsecured  aggregate
recoverable for paid and unpaid losses and loss adjustment expenses and unearned
premiums with the following reinsurers:



                                                                                   As of December 31,
                                                                                   ------------------
                                                                                 2004              2003
                                                                              ------------      ------------
                                                                                          
Transatlantic Reinsurance Company (A+ A.M. Best Rated):
              Unearned premiums                                               $      2,559      $  7,823,374
              Reinsurance recoverable on paid losses and loss adjustment
              expenses                                                           1,661,751         2,457,228
              Unpaid losses and loss adjustment expenses                         2,507,403         9,761,353
                                                                              ------------      ------------
                                                                              $  4,171,713      $ 20,041,955

Amounts due from reinsurers consisted of amounts related to:
              Unpaid losses and loss adjustment expenses                      $  2,507,403      $  9,761,353
              Reinsurance recoverable on paid losses and loss adjustment
              expenses                                                           1,661,751         2,457,228
              Reinsurance receivable
              (payable)                                                             11,301        (1,339,162)
                                                                              ------------      ------------
                                                                              $  4,180,455      $ 10,879,419


(7) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES ("LAE")

      The liability for unpaid losses and loss adjustment expenses is determined
on an  individual-case  basis for all incidents  reported.  The  liability  also
includes amounts for unallocated expenses,  anticipated future claim development
and IBNR.

      Activity in the liability for unpaid losses and loss  adjustment  expenses
is summarized as follows:



                                                For the years ended December 31,
                                               ---------------------------------
                                            2004               2003               2002
                                         ------------       ------------       ------------

                                                                      
Balance at January 1:                    $ 24,570,198       $ 16,983,756       $ 11,005,337
      Less reinsurance recoverables        (9,761,354)        (7,847,421)        (4,798,556)
                                         ------------       ------------       ------------
          Net balance at January 1       $ 14,808,844       $  9,136,335       $  6,206,781
                                         ============       ============       ============

Incurred related to:
      Current year                       $ 76,423,059       $ 26,274,932       $ 15,896,251
      Prior years                          (1,430,278)         1,234,047             90,874
                                         ------------       ------------       ------------
          Total incurred                 $ 74,992,781       $ 27,508,979       $ 15,987,125
                                         ============       ============       ============

Paid related to:
      Current year                       $ 42,304,178       $ 14,205,212       $  8,149,079
      Prior years                          10,341,563          7,631,258          4,908,492
                                         ------------       ------------       ------------
          Total paid                     $ 52,645,741       $ 21,836,470       $ 13,057,571
                                         ============       ============       ============

Net balance at year-end                  $ 37,155,884       $ 14,808,844       $  9,136,335
      Plus reinsurance recoverables         9,414,795          9,761,354          7,847,421
                                         ------------       ------------       ------------
          Balance at year-end            $ 46,570,679       $ 24,570,198       $ 16,983,756
                                         ============       ============       ============


      Based upon  consultations with our independent  actuarial  consultants and
their  statement of opinion on losses and loss adjustment  expenses,  we believe
that the liability for unpaid losses and loss adjustment expenses is adequate to
cover all claims and related expenses which may arise from incidents reported.


                                       67


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      As a result of our  review of our  liability  for  losses  and LAE,  which
includes a  re-evaluation  of the  adequacy of reserve  levels for prior  year's
claims,  we decreased  the  liability  for loss and LAE for claims  occurring in
prior years by $1,430,278 for the year ended December 31, 2004 and increased the
liability for loss and LAE for claims occurring in prior years by $1,234,047 and
$90,874  for the year  ended  December  31,  2003 and  2002,  respectively.  The
adjustments  in the liability were primarily  attributable  to loss  development
with  respect to our  personal  automobile  insurance  program.  There can be no
assurance concerning future adjustments of reserves,  positive or negative,  for
claims through December 31, 2004.

(8) 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 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.

      During  September  2004, we negotiated a new revolving  loan  agreement in
which the maximum credit  commitment  available to us was reduced at our request
to $2.0  million with  built-in  options to  incrementally  increase the maximum
credit  commitment up to $4.0 million over the next three years. We believe that
this available credit is sufficient based on our current operations. Our lender,
however,  could  decide  to reduce  our  available  credit  based on a number of
factors,  including  the A.M.  Best ratings of  Federated  National and American
Vehicle.  If the A.M. Best rating of Federated National falls below a "C," or if
the financial  condition of American Vehicle, as determined by our lender in its
sole discretion  suffers a material adverse change,  then under the terms of the
Revolving  Agreement,  policies  written  by that  subsidiary  will no longer be
eligible collateral,  causing our available credit to be reduced. If that occurs
and we are not able to obtain working capital from other sources,  then we would
have to restrict our growth and,  possibly,  our operations.  As of December 31,
2004,  under the terms of our agreement  with  FlatIron,  only American  Vehicle
policies are eligible for  collateral  and  beginning in March 2005,  our Lender
agreed to permit  policies  written by  Federated  National to be  eligible  for
collateral up to $165,000.

      The  amount  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  is 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.  As of December 31, 2004,  our interest rate was 7.00% as
compared to our interest rate as of December 31, 2003 of 5.75%

      The  Revolving   Agreement   contains  various   operating  and  financial
covenants,  with which we were in  compliance  at December 31, 2004 and December
31, 2003.  Outstanding  borrowings under the Revolving  Agreement as of December
31, 2004 and December 31, 2003 were $2.1 million and $4.1 million, respectively.
Outstanding borrowings in excess of the $2.0 million commitment totaled $148,542
as of  December  31,  2004.  The  excess  amount,  permissible  by  reason  of a
compensating  cash balance of $156,070  for December 31, 2004,  was held for the
benefit of FPF and is included in other assets. Outstanding borrowings in excess
of the $4.0 million  commitment  totaled  $98,786 as of December  31, 2003.  The
excess amount,  permissible by reason of a compensating cash balance of $200,430
for December 31, 2003,  was held for the benefit of FPF and is included in other
assets.  Interest  expense on this  revolving  credit  line for the years  ended
December 31, 2004, 2003 and 2002 totaled  approximately  $178,000,  $203,000 and
$342,000, respectively.

      The annual interest rate on advances under the Revolving  Agreement is 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 worse to total contracts receivable.  The effective
interest  rate  on  this  line  of  credit,  based  on our  average  outstanding
borrowings  under the Revolving  Agreement,  was 5.71%,  4.83% and 6.23% for the
years ended December 31, 2004, 2003 and 2002, respectively.

      In September 2002,  Flatiron  reduced the maximum credit  commitment under
the Revolving  Agreement  due to the A.M. Best ratings of third party  insurance
carriers  with which we were  financing  policies  at the time.  Simultaneously,
however,  we ceased  financing  policies  underwritten  by third party insurance
carriers altogether and began financing only those policies  underwritten by our
insurance  carriers  (in 2003 we began  again to finance  policies  from a small
number of independent  agents whose customer base and  operational  history meet
our strict  criteria for credit  worthiness).  Additionally,  we  implemented  a
direct billing program for policies underwritten by our carriers.  These changes
markedly  decreased  credit  risks and made our  reliance  on the higher  credit
commitment previously offered by FlatIron unnecessary.

      Direct billing is 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  amount of WPAC's  advance  is  subject  to  availability  under a
borrowing base calculation,  with maximum advances outstanding not to exceed the
maximum credit commitment.


                                       68


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


(9) INCOME TAXES

      A summary of the provision for income tax expense (benefit) is as follows:



                                                                  Year Ended December 31,
                                                                  -----------------------
                                                            2004              2003              2002
                                                        -----------       -----------       -----------

                                                                                   
Federal:
     Current                                            $(6,656,755)      $ 3,404,982       $ 3,323,281
     Deferred                                               778,573           (39,283)         (453,708)
                                                        -----------       -----------       -----------
Provision (benefit) for Federal income tax expense       (5,878,182)        3,365,699         2,869,573
                                                        -----------       -----------       -----------
State:
     Current                                                     --           563,375           510,941
     Deferred                                              (986,105)           (6,725)          (77,665)
                                                        -----------       -----------       -----------
Provision (benefit) for state income tax expense           (986,105)          556,650           433,276
                                                        -----------       -----------       -----------
Provision (benefit) for income tax expense              $(6,864,287)      $ 3,922,349       $ 3,302,849
                                                        ===========       ===========       ===========



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





                                                                   Year Ended December 31,
                                                                   -----------------------
                                                            2004              2003              2002
                                                        -----------       -----------       -----------

                                                                                   
Computed expected tax (benefit), at federal rate        $(6,025,502)      $ 4,177,657       $ 2,437,254
State tax, net of federal deduction benefit                (650,829)          556,650           443,276
Tax-exempt interest                                        (124,125)         (122,275)          (95,564)
Amortization of goodwill                                         --            53,536            54,641
Dividend received deduction                                (135,847)          (42,612)           (5,205)
Capital loss carryforward                                        --          (371,847)               --
Disposition of financially impaired bond                         --          (340,000)               --
Valuation allowance for capital loss carry forward               --                --           256,083
Interest expense not requiring cash                         176,375                --                --
Other, net                                                 (104,359)           11,240           212,364
                                                        -----------       -----------       -----------
Income tax expense (benefit), as reported               $(6,864,287)      $ 3,922,349       $ 3,302,849
                                                        ===========       ===========       ===========


                                       69


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



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



                                                         Year Ended December 31,
                                                         -----------------------
                                                         2004              2003
                                                      -----------       -----------

                                                                  
Deferred tax assets:
     Unpaid losses and loss adjustment expenses       $ 1,369,078       $   501,190
     Unearned premiums                                  3,340,012         1,979,284
     Unrealized loss on investment securities             304,667           196,012
     Allowance for credit losses                          367,232           257,975
     Unearned commissions                                 183,486           189,222
     Accrued class action settlement                      225,780           225,780
     Deferred commissions                                  56,445            75,260
     Goodwill                                              52,130           131,063
     Unearned adjusting income                              9,462            20,456
     Capital loss carryforward - Impairment loss          376,300           376,300
                                                      -----------       -----------
Total deferred tax assets                               6,284,592         3,952,542
                                                      -----------       -----------

Deferred tax liabilities:
     Prepaid Florida Hurricane Catastrophic Fund               --          (222,664)
     Deferred acquisition costs, net                   (2,624,702)         (661,262)
     Depreciation                                          (3,814)          (38,433)
                                                      -----------       -----------
Total deferred tax liabilities                         (2,628,516)         (922,359)
                                                      -----------       -----------
Net deferred tax asset                                $ 3,656,076       $ 3,030,183
                                                      ===========       ===========


      In assessing the net realizable  value of deferred tax assets,  management
considers  whether it is more  likely  than not that some  portion or all of the
deferred tax assets will not be realized.  The ultimate  realization of deferred
tax assets is dependent  upon the generation of future taxable income during the
periods in which  those  temporary  differences  become  deductible.  Management
considers the scheduled  reversal of deferred tax liabilities,  projected future
taxable  income  and tax  planning  strategies  in making  this  assessment.  At
December 31, 2004 and 2003,  based upon the level of historical  taxable  income
and projections for future taxable income over the periods in which the deferred
tax assets are deductible,  management  believes it is more likely than not that
the Company will realize the benefits of these deductible differences.


                                       70


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002



(10) REGULATORY REQUIREMENTS AND RESTRICTIONS

      To retain our  certificate of authority,  the Florida  Insurance Code (the
"Code") requires Federated National and American Vehicle to maintain capital and
surplus equal to the greater of 10 percent of their  liabilities  or a statutory
minimum  capital  and  surplus as defined in the Code.  In 2004,  2003 and 2002,
Federated National and American Vehicle were required to have capital surplus of
$4.0 million, $3.60 million and $3.25 million, each,  respectively.  At December
31, 2004, 2003 and 2002, Federated National's statutory capital surplus was $7.6
million,  $16.7  million and $9.2 million,  respectively.  At December 31, 2004,
2003 and 2002,  American Vehicle had statutory capital surplus of $17.1 million,
$10.7 million and $4.0 million,  respectively.  Further, the companies were also
required to adhere to a prescribed net premium-to-surplus ratio.

      As of December 31, 2004, Federated National was not in compliance with its
requirement to maintain minimum capital surplus  primarily based on the incurred
losses associated with the four hurricanes that occurred in August and September
2004. Under the provisions afforded Federated National according to Statement of
Statutory     Accounting     Principles    No    72    titled    "Surplus    and
Quasi-reorganizations,"  compliance  with this provision was restored.  American
Vehicle  remains in  compliance  with  statutory  minimum  capital  and  surplus
requirement.  The insurance  companies are also required to adhere to prescribed
premium-to-capital  surplus ratios. As of December 31, 2004,  Federated National
did not comply with the prescribed  premium-to-capital  surplus ratio, primarily
based on the incurred  losses  associated with the four hurricanes that occurred
in August and September 2004. Under the provisions  afforded  Federated National
according to Statement of Statutory Accounting Principles No 72, compliance with
this provision was also restored.  American  Vehicle  remains in compliance with
statutory premium-to-capital surplus ratios.

      As of December 31, 2004,  to meet  regulatory  requirements,  we had bonds
with a carrying  value of  approximately  $2,049,000  pledged  to the  Insurance
Commissioner of the State of Florida.

      Under  Florida  law,  a  domestic  insurer  may not pay  any  dividend  or
distribute cash or other property to its shareholders except out of that part of
its  available  and  accumulated  capital  surplus  funds which is derived  from
realized net operating profits on its business and net realized capital gains. A
Florida  domestic  insurer may not make dividend  payments or  distributions  to
shareholders   without  prior  approval  of  the  Florida  Office  of  Insurance
Regulation  if the dividend or  distribution  would exceed the larger of (i) the
lesser of (a) 10  percent of  capital  surplus  (b) net  income,  not  including
realized capital gains, plus a two-year carryforward, (ii) 10 percent of capital
surplus with dividends payable  constrained to unassigned funds minus 25 percent
of  unrealized  capital  gains or (iii) the  lesser of (a) 10 percent of capital
surplus  or (b)  net  investment  income  plus  a  three-year carryforward  with
dividends payable constrained to unassigned funds minus 25 percent of unrealized
capital gains.  Alternatively,  a Florida domestic insurer may pay a dividend or
distribution  without  the  prior  written  approval  of the  Florida  Office of
Insurance Regulation (i) if the dividend is equal to or less than the greater of
(a) 10 percent of the insurer's capital surplus as regards policyholders derived
from  realized net  operating  profits on its business and net realized  capital
gains or (b) the insurer's entire net operating profits and realized net capital
gains derived during the immediate  preceding  calendar  year,  (ii) the insurer
will have policyholder  capital surplus equal to or exceeding 115 percent of the
minimum required  statutory  capital surplus after the dividend or distribution,
(iii)  the  insurer  files a notice of the  dividend  or  distribution  with the
Florida  Office of Insurance  Regulation at least ten business days prior to the
dividend payment or distribution and (iv) the notice includes a certification by
an officer of the insurer  attesting that,  after the payment of the dividend or
distribution,  the insurer will have at least 115 percent of required  statutory
capital  surplus  as to  policyholders.  Except  as  provided  above,  a Florida
domiciled  insurer may only pay a dividend or make a distribution (i) subject to
prior  approval by the Florida  Office of Insurance  Regulation  or (ii) 30 days
after the Florida  Office of Insurance  Regulation  has received  notice of such
dividend  or  distribution  and has not  disapproved  it within  such  time.  No
dividends were declared or paid in 2004, 2003 or 2002. Under these laws, neither
Federated  National nor American  Vehicle would be permitted to pay dividends to
21st Century in 2004.

      In  order  to  enhance  the  regulation  of  insurer  solvency,  the  NAIC
established  risk-based  capital  requirements for insurance  companies that are
designed to assess  capital  adequacy and to raise the level of protection  that
statutory surplus provides for policy holders.  These requirements measure three
major areas of risk facing  property and  casualty  insurers:  (i)  underwriting
risks,  which  encompass the risk of adverse loss  developments  and  inadequate
pricing; (ii) declines in asset values arising from credit risk; and (iii) other
business risks from  investments.  Insurers  having less statutory  surplus than
required will be subject to varying degrees of regulatory  action,  depending on
the  level of  capital  inadequacy.  Based  upon the  2004  statutory  financial
statements  for American  Vehicle,  statutory  surplus  exceeded all  regulatory
action levels  established by the NAIC. Based upon the 2004 statutory  financial
statements for Federated  National,  statutory surplus did not exceed regulatory
action levels established by the NAIC.  Federated National's results required us
to submit a plan containing corrective actions. Federated has submitted its plan


                                       71


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


for corrective action and is currently in discussions with the Florida Office of
Insurance  Regulation  regarding  the  merits of the  action  plan  points.  The
regulatory  action  level  permits  the  insurance   regulators  to  perform  an
examination or other analysis and issue a corrective order.  Federated  National
is scheduled to have its statutorily required triennial  examination during 2005
for the three  years ended  December  31,  2004 to be  performed  by the Florida
Office  of  Insurance  Regulation.  We may be  subject  of  additional  targeted
examinations  or analysis.  These  examinations or analysis may result in one or
more  corrective  orders  being  issued  by  the  Florida  Office  of  Insurance
Regulation.

      The  Florida   Office  of  Insurance   Regulation,   which  follows  these
requirements,  could  require  Federated  National or American  Vehicle to cease
operations in the event they fail to maintain the required statutory capital.

      Based  on Risk  Based  Capital  requirements,  the  extent  of  regulatory
intervention and action increases as the ratio of an insurer's statutory surplus
to its  Authorized  Control  Level  ("ACL"),  as  calculated  under  the  NAIC's
requirements,  decreases.  The first action  level,  the Company  Action  Level,
requires  an insurer  to submit a plan of  corrective  actions to the  insurance
regulators if statutory surplus falls below 200.0% of the ACL amount. The second
action level, the Regulatory Action Level,  requires an insurer to submit a plan
containing corrective actions and permits the insurance regulators to perform an
examination or other analysis and issue a corrective order if statutory  surplus
falls below 150.0% of the ACL amount.  The Authorized  Control Level,  the third
action level,  allows the regulators to  rehabilitate or liquidate an insurer in
addition to the aforementioned  actions if statutory surplus falls below the ACL
amount.  The fourth action level is the Mandatory Control Level,  which requires
the  regulators to  rehabilitate  or liquidate the insurer if statutory  surplus
falls below 70.0% of the ACL amount.  Federated  National's  ratio of  statutory
surplus to its ACL was 125.5%,  434.2% and 274.2% at December 31, 2004, 2003 and
2002, respectively. American Vehicle's ratio of statutory surplus to its ACL was
545.1%, 585.2% and 401.6% at December 31, 2004, 2003 and 2002, respectively.

      The NAIC has  also  developed  Insurance  Regulatory  Information  Systems
("IRIS")  ratios to assist state insurance  Department of Financial  Services in
identifying companies which may be developing  performance or solvency problems,
as signaled by significant  changes in the companies'  operations.  Such changes
may not necessarily result from any problems with an insurance company,  but may
merely  indicate  changes in certain ratios outside the ranges defined as normal
by the NAIC.  When an insurance  company has four or more ratios falling outside
"usual  ranges," state  regulators may  investigate to determine the reasons for
the variance and whether corrective action is warranted.

      As of December  31,  2004,  Federated  National  was outside  NAIC's usual
ranges with  respect to its IRIS tests on seven out of twelve  ratios.  With the
exception of two of these test results, all of test results can be attributed to
the significant  degradation of Policyholders'  Surplus stemming from the losses
incurred  relative to its  homeowner s' line of business as a result of the four
hurricanes that affected Florida in August and September of 2004.  Change in Net
Writings and Two-Year  Reserve  Development  to  Policyholders'  Surplus was the
results of test ratios that do not employ Policyholders' Surplus.

      As of December  31,  2003,  Federated  National  was outside  NAIC's usual
ranges with  respect to its IRIS tests on five out of twelve  ratios.  The first
ratio relates to a larger than expected change in net writings, the second ratio
relates to higher surplus growth that stemmed from the Parent company's  capital
contributions  totaling $3.9 million during the year and the third ratio relates
to an investment yield that was less than expected.  The fourth and fifth ratios
involved the one and two year reserve development to policyholder surplus ratios
that were in excess of the "usual  ranges"  and relate to modest,  but  adverse,
development which incurred in 2003 relating to 2002 and 2001 loss reserves.

      As of December 31, 2004,  American Vehicle was outside NAIC's usual ranges
for  three out of  twelve  ratios.  The first  ratio  relates  to a larger  than
anticipated  change in net writings,  the second ratio relates to higher surplus
growth that stemmed from the Parent  company's  capital  contributions  totaling
$4.3 million during the year and the third ratio relates to an investment  yield
that was slightly less than expected.

      As of December 31, 2003,  American Vehicle was outside NAIC's usual ranges
for  three out of  twelve  ratios.  The first  ratio  relates  to a larger  than
anticipated  change in net writings,  the second ratio relates to higher surplus
growth that stemmed from the Parent  company's  capital  contributions  totaling
$5.9 million during the year and the third ratio relates to an investment  yield
that was slightly less than expected.

      We  do  not  currently  believe  that  the  Florida  Office  of  Insurance
Regulation will take any significant  action with respect to Federated  National
or American Vehicle regarding the IRIS ratios,  though there can be no assurance
that will be the case.


                                       72


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      The table  below  reflect the range and test  results  for both  Federated
National  and  American  Vehicle for the years ended  December 31 2004 and 2003,
respectively.



                                                                 Unusual Values
                                                                   Equal to or       Federated National      American Vehicle
                                                                  Over      Under    2004         2003       2004       2003
                                                                  ----      -----    ----         ----       ----       ----
                                                                                                         
Gross Premiums to Ploicyholders' Surplus                           900       --      997.0 *      294.6      154.1      261.7
Net Premium to Policyholders' Surplus                              300       --      786.7 *      229.5      157.0      182.2
Change in Net Writtings                                             33      -33       56.2 *       35.2 *     37.3 *     58.7 *
Surplus Aid to Policyholders' Surplus                               15       --       0.03          6.8          0        9.7
Two-year Overall Operating Ratio                                   100       --      130.1 *       83.3       83.3       86.7
Investment Yield                                                   10.0     4.5        5.1          2.7 *      3.3 *      3.5 *
Change in Policyholders' Surplus                                    50      -10      -31.9 *       72.0 *     64.3 *    165.3 *
Liabilities to Liquid Assets                                       105       --      183.3 *       71.9       63.1       71.2
Gross Agents' Balance to Policyholders' Surplus                     40       --          0          6.9        9.8       11.9
One-Year Reserve Development to Policyholders' Surplus              20       --          6.4       22.5 *      5.8       17.1
Two-Year Reserve Development to Policyholders' Surplus              20       --       22.4 *       28.1 *     11.5        0.9
Estimated Current Reserve Deficiency to Policyholdes' Surplus       25       --       -200.4       13.6        7.9       19.1

                                                            * indicates an unusual value


      GAAP differs in some  respects  from  reporting  practices  prescribed  or
permitted by the Florida Office of Insurance  Regulation.  Federated  National's
statutory  capital and surplus was $7.6 million and $16.7 million as of December
31,  2004 and 2003,  respectively.  Federated  National's  statutory  net income
(loss) was ($25.4) million,  $2.9 million and ($2.1) million for the years ended
December 31, 2004, 2003 and 2002,  respectively.  Federated National's statutory
non-admitted  assets were approximately $8.9 million and $504,000 as of December
31, 2004 and 2003, respectively.

      American  Vehicle's  statutory  capital and surplus was $17.1  million and
$10.7 million as of December 31, 2004 and 2003, respectively. American Vehicle's
statutory net income was approximately $2,032,000, $848,000 and $135,000 for the
years ended December 31, 2004, 2003 and 2002  respectively.  American  Vehicle's
statutory  non-admitted  assets were  approximately  $167,000 and $161,000 as of
December 31, 2004 and 2003, respectively.

(11) COMMITMENTS AND CONTINGENCIES

      In June  2000,  a lawsuit  was filed  against  us, our  directors  and our
executive officers seeking  compensatory damages in an undisclosed amount on the
basis of allegations that our amended  registration  statement dated November 4,
1998 was inaccurate and misleading  concerning the manner in which we recognized
ceded  insurance  commission  income,  in violation of Sections 11 and 15 of the
Securities Act of 1933 and Sections  10(b) and 20(a) of the Securities  Exchange
Act of 1934.  The lawsuit was filed in the United States  District Court for the
Southern  District  of  New  York.  The  plaintiff  class  purportedly  included
purchasers of our common stock between November 5, 1998 and August 13, 1999. The
Court granted the plaintiffs class status. Specifically,  the plaintiffs alleged
that we  recognized  ceded  commission  income on a written  basis,  rather than
amortized on a pro rata basis.  The plaintiffs  allege that this was contrary to
the  Statement of  Financial  Accounting  Concepts  Nos. 1, 2 and 5. We believe,
however,  that the lawsuit is without merit and we have vigorously  defended the
action, because we reasonably relied upon outside subject matter experts to make
these  determinations  at the  time.  We have  also  since  accounted  for ceded
commission on a pro rata basis and have done so since these matters were brought
to our  attention  in 1998.  Nevertheless,  we have also  continued  to actively
participate  in settlement  negotiations  with the plaintiffs and have agreed to
settle the case. The parties have  negotiated the final terms of a Memorandum of
Understanding,  which was executed by the parties and then approved by the court
in late February  2005. We have reserved and charged  against forth quarter 2003
earnings  $600,000 for the potential  settlement  and associated  costs.  During
2004,  and  through  the date of the  auditor's  report,  no  adjustment  to the
original reserve has been deemed necessary.

      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.


                                       73


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      As a direct  premium  writer in the State of Florida,  we are  required to
participate  in  certain   insurer   solvency   pools  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. We were assessed  $258,000
for the year ended December 31, 2002. There was no assessment made for the years
ended December 31, 2004 or 2003.

      Federated  National and American  Vehicle are also required to participate
in an insurance apportionment plan under Florida Statutes 627.351 referred to as
a Joint Underwriting Association Plan ("JUA Plan"). The "JUA Plan" shall provide
for the equitable  apportionment of any profits realized, or losses and expenses
incurred,  among participating insurers. In the event of an underwriting deficit
incurred  by the  "JUA  Plan"  and the  deficit  is not  recovered  through  the
policyholders  in the "JUA  Plan",  such  deficit  shall be  recovered  from the
companies  participating  in the  "Plan" in the  proportion  that the net direct
premiums of each such member written during the preceding  calendar year bear to
the  aggregate net direct  premiums  written in this state by all members of the
joint underwriting "JUA Plan".

      During the year ended  December 31, 2004  Federated  National and American
Vehicle were  assessed  $362,121 and $120,009,  respectively.  These charges are
contained in Operating and Underwriting Expenses in the Statement of Operations.
Future assessments by this association are undeterminable at this time.

      See Note 25,  "Subsequent  Events," for a discussion on the possibility of
an assessment  imposed by Florida's  state run insurer of last resort,  Citizens
Property Insurance Corporation.

(12) LEASES

      Effective  December 31, 2004 we sold our interest in our agency operations
which relieved us from our lease obligations.  Until then we leased office space
under various lease  agreements  with expiration  dates through  September 2007.
Rental expense  associated  with operating  leases was charged to expense in the
period  incurred.  Rental  expenses for 2004,  2003 and 2002 were  approximately
$840,000, $733,000 and $756,000, respectively, and are included in operating and
underwriting expenses in the accompanying consolidated statements of operations.

      At December 31, 2004, there are no minimum aggregate rental commitments.

(13) RELATED PARTY TRANSACTIONS

      One of our directors is a partner at a law firm that handles the Company's
claims  litigation.  Fees  paid to  this  law  firm  amounted  to  approximately
$327,000,  $219,000 and $266,000 for the years ended December 31, 2004, 2003 and
2002, respectively.

      In September  2002,  one of our  directors,  who is also on the Investment
Committee, began to oversee an investment account for the Company. The oversight
arrangement  was  subsequently  terminated  in March of 2003.  Fees paid to this
director in 2003 and 2002 totaled $7,500 and $1,250, respectively.


(14) NET INCOME (LOSS) PER SHARE

      Net income  (loss) per share is computed by dividing net income  (loss) by
the  weighted  average  number  of  shares of  common  stock  and  common  stock
equivalents  outstanding  during  the  periods  presented.  Options  granted  in
accordance  with the stock  option plan were  anti-dilutive  for the years ended
December 31, 2004 and 2002 and were not taken into account in the computation.

      At  December  31,  2003 and  2002,  warrants  issued to two  employees  to
purchase 7,800, and 62,500 shares, respectively, of common stock at $9 per share
were outstanding. During 2003, 54,700 warrants were exercised.

      At December 31, 2002,  warrants sold as part of an underwriting  agreement
at a price of $0.0001 per  warrant,  entitling  the holder to  purchase  125,000
shares of common stock at $10.86 per share, were  outstanding.  During 2003, all
of the 125,000 shares were exercised.  All of these potential common shares were
excluded  from the  computation  of net income per share for 2002 because  their
inclusion would have an anti-dilutive effect.


                                       74


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      A summary of the numerator and  denominator of the basic and fully diluted
(2003 only) net income (loss) per share is presented below:



                                                  Income (Loss)     Shares Outstanding    Per-share
                                                   (Numerator)         (Denominator)       Amount
                                                   ------------          ---------         ------
                                                                                  
For the year ended December 31, 2004:
     Basic net income (loss) per share             $(10,857,775)         5,847,102         $(1.86)
                                                   ============          =========         ======
     Fully diluted income (loss) per share         $(10,857,775)         5,847,102         $(1.86)
                                                   ============          =========         ======

For the year ended December 31, 2003:
     Basic net income per share                    $  8,364,876          4,756,972         $1.76
                                                   ============          =========         ======
     Fully diluted income per share                $  8,364,876          5,022,938         $1.67
                                                   ============          =========         ======

For the year ended December 31, 2002:
     Basic net income per share                    $  4,570,201          4,508,439         $1.01
                                                   ============          =========         ======
     Fully diluted income per share                $  4,570,201          4,508,439         $1.01
                                                   ============          =========         ======


(15) SEGMENT INFORMATION

      We operate  principally in two business  segments  consisting of insurance
and financing.  The insurance segment consists of underwriting through Federated
National  and  American  Vehicle,  managing  general  agent  operations  through
Assurance MGA, claims  processing  through Superior  Adjusting and marketing and
distribution  through  independent agents. The insurance segment sells primarily
standard and nonstandard personal automobile insurance,  homeowners'  insurance,
mobile home property and casualty  insurance,  and general liability  insurance.
This segment includes  substantially all aspects of the insurance,  distribution
and claims process.  The financing segment consists of premium financing through
Federated  Premium Finance.  The financing segment provides premium financing to
our  insureds  and third party  carrier  insureds,  and is marketed  through our
distribution network.

      The accounting policies of the segments are the same as those described in
the  summary of  significant  accounting  policies  and  practices.  We evaluate
business segments based on GAAP pretax operating  earnings.  Corporate  overhead
expenses are not allocated to business segments. Transactions between reportable
segments are accounted for at fair value.

      Operating  segments that are not  individually  reportable are included in
the "All Other"  category,  which  includes the operations of the parent holding
company.



                                       75


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      Information  regarding  components  of  operations  for  the  years  ended
December 31, 2004, 2003 and 2002 follows:



                                                           Years Ended December 31,
                                                           ------------------------
                                                   2004               2003               2002
                                               ------------       ------------       ------------
                                                                            
Total Revenues
     Insurance Segment:
        Earned premium                         $ 66,241,344       $ 42,284,795       $ 26,914,565
        Investment income                         4,160,658          5,815,074          1,253,215
        Adjusting income                          5,771,141          4,172,084          2,886,838
        MGA fee income                            2,039,783          2,328,681          1,970,226
        Commision income                          2,240,386          3,532,108            670,918
        Other income                                434,819           (625,157)            93,719
                                               ------------       ------------       ------------
     Total insurance revenue                     80,888,131         57,507,585         33,789,481
                                               ------------       ------------       ------------

     Financing Segment:
        Premium finance income                    2,748,149          2,622,745          3,657,942
        Pay day advances                                 --                 --             56,584
                                               ------------       ------------       ------------
     Total financing revenue                      2,748,149          2,622,745          3,714,526
                                               ------------       ------------       ------------

     All other segment revenue                    2,918,690          3,224,734          1,445,606
                                               ------------       ------------       ------------

Total operating revenue                          86,554,970         63,355,064         38,949,613
     Intercompany eliminations                   (9,983,546)        (9,766,646)        (4,958,477)
                                               ------------       ------------       ------------
Total revenues                                 $ 76,571,424       $ 53,588,418       $ 33,991,136
                                               ============       ============       ============


Earnings (loss) before income taxes:
     Insurance segment                         $(24,436,582)      $ 13,241,545       $  7,563,465
     Financing segment                            1,059,107            622,740          1,421,302
     All other segments                           1,171,835           (212,455)          (199,414)
                                               ------------       ------------       ------------
Total earnings (loss) before income taxes      $(22,205,639)      $ 13,651,830       $  8,785,353
                                               ============       ============       ============


      Information  regarding  total  assets  as of  December  31,  2004 and 2003
follows:

                                      Years Ended December 31,
                                      ------------------------
                                      2004               2003
                                  -------------      -------------
Assets by segment
   Insurance segment              $ 134,894,764      $  93,301,125
   Financing segment                  8,536,786         10,105,548
   All other segments                15,460,463          3,602,606
                                  -------------      -------------
Total assets by segment             158,892,013        107,009,279
   Intercompany eliminations          4,709,359           (313,686)
                                  -------------      -------------
Total assets by segment           $ 163,601,372      $ 106,695,593
                                  =============      =============


                                       76


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      Supplemental segment information as of and for the year ended December 31,
2004, 2003 and 2002 follows:



                                                                    Years Ended December 31,
                                                                    ------------------------
                                                              2004               2003               2002
                                                          ------------       ------------       ------------
                                                                                       
Insurance segment
     Deferred policy acquisition costs -                  $  6,957,168       $  1,739,685       $      7,721
     Reserves for unpaid loss and LAE                     $ 46,570,679       $ 24,570,198       $ 16,983,756
     Unearned premiums                                    $ 50,152,711       $ 34,122,663       $ 28,934,486
     Earned premiums                                      $ 66,241,344       $ 44,877,230       $ 29,393,004
Net investment income (loss)
     Insurance segment                                    $  4,139,178       $ 1,624,216        $  1,253,765
     All other segments                                         21,480                 --                 --
                                                          ------------       ------------       ------------
Total net investment income (loss)                        $  4,160,658       $  1,624,216       $  1,253,765
                                                          ============       ============       ============

Claims and adjustment expenses incurred related to
current years - Insurance segment                         $ 76,423,059       $ 26,274,932       $ 15,896,251
                                                          ============       ============       ============

Claims and adjustment expenses incurred related to
prior years - Insurance segment                           $ (1,430,278)      $  1,234,047       $     90,874
                                                          ============       ============       ============

Amortization of deferred acquisition costs -
Insurance segment
     Insurance segment                                    $ 10,525,334       $  2,436,813       $    776,171
     Financing segment                                         137,861            212,285           (237,851)
     Eliminations                                           (2,240,386)        (3,503,376)        (2,602,634)
                                                          ------------       ------------       ------------
Total amortization of deferred acquisition costs:         $  8,422,808       $   (854,278)      $ (2,064,314)
                                                          ============       ============       ============

Paid claims and claim adjustment expense - Insurance
segment                                                   $ 52,645,741       $ 21,836,470       $ 13,057,571
                                                          ============       ============       ============

Net premiums written - Insurance segment                  $ 85,176,108       $ 50,900,790       $ 35,271,201
                                                          ============       ============       ============



(16) STOCK COMPENSATION PLANS

      In December 1998, we issued  warrants to two employees to purchase  62,500
shares of common stock of the Company at $9 per share.  The estimated fair value
of  these  warrants  at the  date  issued  was  approximately  $226,000  using a
Black-Scholes  option  pricing model and  assumptions  similar to those used for
valuing the  Company's  stock  options as  described  below.  During  2004,  all
remaining warrants were exercised.

      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 includes  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
December 31, 2004, we had outstanding  exercisable  options to purchase  198,275
shares.

      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, and, as
of December 31, 2004, we had outstanding  exercisable options to purchase 15,000
shares.


                                       77


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      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,  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, we are authorized to
grant options to purchase up to 1,800,000 common shares, and, as of December 31,
2004, we had outstanding exercisable options to purchase 906,300 shares.

      Activity in our stock  option plans for the period from January 1, 2002 to
December 31, 2004 is summarized below:



                                   -------------------------------- ----------------------------- --------------------------------
                                              1998 PLAN                 2001 FRANCHISEE PLAN                 2002 PLAN
                                   -------------------------------- ----------------------------- --------------------------------
                                                       Weighted                      Weighted                       Weighted
                                                        Average                       Average                        Average
                                                        Option                        Option                         Option
                                      Number of        Exercise      Number of        Exercise     Number of         Exercise
                                       Shares            Price        Shares           Price        Shares            Price
                                   ---------------   -------------- -----------    -------------- -----------   ------------------
                                                                                                   
Outstanding at January 1, 2002          618,858         $ 6.67        125,745         $ 6.67               --
Granted                                 342,398         $ 6.67             --                       1,174,500         $ 8.91
Exercised                                (1,500)                                                           --             --
Cancelled                              (158,249)        $ 6.67         (8,512)        $ 6.67          (84,000)        $ 9.02
                                      ---------                     ---------                       ---------
Outstanding at December 31, 2002        801,507         $ 6.67        117,233         $ 6.67        1,090,500         $ 8.90
Granted                                      --         $ 6.67         15,000         $ 9.17          152,250         $10.51
Exercised                              (375,371)        $ 6.67        (92,273)        $ 6.67         (216,900)        $ 8.57
Cancelled                               (17,606)        $ 6.67             --                         (87,750)        $ 9.37
                                      ---------                     ---------                       ---------
Outstanding at December 31, 2003        408,530         $ 6.67         39,960         $ 7.61          938,100         $ 9.20
Granted                                      --                                           --          178,750         $18.02
Exercised                              (193,755)        $ 6.67        (24,960)        $ 6.67         (136,300)        $ 9.16
Cancelled                               (16,500)        $ 6.67             --                         (74,250)        $10.59
                                      ---------                     ---------                       ---------
Outstanding at December 31, 2004        198,275         $ 6.67         15,000         $ 9.17          906,300         $10.74
                                      =========                     =========                       =========


      Options outstanding as of December 31, 2004 are exercisable as follows:



                         ---------------------------------- ---------------------------- ---------------------------------
                                     1998 PLAN                 2001 FRANCHISEE PLAN                 2002 PLAN
                         ---------------------------------- ---------------------------- ---------------------------------
                                              Weighted                      Weighted                     Weighted Average
                           Number of       Average Option     Number      Average Option  Number of       Option Exercise
                            Shares         Exercise Price   of Shares     Exercise Price   Shares             Price
Options Exercisable at:  --------------    ---------------- ----------    -------------- -----------    ------------------
                                                                                            
   December 31, 2004       141,275               $6.67        15,000         $  6.67       491,126            $8.90
   December 31, 2005        28,500               $6.67            --         $  6.67       160,874            $8.90
   December 31, 2006        28,500               $6.67            --         $  6.67        89,150            $8.90
   December 31, 2007                             $6.67            --         $  6.67        89,150            $8.90
   December 31, 2008            --               $  --            --         $  6.67        44,300            $8.90

Thereafter                      --               $  --            --         $  6.67        31,700            $8.90
                           -------                            ------                       -------

Total options
exercisible                198,275                            15,000                       906,300
                           =======                            ======                       =======


      We continue to account for  stock-based  compensation  using the intrinsic
value method  prescribed  by Accounting  Principles  Board Opinion No. 25, under
which no  compensation  cost for stock  options is  recognized  for stock option
awards  granted to employees  at or above fair market  value.  Had  compensation
expense for our stock  compensation  plan been determined based upon fair values
at the grant dates for awards  under the plan in  accordance  with SFAS No. 123,
our net income  (loss) and net income  (loss) per share would have been  reduced
(increased) to the pro forma amounts  indicated  below.  Additional stock option
awards are anticipated in future years.


                                       78



                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002




                                           For the year ending December 31,
                                           --------------------------------
                                       2004              2003            2002
                                  --------------    --------------  --------------
                                                           
Net Income (loss) as reported .   $  (10,857,776)   $    8,364,876  $    4,570,201
Compensation, net of tax effect        7,277,028         4,783,080       1,750,528
                                  --------------    --------------  --------------
Pro forma net income (loss) ...   $  (18,134,804)   $    3,581,796  $    2,819,673
                                  ==============    ==============  ==============
Net income (loss) per share
As reported - Basic ...........   $        (1.86)   $         1.76  $         1.01
As reported - Diluted .........   $        (1.86)   $         1.67  $         1.01
Pro forma - Basic .............   $        (3.10)   $         0.75  $         0.63
Pro forma - Diluted ...........   $        (3.10)   $         0.71  $         0.63


      The weighted  average fair value of options  granted during 2004, 2003 and
2002 estimated on the date of grant using the Black-Scholes option-pricing model
was $6.13 to $18.26; $4.21 to $8.31 and $1.45 to $5.37,  respectively.  The fair
value of options  granted is estimated on the date of grant using the  following
assumptions:



                              December 31, 2004   December 31, 2003    December 31, 2002
                              -----------------   -----------------    -----------------
                                                               
Dividend yield                 2.24% to 3.19%       1.96% to 2.10%      .073% to 3.50%
Expected volatility           96.76% to 103.20%   105.91% to 108.73%        120.22%
Risk-free interest rate        2.13% to 3.25%       2.30% to 3.94%      4.49% to 5.82%
Expected life (in years)        3.00 to 3.60         3.00 to 6.36        4.83 to 7.02


      Summary  information  about the  Company's  stock options  outstanding  at
December 31, 2004:



                                                            Weighted Average     Weighted
                          Range of       Outstanding at        Contractual        Average            Exercisable at
                       Exercise Price   December 31, 2004   Periods in Years    Exercise Price     December 31, 2004
                       --------------   -----------------   ----------------       -----            -----------------
                                                                                          
1998 Plan                  $6.67              198,275             1.99             $6.67                 141,275
2001 Franchise Plan    $6.67 to $9.17          15,000             3.21             $9.17                  15,000
2002 Plan              $8.33 - $20.00         906,300             2.60             $10.74                491,126


(17) EMPLOYEE BENEFIT PLAN

      We have  established  a profit  sharing plan under  Section  401(k) of the
Internal  Revenue Code. This plan allows eligible  employees to contribute up to
15 percent of their  compensation  on a pre-tax basis,  not to exceed  statutory
limits.  For the years  ended  December  31,  2004,  2003 and  2002,  we did not
contribute to the plan. Our contributions, if any, are vested incrementally over
five years.

(18) ACQUISITIONS

      We made no acquisitions during 2004.

(19) COMPREHENSIVE INCOME (LOSS)

      Reclassification adjustments related to the investment securities included
in  comprehensive  income (loss) for the years ended December 31, 2004, 2003 and
2002 are as follows:


                                       79



                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002




                                                                            December 31,
                                                                            ------------
                                                                   2004         2003         2002
                                                                 ---------    ---------    ---------
                                                                                  
Unrealized holdings net gains (losses) arising during the year   $(809,639)   $(520,893)   $(103,764)

Reclassification adjustment for (gains) losses included in net
income                                                             520,893      227,091       90,197
                                                                 ---------    ---------    ---------
                                                                  (288,746)    (293,802)     (13,567)

Tax effect                                                         108,655      196,012        4,613
                                                                 ---------    ---------    ---------
Net depreciation on investment securities                        $(180,091)   $ (97,790)   $  (8,954)
                                                                 =========    =========    =========



(20) AUTHORIZATION OF PREFERRED STOCK

         Our Amended and Restated Articles of Incorporation authorize the
issuance of one million shares of preferred stock with designations, rights and
preferences determined from time to time by our board of directors. Accordingly,
our board of directors is empowered, without shareholder approval, to issue
preferred stock with dividends, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
common stock. We have not issued preferred shares as of December 31, 2004.

(21)  21ST CENTURY HOLDING COMPANY

      The following  summarizes  the major  categories  of 21st Century  Holding
Company's (parent company only) financial statements:



          ASSETS                                          2004            2003
                                                      ------------    ------------

                                                                
Cash and cash equivalents                             $  5,641,910    $    547,760
Investments and advances to subsidiaries                40,753,944      28,893,129
Deferred income taxes                                    7,917,385         824,171
Income taxes recoverable                                (8,674,526)        765,634
Property, plant and equipment, net                         637,641         699,919
Loan costs, net of amortization                            837,665         430,803
Other assets                                             6,123,042         258,280
                                                      ------------    ------------
         Total assets                                 $ 53,237,061    $ 32,419,696
                                                      ============    ============

         LIABILITIES AND SHAREHOLDERS' EQUITY

Subordinated debt                                     $ 16,875,000    $  6,875,000
Dividends payable                                          442,183         422,890
Other liabilities                                        7,118,905         909,171
                                                      ------------    ------------
         Total liabilities                              24,436,088       8,207,061
                                                      ------------    ------------

Shareholders' equity:
     Common stock                                           67,448          40,889
     Additional paid-in capital                         26,310,147      21,181,048
     Accumulated other comprehensive deficit               309,280        (525,506)
     Retained earnings                                   3,893,743       5,283,978
     Treasury stock                                     (1,779,645)     (1,767,774)
                                                      ------------    ------------
         Total shareholders' equity                     28,800,973      24,212,635
                                                      ------------    ------------
         Total liabilities and shareholders' equity   $ 53,237,061    $ 32,419,696
                                                      ============    ============



                                       80



                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


Condensed Statements of Operations


                                                     2004            2003            2002
                                                 ------------    ------------    ------------
                                                                        
Revenue:
     Management fees from subsidiaries           $  1,992,000    $  1,993,500    $  1,885,000
     Equity in income (loss) of subsidiaries      (16,433,198)     12,871,893       5,605,148
     Net investment income (loss)                      21,480             308              --
     Other income                                      95,520         336,194          95,283
                                                 ------------    ------------    ------------
        Total revenue                             (14,324,198)     15,201,895       7,585,431
                                                 ------------    ------------    ------------


Expenses:
     Advertising                                      519,245         315,125         140,287
     Salaries and wages                               716,229         519,456         457,856
     Legal fees                                       232,971         855,573          50,304
     Interest expense and amortization of loan
     costs                                            909,162         403,952           8,853
     Other expenses                                 1,020,257         836,921         674,654
                                                 ------------    ------------    ------------
        Total expenses                              3,397,864       2,931,027       1,331,954
                                                 ------------    ------------    ------------
Income (loss) before provision for income tax
expense and extraordinary gain                    (17,722,062)     12,270,867       6,253,477
Benefit (expense) for income tax                    6,864,287      (3,905,992)     (1,683,276)
                                                 ------------    ------------    ------------
     Net income (loss)                           $(10,857,775)   $  8,364,875    $  4,570,201
                                                 ============    ============    ============


Condensed Statements of Cash Flow



                                                                      2004            2003            2002
                                                                  ------------    ------------    ------------
                                                                                         
Cash flow from operating activities:
Net income (loss)                                                 $(10,857,775)   $  8,364,876    $  4,570,201
Adjustments to reconcile net income (loss) to net cash provided
  by operating activities:
     Equity in income (loss) of subsidiaries                        32,632,932      (3,096,893)     (2,505,148)
     Depreciation and amortization of property plant and
     equipment                                                          94,257         138,151         126,295
     Common Stock issued for interest on Notes                         356,250         112,500              --
     Deferred income tax expense                                    (7,093,214)        (24,094)       (497,655)
     Income tax recoverable                                          9,440,160        (765,634)             --
     Dividends payable                                                  19,293        (242,943)       (119,079)
     Changes in operating assets and liabilities:
        Other assets                                                (5,864,762)        154,012          66,220
        Other Liabilities                                            6,209,732         497,197         (11,388)
                                                                  ------------    ------------    ------------
Net cash provided by operating activities                           24,936,873       5,137,172       1,629,446
                                                                  ------------    ------------    ------------

Cash flow from investing activities:

     Purchases of property and equipment                                31,979         (17,604)        (13,322)

     Increased capital of subsidiaries                             (16,199,733)     (9,775,000)     (3,100,000)
                                                                  ------------    ------------    ------------
Net cash provided by (used in) investing activities                (16,167,754)     (9,792,604)     (3,113,322)
                                                                  ------------    ------------    ------------

Cash flow from financing activities:
     Dividends paid                                                 (1,882,399)       (999,106)       (449,475)
     Subordinated debt                                              12,500,000       7,500,000              --
     Stock options exercised                                         2,856,250       6,868,646              --
     Purchases of treasury stock                                       (11,871)       (681,842)       (245,646)
     Advances from (to) subsidiaries                               (20,135,929)     (7,506,855)      2,197,493
                                                                  ------------    ------------    ------------
Net cash provided by (used in) financing activities                 (6,673,949)      5,180,843       1,502,372
                                                                  ------------    ------------    ------------

Net increase in cash and cash equivalents                            2,095,170         525,411          18,496
Cash and cash equivalents at beginning of year                         547,760          22,349           3,853
                                                                  ------------    ------------    ------------
Cash and cash equivalents at end of year                          $  2,642,930    $    547,760    $     22,349
                                                                  ============    ============    ============



                                       81


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


(22) SUBORDINATED DEBT

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

      The  July  2003  Notes  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  408,050.  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  believes  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  believes  that the
September 2004 Warrants had zero value at the date of issuance.

      The terms of the 2004  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, the quarterly  payments of principal and interest due in shares
of our Common Stock and in accordance with the contractual  computations  issued
common stock as follows:


                                       82


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


Quarterly payment due date    2004      2003
--------------------------   -------   -------
January 31,                   54,014        --
April 30,                     53,729        --
July 31,                      49,965        --
October 31,                   69,200    61,792
                             -------   -------
Total common stock issued    226,908    61,792
                             =======   =======

      For the July  2003  Notes,  the first  quarterly  principal  and  interest
payments totaling approximately $0.7 million per payment were due on October 31,
2003 and quarterly  thereafter for three years with the last  installment due on
July 31,  2006.  The  scheduled  loan  payments  for the next three years are as
follows:

For the period
--------------
Year ending December 31, 2005   $2,500,000
Year ending December 31, 2006    1,875,000
                                ----------
Total                           $4,375,000
                                ==========


      For the September 2004 Notes,  the first quarterly  principal and interest
payments, totaling approximately $1.2 million per payment, is due beginning next
year on January  31,  then  quarterly  thereafter  for three years with the last
installment  due on September 30, 2007. The scheduled loan payments for the next
three years are as follows:

For the period
--------------
Year ending December 31, 2005   $ 4,166,668
Year ending December 31, 2006     4,166,668
Year ending December 31, 2007     4,166,664
                                -----------
                                $12,500,000
                                ===========

(23) SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS


                                       83


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002




                                         Amortization
       Loss and loss    Loss and loss     of deferred    Paid losses
         adjustment       adjustment        policy        and loss
          expenses         expenses       acquisition    adjustment    Net premiums
        CURRENT YEAR      PRIOR YEAR       expenses       expenses      written
       ---------------   -------------   -----------    ------------   -----------

                                                        
2004   $    76,423,059   $  (1,430,278)  $ 8,422,808    $ 52,645,741   $85,176,108
       ===============   =============   ===========    ============   ===========

2003   $    26,274,932   $   1,234,047   $  (854,279)   $ 21,836,470   $50,900,790
       ===============   =============   ===========    ============   ===========

2002   $    15,896,251   $      90,874   $(2,064,314)   $ 13,057,571   $35,271,201
       ===============   =============   ===========    ============   ===========




                     Deferred                             Discount, if
                      policy       Reserves for losses   any, deducted                                         Net
Affiliation        acquisition     and loss adjustment   from previous      Unearned       Net premiums     investment
with registrant       costs             expenses             column         premiums          earned          income
                  --------------- ---------------------- --------------- ---------------- --------------- ---------------

Consolidated
Property and
Casualty
Subsidiaries

                                                                                           
2004                  $6,957,168        $46,570,679            $ --        $50,152,711       $66,241,344     $3,171,620
                      ==========        ===========            ====        ===========       ===========     ==========

2003                  $1,739,685        $24,570,198            $ --        $34,122,663       $42,284,795     $1,624,216
                      ==========        ===========            ====        ===========       ===========     ==========

2002                      $7,721        $16,983,756            $ --        $28,934,486       $26,914,565     $1,253,765
                          ======        ===========            ====        ===========       ===========     ==========



(24) DISCONTINUED OPERATIONS

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

      Additionally,  on the same day,  the Company  also  announced a definitive
agreement to sell the assets of its  subsidiaries,  Federated Agency Group, Inc.
and Fed USA,  Inc.,  to  affiliates  of  Affirmative  Insurance  Holdings,  Inc.
("Affirmative")(Nasdaq: AFFM) for approximately $9.5 million. The sale of assets
to Affirmative  closed on December 31, 2004, at which time the Company  received
$7 million cash,  with up to an additional $2.5 million due in the first quarter
of 2006, subject to certain  performance  criteria are met. The company believes
it will meet these  criteria  during  2005.  Assets and  liabilities,  including
goodwill,  that were sold  totaled  approximately  $2.1  million on December 31,
2004.

      The company has  recognized  a $2.5  million  receivable  relating to this
transaction and it is reflected in Other Assets.  Concurrently,  the company has
also  recognized a $2.5 million  deferred gain relating to the same  transaction
and it is  reflected  as a  liability  titled  Deferred  income on  discontinued
operations.

(25) SUBSEQUENT EVENTS

      Subsequent to December 31, 2004 and the date of  presentation  the Company
received notice from the Alabama  Department of Insurance that American  Vehicle
has been admitted and licensed to underwrite  personal automobile and commercial
general liability lines of insurance.

      On or about January 31, 2005 the Company  issued  159,407 shares of common
stock  in  payment  of the  principal  and  interest  due on the  July  2003 and
September 2004 Notes for the three months ended January 31, 2005.


                                       84


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 2004, 2003, 2002


      On February 18, 2005,  Florida's Citizens Property Insurance  Corporation,
the  state-run  insurer of last  resort,  announced  that it will likely need to
impose an  assessment  on all  property  insurers  in Florida  pursuant to their
deficit  resulting from the claims from 2004's four hurricanes.  The assessment,
if imposed,  would be based on our homeowner premiums written to total homeowner
premiums written statewide by all insurers.  The assessment would then be passed
on  to  all  property  policyholders.  An  estimate  of  our  assessment,  if an
assessment is made, is undeterminable at this time.

      21st Century  Holding  Company (the  "Company")  completed the transaction
contemplated  by the Stock Purchase and Redemption  Agreement (the  "Agreement")
dated January 3, 2005 with Express Tax Service,  Inc.  ("ETS"),  Robert J. Kluba
("Kluba") and Robert H. Taylor  ("Taylor");  together with Kluba, the "Buyers").
The  Company  was the  beneficial  and  record  owner of 80% of the  issued  and
outstanding stock of ETS, which in turn owned 100% of the issued and outstanding
stock of EXPRESSTAX Franchise Corporation ("ETFC").  Kluba was the President and
a director of ETS and ETFC, and the owner of the remaining 20% of the issued and
outstanding stock of ETS. The sale of the assets closed on January 13, 2005 with
an  effective  date of  January  1,  2005.  For more  information,  see Note 24,
"Discontinued Operations."

      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 ETS, less $348,649 representing  intercompany  receivables owed to ETS 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 ETS and ETFC for
five years following the closing.

      In  connection  with  the  transaction,   the  Company  has  extended  the
expiration dates for the 75,000  outstanding stock options previously granted to
Kluba and the 30,000  outstanding  stock options  previously  granted to 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  shall be  exercisable  for the  six-month  period  following the
closing.

      Effective  March 1, 2005,  Federated  National  sold its  interest  in the
Lauderdale  Lakes  property  used by the  company  as its  headquarters  to 21st
Century at the property's net book value of approximately $2.9 million.

      As a result of a $6.1 million capital  contribution  made during the first
quarter of 2005 from 21st  Century,  Federated  National's  compliance  with the
precribed premium to capital surplus ratio has been restored.


                                       85



                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES

ITEM 9.  CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

      An  evaluation  of the  effectiveness  of the design and  operation of our
disclosure controls and procedures within 90 days of this report was carried out
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 our 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  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.  A 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.

(B) CHANGES IN INTERNAL CONTROLS

      Subsequent  to the  date of the most  recent  evaluation  of our  internal
controls, there were no significant changes in our 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.

ITEM 9B. OTHER INFORMATION

      None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Under our  Articles of  Incorporation,  our Board of  Directors is divided
into three classes.  Each class of directors  serves a staggered term. Carl Dorf
and Charles B. Hart, Jr. hold office until the 2005 Annual Meeting, and each has
been  nominated  for  reelection  to the Board,  to serve as class III directors
until the Annual  Meeting to be held in 2008 or until their  successors are duly
elected  and  qualified.  Bruce  Simberg,  Richard W.  Wilcox,  Jr. and Peter J.
Prygelski are class II directors and hold office until the 2006 Annual  Meeting.
Edward J. Lawson and Richard A. Widdicombe are class I directors and hold office
until the 2007 Annual Meeting.

      Nominees

      The following  persons were  recommended by the Board of Directors and are
nominated as directors as follows:

Name                               Age       Position with the Company

Carl Dorf (1) (2)                  64        Director

Charles B. Hart, Jr. (1) (2) (3)   66        Director


                                       86


      Carl Dorf was  appointed to the Board of  Directors in August 2001.  Since
April 2001 Mr. Dorf has been the principal of Dorf Asset Management, LLC, and is
responsible for all investment decisions made by that company. From January 1991
to February  2001,  Mr. Dorf served as the Fund  Manager of ING Pilgrim Bank and
Thrift Fund.  Prior to his  experience  at Pilgrim,  Mr. Dorf was a principal in
Dorf & Associates, an investment management company.

      Charles B. Hart, Jr. has more than 40 years of experience in the insurance
industry.  From 1973 to 1999,  Mr. Hart served as President of Public  Assurance
Group and as General Manager of Operations for Bristol West Insurance  Services.
Since  1999,  Mr.  Hart  has  acted as an  insurance  consultant.  Mr.  Hart was
appointed to the Board of Directors in March 2002.

-----------------
(1)   Member of Independent Directors Committee.
(2)   Member of Investment Committee.
(3)   Member of Audit Committee.

      Set forth below is certain  information  concerning  the directors who are
not currently standing for election:




Name                                       Age       Position with the Company
                                               
Edward J. Lawson (2)                        55       President, Chairman of the Board and Director

Richard A. Widdicombe                       46       Chief Executive Officer and Director

Bruce F. Simberg (2)                        56       Director

Richard W. Wilcox, Jr. (1) (2) (3)          63       Director

Peter J. Prygelski (1) (2) (3)              36       Director


-------------------

(1)   Member of Independent Directors Committee.
(2)   Member of Investment Committee.
(3)   Member of Audit Committee.

      Edward J. Lawson  co-founded  the Company and has served as our  President
and Chairman of the Board since the Company's  inception in 1991. Mr. Lawson has
more than 18 years'  experience in the insurance  industry,  commencing with the
founding of the Company's initial agency in 1983.

      Richard A. Widdicombe was appointed as our Chief Executive Officer in June
2003.  Mr.  Widdicombe  joined the  Company in  November  1999 as  President  of
Federated  National  Insurance  Company  ("Federated  National")  and  Assurance
Managing General Agents, Inc. ("Assurance MGA"). In August 2001 he was appointed
as the President of American Vehicle Insurance Company ("American Vehicle"). Mr.
Widdicombe holds his adjuster's license and CPCU designation.  Mr. Widdicombe is
a member of the  Florida  Department  of  Financial  Services  Initial  Disaster
Assessment  team.  Mr.  Widdicombe  was  appointed  to the Board of Directors in
August 2001.

      Bruce F.  Simberg has served as a director of the  Company  since  January
1998.  Mr.  Simberg has been a practicing  attorney for the last 23 years,  most
recently as managing partner of Conroy,  Simberg, Ganon, Krevans & Abel, P.A., a
law firm in Ft.  Lauderdale,  Florida,  since  October  1979.  Mr.  Simberg  was
appointed to the Board of Directors in January 1998.

      Richard W. Wilcox,  Jr. has been in the  insurance  industry for almost 40
years. In 1963, Mr. Wilcox began an insurance  agency that eventually  developed
into a business  generating $10 million in annual  revenue.  In 1991, Mr. Wilcox
sold his agency to Hilb,  Rogal and Hamilton Company ("HRH") of Fort Lauderdale,
for which he retained the position of President  through 1998.  In 1998,  HRH of
Fort  Lauderdale  merged with Poe and Brown of Fort  Lauderdale,  and Mr. Wilcox
served  as the  Vice  President.  Mr.  Wilcox  retired  in 1999 and  joined  the
Company's Board of Directors in January 2003.

      Peter J.  Prygelski  was appointed as a director of the Company in January
2004.  Since April 2004, Mr.  Prygelski has been Senior  Manager,  Business Risk
Services  Consulting  with  Ernst  &  Young  in Fort  Lauderdale,  Florida.  Mr.
Prygelski is a Certified  Internal  Auditor.  Prior to his employment at Ernst &
Young,  Mr.  Prygelski work as an Independent  Sarbanes Oxley and Internal Audit


                                       87


Consultant  from September 2003 to April 2004. From November 1991 to August 2003
Mr. Prygelski was employed in the internal audit department of American Express,
where he was most recently the  Director/Assistant  General  Auditor of American
Express  Centurion  Bank. As such,  Mr.  Prygelski  managed the company's  audit
activities  and  managed  a  staff  of 12  audit  professionals  and  an  annual
department budget of $2.5 million. His  responsibilities  included preparing and
implementing  the company's  annual audit plan;  supporting the company's  audit
committee by  communicating  issues  related to planning,  audit  results,  plan
status,  and integrated audit coverage;  managing the relationships  with senior
management,  the external auditors, and regulatory  authorities;  and addressing
risks and control gaps to ensure that the company maintained an adequate control
system.

Please see Part 1, Item 1, "Senior  Management",  for information  regarding our
executive officers who are not directors.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

      The following  table  summarizes  compensation  earned for the years ended
December 31, 2004, 2003, and 2002, by our Chief Executive  Officer and the three
other most highly compensated  executive  officers whose  compensation  exceeded
$100,000  during  2004 and is required  to be  reported  (the  "named  executive
officers").



                                                                                        Long-Term
                                             Annual Compensation (1)                   Compensation
---------------------------        ----------------------------------------    -------------------------------

                                                                               Securities
Name and Principal Position                                                    Underlying         All Other
Compensation($)                     Year                 Salary($)               Bonus($)         Options(#)
---------------------------        -------      ------------     ----------     ------------     -------------
                                                                                  
Richard A. Widdicombe               2004          $143,100           0              --             $18,207 (1)
Chief Executive Officer             2003           126,250           0              --                  -- (2)
                                    2002           122,200           0              --                  -- (2)

Edward J. Lawson                    2004          $154,500           0              --             $16,160 (3)
President and Chairman              2003           156,000           0              --                  -- (2)
                                    2002           156,000           0              --                 --  (2)

J. Gordon Jennings, III             2004          $129,577           0              --             $11,036 (4)
Chief Financial Officer             2003           104,000           0              --                  -- (2)
                                    2002            89,800           0              --                  -- (2)

Kent M. Linder                      2004          $118,800           0              --             $16,157 (5)
Chief Operating Officer             2003           107,000           0              --                  -- (2)
                                    2002           104,000           0              --                  -- (2)
 -----------------


(1)   Includes  $7,200  car  allowance,   $851  cellular  phone,  $8,667  health
      insurance premiums,  $300 for events attended by officer and/or family and
      $1,189 airfare and hotel for management trip including family.

(2)   Perquisites and other personal  benefits totaling less than the applicable
      reporting threshold for 2002 and 2003 have been excluded.

(3)   Includes $9,044 car allowance,  $1,064  cellular phone,  $4,924 health and
      dental  insurance  premiums,  $100 for events  attended by officer  and/or
      family and $1,028 airfare and hotel for management trip including family.

(4)   Includes $10,536 health insurance premiums and $500 for events attended by
      officer and/or family.

(5)   Includes  $12,935 health and dental  insurance  premiums,  $1,404 cellular
      phone,  $400 for  events  attended  by  officer  and/or  family and $1,418
      airfare and hotel for management trip including family.

Option Grants in Last Fiscal Year

      The following table sets forth information concerning individual grants of
stock  options  made  during  2004 to the  CFO.  We  have  never  granted  stock
appreciation rights.

                                       88



                                                     % of Total
                           Number of Securities      Options/SAR Granted          Exercise or
                           Underlying Options        to Employees in               Base Price
Name                       Granted (#)(1)            Fiscal Year                    ($/share)    Expiration Date
----------------           -----------------------   ------------------------     -------------- ------------------------
                                                                                      
J. Gordon Jennings, III         30,000                      16.8%                    20.00          May 6, 2010


Stock Option Exercises and Holdings

      The following table sets forth certain  information  with respect to stock
options  and/or  warrants  exercised  during  calendar  year  2004 by the  named
executive  officers and  unexercised  stock options  and/or  warrants held as of
December 31, 2004 by such executive officers.



                              Shares                             Number of Securities        Value of Unexercised
                            Underlying                          Underlying Unexercised       In-the-Money Options
                              Options         Value           Options at Fiscal Year-End       At Fiscal Year-End
                              -------         -----           --------------------------       ------------------

Name                         Exercised      Realized(1)      Exercisable     Unexercisable  Exercisable(2)  Unexercisable(2)
----------------------       ----------    ------------   -----------------  -------------  --------------  ----------------
                                                                                           
Richard A. Widdicombe                --             --         90,000             --        $526,020               --
Edward J. Lawson                     --             --         66,324             --        $384,220               --
J. Gordon Jennings, III          16,000        $99,328          5,000         59,000         $23,665         $151,092
Kent M. Linder                       --             --         75,000             --        $392,475               --


-----------------

(1)   All values are shown pretax and are rounded to the nearest whole dollar.
(2)   Based on a fair market value of $13.90 per share at December 31, 2004.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following  table sets forth,  as of April 15, 2005,  information  with
respect to the  beneficial  ownership of our Common Stock by (i) each person who
is known by us to beneficially  own 5% or more of our outstanding  Common Stock,
(ii) each of our executive  officers named in the Summary  Compensation Table in
the section "Executive  Compensation," (iii) each of our directors, and (iv) all
directors and executive officers as a group.



                                                                     Number of Shares       Percent of
                                                                       Beneficially            Class
Name and Address of Beneficial Owner (1)                                 Owned (2)          Outstanding
----------------------------------------                               ------------         -----------
                                                                                      
Edward J. Lawson (3)..........................................            1,613,098               25.1%
Bruce F. Simberg (4)..........................................              165,750                2.6
Richard A. Widdicombe (5).....................................              141,833                2.2
Kent M. Linder (6)............................................              125,150                2.0
Carl Dorf (7).................................................               89,648                1.4
Richard W. Wilcox, Jr. (8)....................................               48,250                  *
J. Gordon Jennings, III (9)...................................               21,500                  *
Charles B. Hart, Jr. (10).....................................               15,000                  *
Peter J. Prygelski (11) ......................................                3,900                  *


All directors and executive officers as a group (9 persons) (12)          2,224,129               33.3 %



                                       89


5% or greater holders:
Michele V. Lawson (13)                             1,613,098           25.1 %
3661 West Oakland Park Blvd, Suite 300
Lauderdale Lakes, FL 33311

Whitebox Advisors, LLC (14)                          905,922           12.6 %
3033 Excelsior Blvd., Suite 300
Minneapolis, MN  55416

William D. Witter, Inc. (15)                         349,800            5.5 %
One Citicorp Center
153 East 53rd Street, 51st Floor
New York, NY 10022

----------------

*     Less than 1%.

(1)   Except as  otherwise  indicated,  the address of each person  named in the
      table  is c/o  21st  Century  Holding  Company,  3661  West  Oakland  Park
      Boulevard, Suite 300, Lauderdale Lakes, FL 33311.

(2)   Except as otherwise  indicated,  the persons named in this table have sole
      voting and  investment  power with  respect to all shares of Common  Stock
      listed,  which  include  shares of Common Stock in which such persons have
      the right to acquire a beneficial interest within 60 days from the date of
      this Proxy Statement.

(3)   Represents  681,713  shares of Common  Stock  held of record by Michele V.
      Lawson,  25,425  shares held in an account for a minor,  66,324  shares of
      Common  Stock  issuable  upon the  exercise of stock  options  held by Mr.
      Lawson and 20,676  shares of Common  Stock  issuable  upon the exercise of
      stock options held by Mrs. Lawson.

(4)   Includes 28,500 shares of Common Stock issuable upon the exercise of stock
      options held by Mr. Simberg.

(5)   Includes  3,083 shares of Common Stock held jointly with spouse and 90,000
      shares of Common Stock issuable upon the exercise of stock options held by
      Mr. Widdicombe.

(6)   Includes 75,000 shares of Common Stock issuable upon the exercise of stock
      options held by Mr. Linder.

(7)   Includes  5,764  shares of Common  Stock  held by Dorf  Partners  2001 LP,
      67,384  shares of Common Stock held by Dorf Trust,  1,500 shares of Common
      Stock held in a joint account with Mr. Dorf's spouse, and 15,000 shares of
      Common Stock issuable upon the exercise of stock options held by Mr. Dorf.

(8)   Includes 3,000 shares of Common Stock held in Mr.  Wilcox's IRA and 15,000
      shares of Common Stock issuable upon the exercise of stock options held by
      Mr. Wilcox.

(9)   Includes 21,500 shares of Common Stock issuable upon the exercise of stock
      options held by Mr. Jennings.

(10)  Includes 15,000 shares of Common Stock issuable upon the exercise of stock
      options held by Mr. Hart.

(11)  Includes 300 shares of Common Stock held in Mr.  Prygelski's IRA and 3,000
      shares of Common Stock issuable upon the exercise of stock options held by
      Mr. Prygelski.

(12)  Includes  350,000  shares of Common  Stock  issuable  upon the exercise of
      stock options.

(13)  Represents  818,960  shares  of Common  Stock  held of record by Edward J.
      Lawson,  25,425  shares held in an account for a minor,  20,676  shares of
      Common  Stock  issuable  upon the  exercise of stock  options held by Mrs.
      Lawson and 66,324  shares of Common  Stock  issuable  upon the exercise of
      stock options held by Mr. Lawson.

(14)  Includes  532,244  shares of Common  Stock  issuable  upon the exercise of
      Redeemable Warrants held by Whitebox Convertible  Arbitrage Partners,  LP;
      143,142  shares of Common Stock  issuable  upon the exercise of Redeemable
      Warrants held by Whitebox Hedged High Yield Partners, LP; 58,823 shares of
      Common Stock  issuable  upon the exercise of  Redeemable  Warrants held by


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      Whitebox  Intermarket  Partners,  LP; and 149,702  shares of Common  Stock
      issuable upon the exercise of Redeemable  Warrants held by Pandora  Select
      Partners,  LP.  Andrew  Redleaf  is the  managing  member  of the  General
      Partners of  Whitebox  Advisors  LLC and has sole  voting and  dispositive
      power over the shares of Whitebox Advisors LLC.

(15)  Includes  296,620  shares of Common Stock  beneficially  held on behalf of
      various  clients  of  Witter,  Inc.  This  information  is  based  on  the
      beneficial  owner's  filing with the  Securities  and Exchange  Commission
      under Section 13 and/or Section 16 of the Securities Exchange Act of 1934.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Bruce Simberg,  a director,  is a partner of the Fort Lauderdale,  Florida
law firm of Conroy,  Simberg,  Ganon,  Krevans & Abel, P.A., which renders legal
services  to the  Company.  In 2004,  the  Company  paid  legal  fees to Conroy,
Simberg,  Ganon,  Krevans & Abel,  P.A. for  services  rendered in the amount of
approximately  $327,000.  We  believe  that the  services  provided  by  Conroy,
Simberg, Ganon, Krevans & Abel, P.A. are on terms at least as favorable as those
that we could secure from a non-affiliated third party.

      The employment  agreement of Michele  Lawson,  Mr.  Lawson's spouse and an
employee of the Company,  was amended to increase her annual  salary to $117,000
from $78,000 and increase her car allowance to $1,125 from $300 per month.  Mrs.
Lawson's duties include  overseeing the Company's  accounts payable,  claims and
commission payment processes.

      During 2004, Mr. Lawson's daughter received  compensation totaling $70,200
for  her  services  as a  vice  president  of one  of  the  Company's  insurance
subsidiaries  and  as  human  resources  director;  Mr.  Lawson's  sister-in-law
received  compensation  totaling  $62,701 for her services as an underwriter for
one of the Company's  insurance  subsidiaries;  and Mr. Lawson's nephew received
compensation totaling $72,800 for his services as the president of the Company's
premium finance subsidiary.  We believe that the compensation  provided to these
individuals  is comparable  to that paid by other  companies in our industry and
market for similar positions.

      We have  adopted a policy  that any  transactions  between the Company and
executive officers,  directors,  principal shareholders or their affiliates take
place on an  arms-length  basis and  require  the  approval of a majority of our
independent directors.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

      DeMeo Young  McGrath  ("DeMeo")  has served as the  Company's  independent
auditors for each fiscal year since 2002. McKean,  Paul, Chrycy,  Fletcher & Co.
("McKean") was the Company's independent auditors prior to 2002.

      DeMeo has advised the Company that neither it, nor any of its members, has
any direct financial interest in the Company as a promoter,  underwriter, voting
trustee,  director,  officer or employee.  All professional services rendered by
DeMeo during the fiscal year ended December 31, 2004 were furnished at customary
rates.

      For the fiscal year ended December 31, 2004, fees for services provided by
DeMeo and McKean were as follows:

                                 DeMeo        McKean
                              ----------   ----------

      Audit Fees(1)           $  290,302   $   16,713

      Audit-Related Fees(2)   $   22,743   $        0

      Tax Fees(3)             $   56,748   $        0
                              ----------   ----------

      Total                   $  369,793   $   16,713

(1)   Audit  fees  consisted  of audit  work  performed  in the  preparation  of
      financial  statements,  as well as work  generally  only  the  independent
      auditor can reasonably be expected to provide, such as statutory audits.

(2)   Audit-related fees consisted primarily of audits of employee benefit plans
      and special procedures related to regulatory filings in 2004.

(3)   Tax  fees  consisted  primarily  of  assistance  with tax  compliance  and
      reporting.


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                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K

      (A)   THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

            (1)   Financial Statements

                  The following consolidated financial statements of the Company
                  and the reports of independent auditors thereon are filed with
                  this report:

                  Independent Auditors' Report (De Meo, Young, McGrath).

                  Consolidated Balance Sheets as of December 31, 2004 and 2003.

                  Consolidated  Statements  of  Operations  for the years  ended
                  December 31, 2004, 2003 and 2002.

                  Consolidated    Statements   of   Shareholders'   Equity   and
                  Comprehensive  Income (Loss) for the years ended  December 31,
                  2004, 2003 and 2002.

                  Consolidated  Statements  of Cash  Flows for the  years  ended
                  December 31, 2004, 2003 and 2002.

                  Notes to Consolidated Financial Statements for the years ended
                  December 31, 2004, 2003 and 2002.

            (2)   Financial Statement Schedules.

                  Schedule    VI,    Supplemental     information     concerning
                  property-casualty  insurance  operations,  is included  herein
                  under Item 8, Financial Statements and Supplementary Data.

            (3)   Exhibits


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                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES


                               EXHIBIT DESCRIPTION


3.1   Amended and Restated Articles of Incorporation (1)

3.2   Form of Registrant's Amended and Restated Bylaws (1)

4.1   Specimen of Common Stock Certificate (1)

4.2   Revised    Representative's    Warrant   Agreement   including   form   of
      Representative's Warrant (2)

4.3   Amendment dated October 1, 2003 to Warrant Agreement (3)

4.4   Form of 6% Senior Subordinated Note due July 31, 2006 (4)

4.5   Form of Redeemable Warrant dated July 31, 2003 (4)

4.6   Unit  Purchase  Agreement  dated July 31, 2003 between the Company and the
      Purchasers of the 6% Senior Subordinated Notes (5)

4.7   Amendment to Unit Purchase  Agreement and  Registration  Rights  Agreement
      dated  October 15, 2003 between the Company and the  Purchasers  of the 6%
      Senior Subordinated Notes (6)

4.8   Form of 6% Senior Subordinated Note due September 30, 2007 (15)

4.9   Form of Redeemable Warrant dated September 30, 2004 (15)

4.10  Unit Purchase  Agreement  dated September 30, 2004 between the Company and
      the Purchasers of the 6% Senior  Subordinated Notes due September 30, 2007
      (15)

10.1  Stock Option Plan, as amended (7)*

10.2  Employment Agreement between the Registrant and Edward J. Lawson (1)*

10.3  Employment Agreement between the Registrant and Michele V. Lawson (1)*

10.4  Form of Indemnification Agreement between the Registrant and its directors
      and executive officers (1)*


10.5  Revolving  Credit  and Term Loan  Agreement  between  Westchester  Premium
      Acceptance Corporation and WPAC, as amended (1)

10.6  Third  Modification  Agreement to Revolving Credit and Term Loan Agreement
      between FlatIron Funding Company, LLC and WPAC (9)

10.7  Fourth Modification  Agreement to Revolving Credit and Term Loan Agreement
      between Federated Premium Finance,  Inc.,  FlatIron Funding Company,  LLC,
      FlatIron Funding Company and FlatIron Credit Company, Inc. (10)

10.8  Sale and Assignment Agreement between Federated Premium Finance,  Inc. and
      WPAC (9)

10.9  Premium Receivable  Servicing Agreement between Federated Premium Finance,
      Inc. and FPF, Inc. (10)

10.10 First Modification  Agreement between Federated Premium Finance,  Inc. and
      WPAC (11)

10.11 General Agency Agreement dated August 1, 1998 between  Federated  National
      Insurance Company and Assurance Managing General Agents, Inc. (12)

10.12 Managing General Agency Agreement dated September 4, 2001 between American
      Vehicle Insurance Company and Assurance Managing General Agents, Inc. (12)

10.13 Commercial  and Private  Passenger  Automobile  Quota Share  Treaty  dated
      December  31,  2003  between  Federated  National  Insurance  Company  and
      TransAtlantic Reinsurance Company (13)

10.14 Private  Passenger  Automobile  Quota Share Treaty  dated  January 1, 2003
      between American Vehicle Insurance  Company and TransAtlantic  Reinsurance
      Company (13)

10.15 Addendum  No. 1 dated  September 1, 2003 to Private  Passenger  Automobile
      Quota  Share  Treaty  between  American  Vehicle   Insurance  Company  and
      TransAtlantic  Reinsurance  Company (9)

10.16 Employment Agreement dated November 1, 2003 between Registrant and Richard
      A. Widdicombe (13)*

10.17 Assumption  Agreement dated as of May 3, 2004 between  Federated  National
      Insurance Company and Citizens Property Insurance Corporation (14)

10.18 Escrow Agreement dated as of May 3, 2004 among Citizens Property Insurance
      Corporation,  Federated  National  Insurance Company and Wells Fargo, N.A.
      (14)

10.19 Employment  Agreement  dated  as of  June 8,  2004  between  James  Gordon
      Jennings III and 21st Century Holding Company (14)

10.20 Second  Modification  Agreement,  dated as of September 28, 2004,  between
      Federated  Premium  Finance,   Inc.  and  Westchester  Premium  Acceptance
      Corporation (16)

10.21 First  Modification  Agreement,  dated as of December 7, 2004 between 21st
      Century Holding Company and Edward J. Lawson (17)

10.22 Contract for sale and purchase of real property between Federated National
      Insurance Company and 21st Century Holding Company ***

10.23 Form of 2001 Franchise Program Stock Option Agreement * ***

10.24 Form of 2002 Stock Option Plan Option Agreement * ***


                                       93


                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES


21.1  Subsidiaries of the Registrant (10)

23.1  Consent  of  De  Meo,  Young,   McGrath,   Independent   Certified  Public
      Accountants **

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

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

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

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



*     Management Compensation Plan or Arrangement

**    Filed herewith

***   Filed with the  Company's  2004 Annual  Report on Form 10-K as  originally
      filed.

(1)   Previously  filed as an  exhibit  of the same  number to the  Registrant's
      Registration  Statement on Form SB-2 (File No. 333-63623) and incorporated
      herein by reference.

(2)   Previously  filed as an  exhibit  of the same  number  of the 1998  Annual
      Report on Form 10-KSB and incorporated herein by reference.

(3)   Previously  filed as an  exhibit  of the same  number to the  Registrant's
      Registration  Statement on Form S-3 (File No. 333-105221) and incorporated
      herein by reference.

(4)   Previously filed as Exhibits 4.1 and 4.2,  respectively,  to the Quarterly
      Report on Form 10-Q for the quarter  ended June 30, 2003 and  incorporated
      herein by reference.

(5)   Previously filed as Exhibit 4.5 to the Registrant's Registration Statement
      on Form S-3 (File No 333-109313) and incorporated herein by reference.

(6)   Previously   filed  exhibit  of  the  same  number  to  the   Registrant's
      Registration  Statement on Form S-3 (File No. 333-108739) and incorporated
      herein by reference.

(7)   Previously  filed as an exhibit to the Company's 2000 Annual Meeting Proxy
      Statement and incorporated herein by reference.

(8)   Previously  filed as an  exhibit  of the same  number  of the 1999  Annual
      Report on Form 10-KSB and incorporated herein by reference.

(9)   Previously  filed as an  exhibit  of the same  number  of the 2000  Annual
      Report on Form 10-KSB and incorporated herein by reference.

(10)  Previously  filed as an  exhibit  of the same  number  of the 2001  Annual
      Report on Form 10-K and incorporated herein by reference.

(11)  Previously  filed as an  exhibit  of the same  number  of the 2002  Annual
      Report on Form 10-K and incorporated herein by reference.

(12)  Previously  filed as an exhibit of the same number of  Amendment  No. 1 to
      the 2002 Annual Report on Form 10K and incorporated herein by reference.

(13)  Previously  filed as an  exhibit  of the same  number  of the 2003  Annual
      Report on Form 10-K and incorporated herein by reference.

(14)  Previously  filed as Exhibits 10.1,  10.2 and 10.3,  respectively,  to the
      Quarterly  Report on Form 10-Q for the  quarter  ended  June 30,  2004 and
      incorporated herein by reference.

(15)  Previously  filed as  exhibits  of the  same  number  to the  Registrant's
      Registration  Statement on Form S-3 (File No. 333-120157) and incorporated
      herein by reference.

(16)  Previously  filed as Exhibit 10.1 to the Current  Report on Form 8-K dated
      September 28, 2004 and incorporated herein by reference.

(17)  Previously  filed as Exhibit 10.1 to the Current  Report on Form 8-K dated
      December 7, 2004 and incorporated herein by reference.


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                  21ST CENTURY HOLDING COMPANY AND SUBSIDIARIES


                                   SIGNATURES

      Pursuant  to the  requirements  of Section 13 or 15 (d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K/A (Amendment
No. 2) report to be signed  on its  behalf  by the  undersigned,  thereto  duly
authorized.

                          21ST CENTURY HOLDING COMPANY

                         By:      /s/ Richard A. Widdicombe
                                  Richard A. Widdicombe, Chief Executive Officer

                                  /s/ James G. Jennings III
                                  James G. Jennings III, Chief Financial Officer

Dated:  May 17, 2005



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