<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

<Table>
<C>          <S>
 (Mark One)
    [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
             FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

                                   OR




    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
             FOR THE TRANSITION PERIOD FROM         TO
</Table>

                         COMMISSION FILE NUMBER 0-07477

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

                             THE ENSTAR GROUP, INC.
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                   GEORGIA                                       63-0590560
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)
</Table>

                               401 MADISON AVENUE
                           MONTGOMERY, ALABAMA 36104
                    (Address of principal executive offices)
                                 (334) 834-5483
              (Registrant's telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]   No [ ]

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  Yes [X]   No [ ]

     Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes [X]   No [ ]

     The number of shares of Registrant's Common Stock, $.01 par value per
share, outstanding at August 9, 2005 was 5,517,909.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY THE
ENSTAR GROUP, INC. OR MEMBERS OF ITS MANAGEMENT TEAM CONTAIN STATEMENTS WHICH
MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, 15 U.S.C.A. SECTIONS 77Z-2 AND 78U-5
(SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF
OR CURRENT EXPECTATIONS OF THE ENSTAR GROUP, INC. AND MEMBERS OF ITS MANAGEMENT
TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THE ENSTAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004, AND ARE
HEREBY INCORPORATED BY REFERENCE. THE ENSTAR GROUP, INC. UNDERTAKES NO
OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.
                                        i
<PAGE>

                                     PART I

                             FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                              JUNE 30,   DECEMBER 31,
                                                                2005         2004
                                                              --------   ------------
                                                              (DOLLARS IN THOUSANDS)
                                                                    (UNAUDITED)
<S>                                                           <C>        <C>
                                       ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 74,895     $ 81,675
  Certificates of deposit...................................     4,112        4,058
  Other current assets......................................        62          132
                                                              --------     --------
       Total current assets.................................    79,069       85,865
Partially owned equity affiliates...........................    76,760       72,618
Marketable securities.......................................     6,492           --
Other assets................................................       504          494
                                                              --------     --------
       Total assets.........................................  $162,825     $158,977
                                                              ========     ========

                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................  $    401     $    345
  Accounts payable to affiliates............................     2,664          358
  Income taxes payable......................................       211          639
                                                              --------     --------
       Total current liabilities............................     3,276        1,342
Deferred income tax liabilities.............................     8,424        7,730
Accrued taxes...............................................     2,325        2,625
Deferred compensation.......................................       756          662
Other liabilities...........................................       450          444
                                                              --------     --------
       Total liabilities....................................    15,231       12,803
                                                              --------     --------
Commitments and contingencies (Note 5)
Shareholders' equity:
  Common stock ($.01 par value; 55,000,000 shares
     authorized, 5,960,260 shares issued at June 30, 2005
     and December 31, 2004).................................        60           60
  Additional paid-in capital................................   190,008      190,008
  Deferred compensation of partially owned equity
     affiliate..............................................       (82)        (125)
  Accumulated other comprehensive income, net...............       933          391
  Accumulated deficit.......................................   (37,515)     (38,350)
  Treasury stock, at cost (442,351 shares)..................    (5,810)      (5,810)
                                                              --------     --------
       Total shareholders' equity...........................   147,594      146,174
                                                              --------     --------
       Total liabilities and shareholders' equity...........  $162,825     $158,977
                                                              ========     ========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        1
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<Table>
<Caption>
                                                 THREE MONTHS ENDED         SIX MONTHS ENDED
                                                      JUNE 30,                  JUNE 30,
                                               -----------------------   -----------------------
                                                  2005         2004         2005         2004
                                               ----------   ----------   ----------   ----------
                                                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                  (UNAUDITED)
<S>                                            <C>          <C>          <C>          <C>
Interest income..............................  $      561   $      201   $    1,043   $      378
Other investment income......................         604           --          604           --
Earnings of partially owned equity
  affiliates.................................       1,046        1,980        1,311        4,980
Other income.................................         101          198          201          298
General and administrative expenses..........        (861)        (780)      (1,641)      (1,507)
                                               ----------   ----------   ----------   ----------
Income before income taxes and minority
  interest...................................       1,451        1,599        1,518        4,149
Income taxes.................................        (655)        (450)        (683)      (1,279)
                                               ----------   ----------   ----------   ----------
Income before minority interest..............         796        1,149          835        2,870
Minority interest............................          --         (446)          --       (1,069)
                                               ----------   ----------   ----------   ----------
Net income...................................  $      796   $      703   $      835   $    1,801
                                               ==========   ==========   ==========   ==========
Weighted average shares
  outstanding -- basic.......................   5,517,909    5,485,240    5,517,909    5,475,496
                                               ==========   ==========   ==========   ==========
Weighted average shares
  outstanding -- assuming dilution...........   5,845,621    5,778,593    5,847,330    5,773,744
                                               ==========   ==========   ==========   ==========
Net income per common share -- basic.........  $     0.14   $     0.13   $     0.15   $     0.33
                                               ==========   ==========   ==========   ==========
Net income per common share -- assuming
  dilution...................................  $     0.14   $     0.12   $     0.14   $     0.31
                                               ==========   ==========   ==========   ==========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        2
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

           CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<Table>
<Caption>
                                                               THREE MONTHS       SIX MONTHS
                                                              ENDED JUNE 30,    ENDED JUNE 30,
                                                              ---------------   ---------------
                                                               2005     2004     2005     2004
                                                              -------   -----   ------   ------
                                                                   (DOLLARS IN THOUSANDS)
                                                                         (UNAUDITED)
<S>                                                           <C>       <C>     <C>      <C>
Net income..................................................  $  796    $703    $  835   $1,801
Other comprehensive income (loss):
  Unrealized holding gains on investments, net of income tax
     expense of $487, $103, $424 and $150...................     785     163       684      240
  Reclassification adjustment for gains included in net
     income, net of income tax expense of $75 and $13.......    (122)     --       (21)      --
  Unrealized loss on cash flow hedge, net of income tax
     benefit of $8 and $41..................................      --     (13)       --      (66)
  Currency translation adjustment, net of income tax
     (benefit) expense of $(60), $(17), $(75) and $15.......     (97)    (27)     (121)      25
                                                              ------    ----    ------   ------
Other comprehensive income..................................     566     123       542      199
                                                              ------    ----    ------   ------
Comprehensive income........................................  $1,362    $826    $1,377   $2,000
                                                              ======    ====    ======   ======
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        3
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                 SIX MONTHS ENDED
                                                                     JUNE 30,
                                                              -----------------------
                                                                 2005         2004
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS)
                                                                    (UNAUDITED)
<S>                                                           <C>          <C>
Cash flows from operating activities:
  Net income................................................   $   835      $ 1,801
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Earnings of partially owned equity affiliates..........    (1,311)      (4,980)
     Dividends and distributions received from partially
      owned equity affiliates...............................        --        9,586
     Minority interest in earnings of JCF CFN...............        --        1,069
     Gain on sale of marketable securities..................      (604)          --
     Noncash compensation expense...........................        --           33
     Deferred income taxes..................................        57          532
     Tax benefit from exercise of stock options and issuance
      of shares from deferred compensation plan.............        --          606
  Changes in assets and liabilities:
     Accounts payable and accrued expenses..................      (767)        (304)
     Other, net.............................................       132          199
                                                               -------      -------
       Net cash (used in) provided by operating
        activities..........................................    (1,658)       8,542
                                                               -------      -------
Cash flows from investing activities:
  Purchase of marketable securities.........................    (9,460)          --
  Proceeds from sale of marketable securities...............     4,374           --
  Purchases of certificates of deposit......................    (4,084)      (4,072)
  Maturities of certificates of deposit.....................     4,048        4,072
                                                               -------      -------
       Net cash used in investing activities................    (5,122)          --
                                                               -------      -------
Cash flows from financing activities:
  Distributions to minority interest........................        --       (2,474)
  Proceeds from exercise of stock options...................        --          555
                                                               -------      -------
       Net cash used in financing activities................        --       (1,919)
                                                               -------      -------
Increase (decrease) in cash and cash equivalents............    (6,780)       6,623
Cash and cash equivalents at the beginning of the period....    81,675       55,767
                                                               -------      -------
Cash and cash equivalents at the end of the period..........   $74,895      $62,390
                                                               =======      =======
Supplemental disclosures of cash flow information:
  Income taxes paid.........................................   $ 1,072      $   420
                                                               =======      =======
Supplemental disclosures of noncash investing activities:
  Accrued initial capital contribution to Affirmative
     Investment LLC.........................................   $ 2,688      $    --
                                                               =======      =======
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        4
<PAGE>

                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 1:  GENERAL

     The Enstar Group, Inc. and Subsidiaries, (the "Company"), is a publicly
traded company engaged in the operation of several equity affiliates in the
financial services industry. Enstar also continues its active search for one or
more additional operating businesses which meet its acquisition criteria.

     The Company, through the operations of its partially owned equity
affiliates, Castlewood Holdings Limited ("Castlewood Holdings") and B.H.
Acquisition Limited ("B.H. Acquisition"), and their subsidiaries, acquires and
manages insurance and reinsurance companies in run-off. The management of these
businesses includes claims administration, adjustment and settlement together
with the collection of reinsurance recoveries. Castlewood Holdings, a
Bermuda-based company, also provides management, consulting and other services
to the insurance and reinsurance industry for both fixed and success-based fee
arrangements. In general, reinsurance is an arrangement in which the reinsurer
agrees to indemnify an insurance or reinsurance company against all or a portion
of the risks underwritten by such insurance or reinsurance company under one or
more insurance or reinsurance contracts.

     The Company consolidates JCF CFN LLC and related entities (collectively,
the "JCF CFN Entities"). The JCF CFN Entities were formed to serve as members of
Green Tree Investment Holdings LLC (formerly known as CFN Investment Holdings
LLC) and related entities (collectively, "Green Tree"), which, in turn, were
formed to effect the acquisition of a portfolio of home equity and manufactured
housing loan securities and the associated servicing businesses from Conseco
Finance Corp. ("Conseco Finance"). In July 2004, the JCF CFN Entities completed
the sale of their entire interest in Green Tree. See Note 4 for further
discussion of this transaction.

     The condensed consolidated financial statements of the Company are
unaudited and, in the opinion of management, include all adjustments consisting
solely of normal recurring adjustments necessary to fairly state the Company's
financial condition, results of operations and cash flows for the interim
period. The results of operations for the three and six months ended June 30,
2005 are not necessarily indicative of the results to be expected for the full
year. These statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2004
included in the Company's Form 10-K as filed with the Securities and Exchange
Commission on March 30, 2005 under the Securities Exchange Act of 1934, as
amended.

NOTE 2:  SIGNIFICANT ACCOUNTING POLICIES

     (a) Principles of Consolidation -- The condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
Enstar Financial Services, Inc., an inactive company. In addition, the Company
consolidates the JCF CFN Entities, recording a minority interest in its
financial statements for Castlewood Holdings' 40% interest. The JCF CFN Entities
have been inactive since July 2004. All significant intercompany balances and
transactions have been eliminated in consolidation.

     (b) Use of Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The estimates susceptible to significant change are
those related to the valuation allowance for deferred tax assets and loss and
loss adjustment expenses included in earnings of partially owned equity
affiliates.

     (c) Cash Equivalents -- Cash equivalents consist of short term, highly
liquid investments with original purchased maturities of three months or less.

                                        5
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     (d) Marketable Securities -- Marketable securities are classified as
available-for-sale and reported at fair value, with unrealized gains excluded
from earnings and reported in a separate component of shareholders' equity.

     (e) Partially Owned Equity Affiliates -- Partially owned equity affiliates
are accounted for under the equity method of accounting. Equity method
investments are recorded at cost and are adjusted periodically to recognize the
Company's proportionate share of the investee's income or loss, additional
contributions made and dividends and capital distributions received. In the
event any of the partially owned equity affiliates were to incur a loss and the
Company's cumulative proportionate share of the loss exceeded the carrying
amount of the equity method investment, application of the equity method would
be suspended and the Company's proportionate share of further losses would not
be recognized until the Company committed to provide further financial support
to the investee. The Company would resume application of the equity method once
the investee becomes profitable and the Company's proportionate share of the
investee's earnings equals its cumulative proportionate share of losses that
were not recognized during the period the application of the equity method was
suspended.

     (f) Comprehensive Income -- The Company reports comprehensive income in
accordance with Statement of Financial Accounting Standards ("SFAS") 130,
"Reporting Comprehensive Income" which defines comprehensive income as certain
changes in equity from non-owner sources. The Company recorded other
comprehensive income from unrealized holding gains from equity securities that
are classified as available-for-sale and are carried at fair value. In addition,
the Company recorded other comprehensive income from its partially owned equity
affiliates. This other comprehensive income arose from unrealized holding gains
and losses from debt and equity securities that are classified as
available-for-sale and are carried at fair value and currency translation
adjustments resulting from the translations of financial information of
subsidiaries into U.S. dollars.

     The components of accumulated other comprehensive income are as follows:

<Table>
<Caption>
                                                              JUNE 30,   DECEMBER 31,
                                                                2005         2004
                                                              --------   ------------
<S>                                                           <C>        <C>
Currency translation adjustment, net of income tax expense
  of $168 and $243..........................................    $270         $391
Unrealized holding gains, net of income tax expense of
  $412......................................................     663           --
                                                                ----         ----
Total accumulated other comprehensive income................    $933         $391
                                                                ====         ====
</Table>

     (g) Revenue Recognition -- Revenue includes interest income earned from
cash, cash equivalents and certificates of deposit, the Company's proportionate
share of earnings from partially owned equity affiliates and gains on the sale
of marketable securities. Interest income is recorded when earned. The Company's
proportionate share of earnings from partially owned equity affiliates is
recorded as such earnings are recognized by the partially owned equity
affiliate. Realized gains on sales of marketable securities are calculated using
the specific identification method and are recorded on the trade date.

     (h) Stock-Based Compensation -- For the three and six months ended June 30,
2005 and 2004, the Company utilized various stock-based compensation plans for
the benefit of non-employee directors and certain officers. In 1997, the Company
adopted the Deferred Compensation and Stock Plan for Non-Employee Directors and
a long-term incentive program made up of three stock option/incentive plans.
Additionally, in 2001, the Company adopted the 2001 Outside Directors' Stock
Option Plan and amended certain provisions of an existing plan. The Company
accounts for these plans under the intrinsic value recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations.
Compensation expense for the Deferred Compensation and Stock Plan for
Non-Employee Directors is recognized at the first of every quarter

                                        6
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for retainer fees and upon the occurrence of various Board of Director and
committee meetings. There is no compensation expense recognized in net earnings
for stock option/incentive plans that had an exercise price equal to the market
value of the Company's underlying common stock on the date of grant. In
connection with options granted in November 2001, the market value of the
Company's common stock on the date of grant exceeded the exercise price,
resulting in a charge to earnings for that year. In addition, compensation
expense was recognized over the vesting life of these options through June 2004.
Had compensation costs for grants under the Company's stock option/incentive
plans been determined based on the fair value recognition provision of SFAS 123,
"Accounting for Stock-Based Compensation," the Company's pro forma net income
and net income per share for the three and six months ended June 30, 2005 and
2004 would have been as follows:

<Table>
<Caption>
                                                       THREE MONTHS       SIX MONTHS
                                                      ENDED JUNE 30,    ENDED JUNE 30,
                                                      ---------------   --------------
                                                       2005     2004    2005     2004
                                                      ------   ------   -----   ------
                                                           (DOLLARS IN THOUSANDS,
                                                           EXCEPT PER SHARE DATA)
                                                                (UNAUDITED)
<S>                                                   <C>      <C>      <C>     <C>
Net income, as reported.............................  $ 796    $ 703    $ 835   $1,801
Add: Stock-based employee compensation expense
  included in reported net income, net of income
  taxes.............................................     37       10       58       20
Deduct: Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of income taxes...............   (100)    (118)    (178)    (235)
                                                      -----    -----    -----   ------
Pro forma net income................................  $ 733    $ 595    $ 715   $1,586
                                                      =====    =====    =====   ======
Income per common share:
  Basic -- as reported..............................  $0.14    $0.13    $0.15   $ 0.33
                                                      =====    =====    =====   ======
  Basic -- pro forma................................  $0.13    $0.11    $0.13   $ 0.29
                                                      =====    =====    =====   ======
  Assuming dilution -- as reported..................  $0.14    $0.12    $0.14   $ 0.31
                                                      =====    =====    =====   ======
  Assuming dilution -- pro forma....................  $0.13    $0.10    $0.12   $ 0.27
                                                      =====    =====    =====   ======
</Table>

     The pro forma stock-based employee compensation reflected above is based on
the application of Emerging Issues Task Force No. 00-23, "Issues Related to the
Accounting for Stock Compensation Under APB 25 and Financial Accounting
Standards Board ("FASB") Interpretation No. 44," to the straight-line vesting of
such awards over the full vesting period.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R requires that the compensation cost resulting
from all share-based payment transactions (e.g. stock options and restricted
stock) be recognized in the financial statements. SFAS 123R requires all
entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees and non-employees except for
equity instruments held by employee share ownership plans. This statement
replaces SFAS 123 and supersedes APB 25. The Company currently accounts for
employee share-based payment awards under the provisions of APB 25. The Company
will apply the provisions of SFAS 123R beginning January 1, 2006. The Company is
currently evaluating the impact that the implementation of this statement will
have on its consolidated financial position and results of operations.

                                        7
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3:  MARKETABLE SECURITIES

     In June 2005, the Company purchased certain shares of common stock in a
publicly-traded U.S. corporation for approximately $9.5 million. The Company
sold a portion of these securities in June for total proceeds of approximately
$4.4 million, resulting in a realized gain of $604,000. The remaining securities
are classified as available-for-sale and are reported at a fair value of
approximately $6.5 million at June 30, 2005, with an unrealized gain of $495,000
(net of income taxes) reported as a component of accumulated other comprehensive
income.

NOTE 4:  PARTIALLY OWNED EQUITY AFFILIATES

  B.H. ACQUISITION

     In July 2000, the Company, through B.H. Acquisition, a joint venture with
Castlewood Limited ("Castlewood") and an entity controlled by Trident II, L.P.
("Trident"), acquired as an operating business two reinsurance companies,
Brittany Insurance Company Ltd. ("Brittany") and Compagnie Europeenne
d'Assurances Industrielles S.A. ("CEAI"). Brittany and CEAI are principally
engaged in the active management of books of reinsurance business from
international markets. The Company owns 50% of the voting stock and a 33%
economic interest in B.H. Acquisition. As part of the transaction, Castlewood
owns 33% of the voting stock and a 45% economic interest in B.H. Acquisition.
The Company's ownership in B.H. Acquisition is accounted for using the equity
method of accounting.

  CASTLEWOOD HOLDINGS LIMITED

     In November 2001, the Company, together with Trident and the shareholders
and senior management of Castlewood (the "Castlewood Principals"), completed the
formation of a new venture, Castlewood Holdings, to acquire and manage insurance
and reinsurance companies, including companies in run-off (insurance and
reinsurance companies that have ceased the underwriting of new policies), and to
provide management, consulting and other services to the insurance and
reinsurance industry (the "Castlewood Holdings Transaction"). As part of the
transaction, the Company made a capital commitment of $39.5 million for its
interest in Castlewood Holdings. The Company owns 50% of the voting stock of
Castlewood Holdings and the Castlewood Principals and Trident each own 25% of
Castlewood Holdings' voting stock. The Company owns a 32.63% economic interest
in Castlewood Holdings. Castlewood is a private Bermuda-based firm, experienced
in managing and acquiring reinsurance operations. The Company's ownership in
Castlewood Holdings is accounted for using the equity method of accounting.

     As a result of this transaction, the Company's 33% direct economic interest
in B.H. Acquisition increased by an additional indirect economic interest
through Castlewood Holdings. At June 30, 2005, the Company's beneficial
ownership in B.H. Acquisition was 47.68%. The Company's combined voting interest
in B.H. Acquisition is limited to 50%.

     Immediately following the closing of the Castlewood Holdings Transaction,
the Company contributed $12.5 million to Castlewood Holdings. In August 2002,
the Company funded an additional $21 million to Castlewood Holdings. The funds
were used, in part, to capitalize Fitzwilliam (SAC) Insurance Limited
("Fitzwilliam"), a wholly owned subsidiary. Fitzwilliam, based in Bermuda,
offers specialized reinsurance protections to related companies, clients of
Castlewood Holdings and other third-party companies. The remaining commitment of
approximately $7.2 million was funded in March 2003. The funds were used for the
purchase of The Toa-Re Insurance Company (UK) Limited ("Toa-UK"), a London-based
subsidiary of The Toa Reinsurance Company, Limited (described below).

     In conjunction with the closing of the Castlewood Holdings Transaction, the
Company also transferred its shares in Revir Limited ("Revir"), a newly-formed
Bermuda holding company, at cost to Castlewood Holdings. Revir then completed
the acquisition of two reinsurance companies in run-off, River Thames
                                        8
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Insurance Company Limited ("River Thames"), based in London, England, and
Overseas Reinsurance Corporation Limited ("Overseas Reinsurance"), based in
Bermuda (collectively, the "River Thames Transaction"). The total purchase price
of River Thames and Overseas Reinsurance was approximately $15.2 million.

     In August 2002, Castlewood Holdings purchased Hudson Reinsurance Company
Limited ("Hudson"), a Bermuda-based company, for approximately $4.1 million.
Hudson reinsured risks relating to property, casualty and workers' compensation,
on a worldwide basis, and is now administering the run-off of its claims.

     In March 2003, Castlewood Holdings and Shinsei Bank, Limited ("Shinsei")
completed the acquisition of all of the outstanding capital stock of Toa-UK for
approximately $46 million. Toa-UK underwrote reinsurance business throughout the
world between 1980 and 1994, when it stopped writing new business and is
currently operating in run-off. The acquisition was effected through Hillcot
Holdings Ltd. ("Hillcot"), a newly formed Bermuda company, in which Castlewood
Holdings has a 50.1% economic interest and a 50% voting interest. Upon
completion of the transaction, Toa-UK's name was changed to Hillcot Re Limited.
Hillcot is included in Castlewood Holdings' consolidated financial statements,
with the remaining 49.9% economic interest reflected as minority interest. J.
Christopher Flowers ("Mr. Flowers"), a member of the Company's board of
directors and the Company's largest shareholder, is a director of Shinsei.
Castlewood Holdings' results of operations include the results of Toa-UK from
the date of acquisition in March 2003.

     In August 2004, Castlewood Holdings awarded a grant of 744 shares of its
Class D stock to certain of its employees under a stock-based compensation plan.
The plan allows total awards up to a maximum of 7.5% of the total issued share
capital of Castlewood Holdings. Of the shares awarded, 391 shares had vested as
of June 30, 2005. The remaining shares granted under the award will vest over
various periods through April 2009. As a result of the award in August 2004 and
subsequent vesting of additional shares, the Company's original economic
interest in Castlewood Holdings of 33 1/3% has been diluted by 0.70% to 32.63%
as of June 30, 2005. As shares issued under the August 2004 award vest and as
additional shares are awarded in the future, the Company's economic interest
could decrease to a minimum of 30.83%. The Company's voting interest will remain
at 50%.

     During 2004, Castlewood Holdings, through one of its subsidiaries, invested
a total of approximately $9.1 million in Cassandra Equity LLC and Cassandra
Equity (Cayman) LP, (collectively, "Cassandra"), for a 27% interest in each.
Cassandra was formed to invest in equity shares of a publicly traded
international reinsurance company. J.C. Flowers I LP also owns a 27% interest in
Cassandra. J.C. Flowers I LP is a private investment fund, the general partner
of which is JCF Associates I LLC. Mr. Flowers is the managing member of JCF
Associates I LLC. In March 2005, Cassandra sold all of its holdings for total
proceeds of approximately $40.0 million. Castlewood Holdings' proportionate
share of the proceeds was approximately $10.8 million.

     Also during 2004, Castlewood Holdings, through one of its subsidiaries,
completed the acquisition of Mercantile Indemnity Company Ltd., Harper Insurance
Limited and Longmynd Insurance Company Ltd. for a total purchase price of
approximately $4.5 million. Castlewood Holdings recorded an extraordinary gain
of approximately $21.8 million relating to the excess of the fair value of the
net assets acquired over the cost of these acquisitions.

     In May 2005, Castlewood Holdings, through one of its subsidiaries,
purchased Fieldmill Insurance Company Limited (formerly known as Harleysville
Insurance Company (UK) Limited) for approximately $1.4 million.

                                        9
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  PARTIALLY OWNED EQUITY AFFILIATES OF JCF CFN

     During 2003, the Company funded approximately $15.3 million to the JCF CFN
Entities in exchange for a 60% interest in such entities. In addition,
Castlewood Holdings funded approximately $10.2 million to the JCF CFN Entities
in exchange for a 40% interest.

     The JCF CFN Entities invested in Green Tree together with affiliates of
J.C. Flowers I LP, affiliates of Fortress Investment Group LLC and affiliates of
Cerberus Capital Management, L.P. In June 2003, the JCF CFN Entities invested
approximately $25.1 million in exchange for a 3.995% interest in Green Tree.
Green Tree completed the purchase of certain assets of Conseco Finance for
approximately $630 million in cash plus certain assumed liabilities. The assets
consisted primarily of a portfolio of home equity and manufactured housing loan
securities as well as the associated servicing businesses. J.C. Flowers I LP is
a private investment fund, the general partner of which is JCF Associates I LLC.
The managing member of JCF Associates I LLC is Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder. The JCF CFN
Entities accounted for the investment in Green Tree under the equity method of
accounting. Because the JCF CFN Entities are consolidated, Green Tree was
treated as a partially owned equity affiliate of the Company.

     In July 2004, the JCF CFN Entities, along with certain affiliates of J.C.
Flowers I LP, completed the sale of their entire interests in Green Tree to FIT
CFN Holdings LLC, an affiliate of Fortress Investment Group LLC, and Cerberus
Green Tree Investments, LLC and Cerberus JCF Coinvest, LLC, each an affiliate of
Cerberus Capital Management L.P. In exchange for their entire interest, the JCF
CFN Entities received aggregate sales proceeds of approximately $40 million in
cash. Of this amount, Castlewood Holdings received aggregate sales proceeds of
approximately $16 million. The proceeds received by the JCF CFN Entities at
completion of the sale were reduced by prior cash distributions of approximately
$7.2 million made by Green Tree during 2004. The Company recorded a pre-tax
realized gain of approximately $6.9 million on the sale. The JCF CFN Entities
have been inactive since July 2004.

  AFFIRMATIVE INVESTMENT LLC

     In June 2005, the Company committed to contribute up to $10 million for a
14%, non-voting interest in Affirmative Investment LLC ("Affirmative
Investment"), a newly formed Delaware limited liability company. J.C. Flowers I
LP committed the capital necessary for the remaining 86% interest in Affirmative
Investment. Both J.C. Flowers I LP and Affirmative Associates LLC, the managing
member of Affirmative Investment, are controlled by Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder. At June 30,
2005 the Company accrued its initial capital contribution of approximately $2.6
million, which was paid on July 1, 2005.

     Affirmative Investment currently holds 1,183,000 shares of common stock of
Affirmative Insurance Holdings, Inc. ("Affirmative Insurance"), which were
acquired through open market purchases. In addition, in June 2005, Affirmative
Investment acquired 50% of the membership interests of New Affirmative LLC
("NAL"). The remaining 50% of the membership interests of NAL are held by
Delaware Street Capital Master Fund, LP or its affiliates ("DSC"). In turn, NAL,
pursuant to a Stock Purchase Agreement with Vesta Insurance Group, Inc. ("VIG")
and Vesta Fire Insurance Corporation, a subsidiary of VIG (together with VIG,
"Vesta"), has agreed to acquire from Vesta an aggregate of 5,218,228 shares of
Affirmative Insurance common stock for a purchase price of $15.00 per share
(subject to regulatory approval). At or simultaneously with the closing of the
transaction with Vesta and subject to regulatory approval, Affirmative
Investment will contribute the 1,183,000 shares of Affirmative Insurance that it
currently holds, and DSC will contribute the 1,459,699 shares of Affirmative
Insurance common stock that it currently holds, to NAL.

                                        10
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  SUMMARIZED FINANCIAL INFORMATION

     In accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock", the Company prepared summarized financial
information for B.H. Acquisition and Castlewood Holdings as of June 30, 2005 and
December 31, 2004 and for the three and six months ended June 30, 2005 and 2004,
respectively. Summarized financial information for Affirmative Investment is
presented as of June 30, 2005 (Affirmative Investment was formed in June 2005).
Affirmative Investment had no income or expense items for the period ended June
30, 2005. Summarized financial information for Green Tree is presented for the
three and six months ended June 30, 2004 (the Company's interest in Green Tree
was sold in July 2004). The summarized financial information presented below for
B.H. Acquisition and Castlewood Holdings is derived from their respective
audited financial statements as of December 31, 2004 and their unaudited
quarterly financial statements as of June 30, 2005 and for the three and six
months ended June 30, 2005 and 2004. The summarized financial information
presented below for Affirmative Investment and Green Tree is derived from their
respective unaudited quarterly financial statements.

<Table>
<Caption>
                                                                 JUNE 30, 2005
                                                     --------------------------------------
                                                        B.H.       CASTLEWOOD   AFFIRMATIVE
                                                     ACQUISITION    HOLDINGS    INVESTMENT
                                                     -----------   ----------   -----------
                                                             (DOLLARS IN THOUSANDS)
<S>                                                  <C>           <C>          <C>
Total assets.......................................   $106,290     $1,346,962     $38,049
Total liabilities..................................     67,695      1,132,769      19,299
Minority interest..................................         --         31,835          --
Total equity.......................................     38,595        182,358      18,750
</Table>

<Table>
<Caption>
                                                                 DECEMBER 31, 2004
                                                              ------------------------
                                                                 B.H.       CASTLEWOOD
                                                              ACQUISITION    HOLDINGS
                                                              -----------   ----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
Total assets................................................   $110,414     $1,347,853
Total liabilities...........................................     71,748      1,139,123
Minority interest...........................................         --         31,392
Total equity................................................     38,666        177,338
</Table>

<Table>
<Caption>
                                                                 THREE MONTHS ENDED
                                                                   JUNE 30, 2005
                                                              ------------------------
                                                                 B.H.       CASTLEWOOD
                                                              ACQUISITION    HOLDINGS
                                                              -----------   ----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
Revenue.....................................................                  $3,857
Underwriting income (loss)..................................     $(290)        3,873
Net income..................................................        70         3,137
</Table>

<Table>
<Caption>
                                                                  SIX MONTHS ENDED
                                                                   JUNE 30, 2005
                                                              ------------------------
                                                                 B.H.       CASTLEWOOD
                                                              ACQUISITION    HOLDINGS
                                                              -----------   ----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>           <C>
Revenue.....................................................                  $8,345
Underwriting income (loss)..................................     $(580)        5,423
Net income (loss)...........................................       (71)        4,081
</Table>

                                        11
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                        THREE MONTHS ENDED JUNE 30, 2004
                                                      -------------------------------------
                                                         B.H.       CASTLEWOOD
                                                      ACQUISITION    HOLDINGS    GREEN TREE
                                                      -----------   ----------   ----------
                                                             (DOLLARS IN THOUSANDS)
<S>                                                   <C>           <C>          <C>
Revenue.............................................                  $6,289      $111,183
Underwriting income (loss)..........................     $(290)        2,333
Operating income....................................                                51,511
Net income (loss)...................................      (485)        2,109        38,162
</Table>

<Table>
<Caption>
                                                         SIX MONTHS ENDED JUNE 30, 2004
                                                      -------------------------------------
                                                         B.H.       CASTLEWOOD
                                                      ACQUISITION    HOLDINGS    GREEN TREE
                                                      -----------   ----------   ----------
                                                             (DOLLARS IN THOUSANDS)
<S>                                                   <C>           <C>          <C>
Revenue.............................................                 $10,668      $246,370
Underwriting income (loss)..........................     $(580)        4,173
Operating income....................................                               116,548
Net income (loss)...................................      (742)        5,295        93,183
</Table>

     The Company's consolidated accumulated deficit includes undistributed
earnings of its partially owned equity affiliates of approximately $27.4 million
and approximately $26.1 million at June 30, 2005 and December 31, 2004,
respectively.

NOTE 5:  COMMITMENTS AND CONTINGENCIES

     In December 2004, the Company signed a one year lease beginning January 1,
2005 on an office building at 401 Madison Avenue, Montgomery, Alabama which
serves as the corporate headquarters. The lease also provides renewal options
for three periods of one year each. Additionally, pursuant to an oral agreement,
the Company leases space in a warehouse at 703 Howe Street, Montgomery, Alabama
on a month-to-month basis. The Company leases the office building and warehouse
space from unaffiliated third parties for $3,000 and $350 per month,
respectively. The Company believes the rental amounts are competitive with
market rates and that the cancellation or termination of either of these leases
would not have a material adverse effect on the Company's results of operations.
The Company incurred rent expense in the amount of $10,050 and $20,100 for the
three and six months ended June 30, 2005 and $9,300 and $18,600 for the same
periods in 2004. In February 2002, the Company entered into an agreement with
J.C. Flowers & Co. LLC running through November 2005 for the use of certain
office space and administrative services from J.C. Flowers & Co. LLC for an
annual payment of $66,000. J.C. Flowers & Co. LLC is managed by Mr. Flowers.

     In June 2005, the Company committed to contribute up to $10 million for a
14%, non-voting interest in Affirmative Investment. At June 30, 2005 the Company
accrued the initial capital contribution of approximately $2.6 million, which
was paid on July 1, 2005. The Company expects to fund approximately $5.5 million
upon closing of the Stock Purchase Agreement between NAL and Vesta. (Note 4)

NOTE 6:  INCOME TAXES

     Income tax expense was $655,000 and $683,000 for the three and six months
ended June 30, 2005, respectively, compared to $450,000 and approximately $1.3
million for the same periods in 2004. The Company's effective tax rates for 2005
and 2004 differ from the statutory rate primarily due to changes in the
valuation allowance related to deferred tax assets, tax contingencies and state
income taxes.

     The Company provides U.S. taxes for the anticipated repatriation of certain
earnings of foreign subsidiaries. A valuation allowance is recorded when it is
more likely than not that some portion or all of the

                                        12
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deferred tax assets will not be realized. The ultimate realization of the
deferred tax assets depends on the ability to generate sufficient taxable income
in the future in the appropriate jurisdictions. The Company has provided a
valuation allowance for operating losses of partially owned foreign subsidiaries
at June 30, 2005 and December 31, 2004.

     The Company has established reserves for tax-related uncertainties based on
its best estimates of whether, and the extent to which, additional taxes and
interest will be due. These reserves are adjusted in light of changing facts and
circumstances. At June 30, 2005, the accrual of $2.3 million for tax
contingencies is reflected in accrued taxes in the consolidated balance sheet.

     In the second quarter of 2004 additional paid-in capital increased by
$606,000 as a result of an income tax benefit. This income tax benefit resulted
from tax deductions triggered by the exercise of stock options and the issuance
of shares of common stock from the Deferred Compensation and Stock Plan for
Non-Employee Directors.

NOTE 7:  SEGMENT INFORMATION

     The Company separately evaluates the performance of B.H. Acquisition and
Castlewood Holdings based on the different services provided by each of the
entities, and such evaluation is based on 100% of the entities' results of
operations. The Company made its initial investment in Affirmative Investment in
June 2005. Affirmative Investment had no income or expense items for the period
ending June 30, 2005. Prior to the sale of the Company's interest in Green Tree
in July 2004, the Company also separately evaluated the performance of the JCF
CFN Entities. The Company also reviews separate financial results for Enstar's
corporate activity.

     B.H. Acquisition, through its wholly owned subsidiaries, Brittany and CEAI,
is principally engaged in the active management of books of reinsurance business
from international markets. Castlewood Holdings acquires and manages insurance
and reinsurance companies, including companies in run-off, and provides
management, consulting and other services to the insurance and reinsurance
industry. Affirmative Investment was formed to facilitate the participation of
its members in the purchase, sale and ownership of membership interests of NAL
and common stock of Affirmative Insurance. The JCF CFN Entities were formed to
serve as a member of Green Tree which, in turn, was formed to effect the
acquisition of a portfolio of home equity and manufactured housing loan
securities and associated servicing businesses from Conseco Finance.

     A reconciliation of the consolidated financial information by segment to
the Company's consolidated financial statements as of June 30, 2005 and December
31, 2004 and for the three and six months ended June 30, 2005 and 2004,
respectively, is as follows:

<Table>
<Caption>
                                                          JUNE 30, 2005
                                  -------------------------------------------------------------
                                                 B.H.       CASTLEWOOD   AFFIRMATIVE
                                  CORPORATE   ACQUISITION    HOLDINGS    INVESTMENT     TOTAL
                                  ---------   -----------   ----------   -----------   --------
                                                     (DOLLARS IN THOUSANDS)
<S>                               <C>         <C>           <C>          <C>           <C>
Total reportable segment assets:
  Partially owned equity
     affiliates.................                $12,824      $61,224       $2,712      $ 76,760
  Corporate assets..............   $86,065                                               86,065
                                   -------      -------      -------       ------      --------
     Total......................   $86,065      $12,824      $61,224       $2,712      $162,825
                                   =======      =======      =======       ======      ========
</Table>

                                        13
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                            DECEMBER 31, 2004
                                             -----------------------------------------------
                                                            B.H.       CASTLEWOOD
                                             CORPORATE   ACQUISITION    HOLDINGS     TOTAL
                                             ---------   -----------   ----------   --------
                                                         (DOLLARS IN THOUSANDS)
<S>                                          <C>         <C>           <C>          <C>
Total reportable segment assets:
  Partially owned equity affiliates........                $12,843      $59,775     $ 72,618
  Corporate assets.........................   $86,359                                 86,359
                                              -------      -------      -------     --------
     Total.................................   $86,359      $12,843      $59,775     $158,977
                                              =======      =======      =======     ========
</Table>

<Table>
<Caption>
                                                     THREE MONTHS ENDED JUNE 30, 2005
                                               ---------------------------------------------
                                                              B.H.       CASTLEWOOD
                                               CORPORATE   ACQUISITION    HOLDINGS    TOTAL
                                               ---------   -----------   ----------   ------
                                                          (DOLLARS IN THOUSANDS)
<S>                                            <C>         <C>           <C>          <C>
Net underwriting income (loss)...............                 $(290)      $  3,873
Revenue......................................                                3,857
Net investment income........................    $ 604          555          8,255
Interest income..............................      561
Share of net income of partly-owned
  companies..................................                                   32
General and administrative expenses..........     (861)        (480)       (10,979)
Amortization of run-off provision............                   333
Other income.................................      101
Foreign exchange loss........................                   (48)        (1,138)
                                                 -----        -----       --------
Income before income taxes...................      405           70          3,900
Income taxes.................................     (655)                       (151)
Minority interest............................                                 (612)
                                                 -----        -----       --------
Net income (loss)............................    $(250)       $  70       $  3,137
                                                 =====
Company's economic ownership %...............                    33%         32.63%
                                                              -----       --------
Earnings of partially owned equity
  affiliates.................................                 $  23       $  1,023    $1,046
                                                              =====       ========    ======
</Table>

                                        14
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                      SIX MONTHS ENDED JUNE 30, 2005
                                               ---------------------------------------------
                                                              B.H.       CASTLEWOOD
                                               CORPORATE   ACQUISITION    HOLDINGS    TOTAL
                                               ---------   -----------   ----------   ------
                                                          (DOLLARS IN THOUSANDS)
<S>                                            <C>         <C>           <C>          <C>
Net underwriting income (loss)...............                 $(580)      $  5,423
Revenue......................................                                8,345
Net investment income........................   $   604         898         13,283
Interest income..............................     1,043
Share of net income of partly-owned
  companies..................................                                   79
General and administrative expenses..........    (1,641)       (999)       (18,536)
Amortization of run-off provision............                   666
Other income.................................       201
Foreign exchange loss........................                   (56)        (2,195)
                                                -------       -----       --------
Income (loss) before income taxes............       207         (71)         6,399
Income taxes.................................      (683)                    (1,327)
Minority interest............................                                 (991)
                                                -------       -----       --------
Net income (loss)............................   $  (476)      $ (71)      $  4,081
                                                =======
Company's economic ownership %...............                    33%         32.69%
                                                              -----       --------
Earnings (loss) of partially owned equity
  affiliates.................................                 $ (23)      $  1,334    $1,311
                                                              =====       ========    ======
</Table>

     The Company's economic ownership percentage in Castlewood Holdings
decreased from 32.89 to 32.63% during the second quarter of 2005. The Company's
economic ownership percentage used in the table above for the six months ended
June 30, 2005 represents a weighted average for the period. (Note 4)

                                        15
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                               THREE MONTHS ENDED JUNE 30, 2004
                                    -------------------------------------------------------
                                                   B.H.       CASTLEWOOD
                                    CORPORATE   ACQUISITION    HOLDINGS    JCF CFN   TOTAL
                                    ---------   -----------   ----------   -------   ------
                                                    (DOLLARS IN THOUSANDS)
<S>                                 <C>         <C>           <C>          <C>       <C>
Net underwriting income (loss)....                 $(290)      $ 2,333
Revenue...........................                               6,289
Net investment income.............                    55           481
Interest income...................   $   201
Share of net income of
  partly-owned companies..........                                 342     $1,661
General and administrative
  expenses........................      (780)       (224)       (7,088)
Amortization of run-off
  provision.......................                   333
Other income......................       198
Foreign exchange loss.............                  (359)         (104)
                                     -------       -----       -------     ------
Income (loss) before income
  taxes...........................      (381)       (485)        2,253      1,661
Income taxes......................      (450)                     (188)
Minority interest.................      (446)                       44
                                     -------       -----       -------     ------
Net income (loss).................   $(1,277)      $(485)      $ 2,109     $1,661
                                     =======
Company's economic ownership %....                    33%       33 1/3%
                                                   -----       -------     ------
                                                                   702
Company's portion of earnings from
  JCF CFN.........................                                (223)
                                                               -------
Earnings (loss) of partially owned
  equity affiliates...............                 $(160)      $   479     $1,661    $1,980
                                                   =====       =======     ======    ======
</Table>

                                        16
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                SIX MONTHS ENDED JUNE 30, 2004
                                   ---------------------------------------------------------
                                                  B.H.       CASTLEWOOD
                                   CORPORATE   ACQUISITION    HOLDINGS      JCF CFN   TOTAL
                                   ---------   -----------   ----------     -------   ------
                                                    (DOLLARS IN THOUSANDS)
<S>                                <C>         <C>           <C>            <C>       <C>
Net underwriting income (loss)...                $  (580)     $  4,173
Revenue..........................                               10,668
Net investment income............                    513         2,687
Interest income..................   $   378
Share of net income of
  partly-owned companies.........                                1,026      $3,995
General and administrative
  expenses.......................    (1,507)      (1,139)      (13,366)
Amortization of run-off
  provision......................                    666
Other income.....................       298
Foreign exchange gain (loss).....                   (202)          973
                                    -------      -------      --------      ------
Income (loss) before income
  taxes..........................      (831)        (742)        6,161       3,995
Income taxes.....................    (1,279)                      (454)
Minority interest................    (1,069)                      (412)
                                    -------      -------      --------      ------
Net income (loss)................   $(3,179)     $  (742)     $  5,295      $3,995
                                    =======
Company's economic ownership %...                     33%           33 1/3%
                                                 -------      --------      ------
                                                                 1,764
Company's portion of earnings
  from JCF CFN...................                                 (534)
                                                              --------
Earnings (loss) of partially
  owned equity affiliates........                $  (245)     $  1,230      $3,995    $4,980
                                                 =======      ========      ======    ======
</Table>

     A minority interest for Castlewood Holdings' portion of earnings from the
JCF CFN Entities is reported in the Corporate column.

NOTE 8: STOCK COMPENSATION

     In April 2005, under the 1997 Amended Omnibus Incentive Plan (the
"Incentive Plan"), the Company granted 5,000 options to Paul J. Collins, one of
the Company's non-employee directors. The options granted to Mr. Collins vest on
April 4, 2006. The options have an exercise price of $57.81, the closing market
price on the date of grant, and expire on April 4, 2015. The options have an
estimated fair value of $9.36 as determined using the Black-Scholes option
pricing model and based on the following assumptions: 3.74% risk-free interest
rate, 0.00% dividend yield, 21.5% expected volatility and 2.13 years expected
life.

     As of June 30, 2005, a total of 470,000 options have been issued or
reserved for issuance under the Incentive Plan.

                                        17
<PAGE>
                    THE ENSTAR GROUP, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: INCOME PER SHARE

     The table below illustrates the reconciliation between net income per
common share -- basic and net income per common share -- assuming dilution for
the three and six months ended June 30, 2005 and 2004. Net income per common
share -- basic is computed by dividing net income by the weighted average shares
outstanding. Net income per common share -- assuming dilution is computed by
dividing net income by the sum of the weighted average shares outstanding and
common share equivalents. Common share equivalents consist of stock units
deferred under the Deferred Compensation and Stock Plan for Non-Employee
Directors and stock options granted under the Company's stock option/incentive
plans.

<Table>
<Caption>
                                         THREE MONTHS ENDED         SIX MONTHS ENDED
                                              JUNE 30,                  JUNE 30,
                                       -----------------------   -----------------------
                                          2005         2004         2005         2004
                                       ----------   ----------   ----------   ----------
                                         (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                          (UNAUDITED)
<S>                                    <C>          <C>          <C>          <C>
Net income...........................  $      796   $      703   $      835   $    1,801
                                       ==========   ==========   ==========   ==========
Net income per common
  share -- basic.....................  $     0.14   $     0.13   $     0.15   $     0.33
                                       ==========   ==========   ==========   ==========
Net income per common share --
  assuming dilution..................  $     0.14   $     0.12   $     0.14   $     0.31
                                       ==========   ==========   ==========   ==========
Weighted average shares outstanding--
  basic..............................   5,517,909    5,485,240    5,517,909    5,475,496
Common share equivalents.............     327,712      293,353      329,421      298,248
                                       ----------   ----------   ----------   ----------
Weighted average shares outstanding--
  assuming dilution..................   5,845,621    5,778,593    5,847,330    5,773,744
                                       ==========   ==========   ==========   ==========
</Table>

     There were no antidilutive common stock equivalents for the three and six
months ended June 30, 2005 and 2004.

NOTE 10: SUBSEQUENT EVENTS

     In July 2005, the Company funded its initial capital call from Affirmative
Investment of approximately $2.6 million. This amount was accrued in the
Company's consolidated financial statements at June 30, 2005.

     In July 2005, the Company sold a portion of its marketable securities for
total proceeds of approximately $1.4 million. The Company realized a pre-tax
gain of $207,000 on the sale.

                                        18
<PAGE>

                REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

Board of Directors and Shareholders of
The Enstar Group, Inc.
Montgomery, Alabama

     We have reviewed the accompanying condensed consolidated balance sheet of
The Enstar Group, Inc. and Subsidiaries ("Enstar") as of June 30, 2005, and the
related condensed consolidated statements of income and comprehensive income for
the three-month and six-month periods ended June 30, 2005 and 2004, and of cash
flows for the six-month periods ended June 30, 2005 and 2004. These interim
financial statements are the responsibility of Enstar's management.

     We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

     Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.

     We have previously audited, in accordance with standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Enstar as of December 31, 2004, and the related consolidated statements
of income, comprehensive income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated March 30, 2005,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2004 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

                                               /s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia
August 9, 2005

                                        19
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

OVERVIEW

     Through the operations of the Company's partially owned equity affiliates,
Castlewood Holdings and B.H. Acquisition, and their subsidiaries, the Company
acquires and manages insurance and reinsurance companies in run-off. The
management of these businesses includes claims administration, adjustment and
settlement together with the collection of reinsurance recoveries. Castlewood
Holdings, a Bermuda-based company, also provides management, consulting and
other services to the insurance and reinsurance industry for both fixed and
success-based fee arrangements. In general, reinsurance is an arrangement in
which the reinsurer agrees to indemnify an insurance or reinsurance company
against all or a portion of the risks underwritten by such insurance or
reinsurance company under one or more insurance or reinsurance contracts. For a
discussion of certain risks and uncertainties relating to the Company's
participation in the reinsurance industry see "Safe Harbor Compliance Statement
for Forward-Looking Statements" included as Exhibit 99.1 to The Enstar Group,
Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2004,
which is hereby incorporated by reference.

     The Company is also actively engaged in the search for one or more
additional operating businesses which meet the Company's acquisition criteria.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"). SFAS 123R requires that the compensation
cost resulting from all share-based payment transactions (e.g. stock options and
restricted stock) be recognized in the financial statements. SFAS 123R requires
all entities to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees and non-employees except for
equity instruments held by employee share ownership plans. This statement
replaces SFAS 123, "Accounting for Stock-Based Compensation," and supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company currently accounts for employee share-based
payment awards under the provisions of APB 25. The Company will apply the
provisions of SFAS 123R beginning January 1, 2006. The Company is currently
evaluating the impact that the implementation of this statement will have on its
consolidated financial position and results of operations.

CRITICAL ACCOUNTING POLICIES

  ENSTAR

     In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The most significant accounting estimates inherent
in the preparation of the Company's consolidated financial statements include
estimates associated with its evaluation of the income tax valuation allowance.

     Income Tax Valuation Reserve -- The Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. The effect of
temporary differences on the financial statements includes certain operating
losses of partially owned foreign subsidiaries and tax credit carryforwards. The
Company has established a valuation allowance for the uncertainty of the
realization of these and any other net deferred tax assets. However, utilization
of the remaining deferred tax assets at June 30, 2005, is based on management's
assessment of the Company's earnings history, expectations of future taxable
income, and other relevant considerations.

  CASTLEWOOD HOLDINGS AND B.H. ACQUISITION

     Certain amounts in Castlewood Holdings' and B.H. Acquisition's consolidated
financial statements are the result of transactions that require the use of best
estimates and assumptions to determine reported values.

                                        20
<PAGE>

These amounts could ultimately be materially different than what has been
provided for in their consolidated financial statements. The assessment of loss
reserves and reinsurance recoverable are considered to be the values requiring
the most inherently subjective and complex estimates. In addition, the
assessment of the possible impairment of goodwill involves certain estimates and
assumptions. As such, the accounting policies for these amounts are of critical
importance to their consolidated financial statements.

     Loss and Loss Adjustment Expenses -- Because a significant amount of time
can lapse between the assumption of risk, the occurrence of a loss event, the
reporting of the event to an insurance or reinsurance company and the ultimate
payment of the claim on the loss event, Castlewood Holdings' and B.H.
Acquisition's liability for unpaid losses and loss expenses is based largely
upon estimates. Castlewood Holdings' and B.H. Acquisition's management must use
considerable judgment in the process of developing these estimates. The
liability for unpaid losses and loss expenses for property and casualty business
includes amounts determined from loss reports on individual cases and amounts
for losses incurred but not reported. Such reserves are reviewed and estimated
by management quarterly based upon reports received from ceding companies and
annually based upon independent actuarial estimates of ultimate unpaid losses.
Castlewood Holdings' and B.H. Acquisition's ultimate liability may be
significantly greater than or less than the amount estimated, with any
adjustments in such estimates being reflected in the periods in which they
become known.

     Reinsurance Balances Receivable -- One of the ways loss exposure is managed
is through the use of reinsurance. While reinsurance arrangements are designed
to limit losses and to permit recovery of a portion of direct unpaid losses,
reinsurance does not relieve Castlewood Holdings or B.H. Acquisition of their
liabilities to their insureds. Accordingly, loss reserves represent total gross
losses, and reinsurance recoverable represents anticipated recoveries of a
portion of those unpaid losses as well as amounts recoverable from reinsurers
with respect to claims, which have already been paid.

     Goodwill -- On January 1, 2002, Castlewood Holdings and B.H. Acquisition
adopted SFAS 142. This statement requires that goodwill be assessed for
impairment on at least an annual basis. In determining goodwill, Castlewood
Holdings must determine the fair values of the assets of an acquired company.
The determination of fair value necessarily involves many assumptions. Fair
values of reinsurance assets and liabilities acquired are derived from
probability weighted ranges of the associated projected cash flows, based on
actuarially prepared information and management run-off strategy. Fair value
adjustments are based on the estimated timing of loss and loss adjustment
expense payments and an assumed interest rate, and are amortized over the
estimated payout period, as adjusted for accelerations on commutation
settlements, using the constant yield method options. If the assumptions made in
initially valuing the assets change significantly in the future, Castlewood
Holdings may be required to record impairment charges which could have a
material impact on the financial statements.

     Castlewood Holdings assessed its recorded goodwill in 2004 in accordance
with SFAS 142 and determined that there had been no impairment in its carrying
value.

     SFAS 142 also requires that negative goodwill be reversed immediately.
During 2004, Castlewood Holdings recorded negative goodwill in earnings upon the
acquisition of three companies, and presented it as an extraordinary gain.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary uses of liquidity include, but are not limited to,
funding normal operating expenses as well as various expenses incurred in
connection with the Company's search for one or more suitable acquisitions. In
addition, the Company uses cash on hand to fund commitments made in connection
with the purchase of its partially owned equity affiliates. The primary sources
of the Company's liquidity include the receipt of dividends and distributions
from partially owned equity affiliates.

     Net cash used in operating activities was approximately $1.7 million for
the six months ended June 30, 2005 compared to net cash provided by operating
activities of approximately $8.5 million for the same period in 2004. This
substantial decrease was primarily due to the receipt of distributions from
Castlewood Holdings

                                        21
<PAGE>

and Green Tree of approximately $3.0 million and $6.6 million, respectively, in
2004. There were no distributions from partially owned equity affiliates during
the six months ended June 30, 2005.

     Net cash used in investing activities was approximately $5.1 million for
the six months ended June 30, 2005. The Company purchased marketable securities
for approximately $9.5 million during the second quarter of 2005 and received
proceeds of approximately $4.4 million from the sale of a portion of these
securities during the same period. Investing activities during the six months
ended June 30, 2004 related to the maturities and purchases of certificates of
deposit, which netted to zero.

     There were no financing activities for the six months ended June 30, 2005.
Net cash used in financing activities was approximately $1.9 million for the six
months ended June 30, 2004. Approximately $2.5 million was distributed to
Castlewood Holdings as the minority interest portion of the distributions
received from Green Tree in 2004. This amount was partially offset by the
receipt of $555,000 by the Company in 2004 from the exercise of certain stock
options by a former non-employee director of the Company.

     The Company's assets, aggregating approximately $162.8 million at June 30,
2005, include approximately $74.9 million in cash and cash equivalents,
approximately $4.1 million in short-term certificates of deposit and
approximately $6.5 million in marketable securities. The Company believes its
current liquidity is adequate to fund any foreseeable cash requirements.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

     In December 2004, the Company signed a one year lease beginning January 1,
2005 on an office building at 401 Madison Avenue, Montgomery, Alabama which
serves as the corporate headquarters. The lease also provides renewal options
for three periods of one year each. Additionally, pursuant to an oral agreement,
the Company leases space in a warehouse at 703 Howe Street, Montgomery, Alabama
on a month-to-month basis. The Company leases the office building and warehouse
space from unaffiliated third parties for $3,000 and $350 per month,
respectively. The Company believes the rental amounts are competitive with
market rates and that the cancellation or termination of either of these leases
would not have a material adverse effect on the Company's results of operations.
The Company incurred rent expense in the amount of $10,050 and $20,100 for the
three and six months ended June 30, 2005 and $9,300 and $18,600 for the same
periods in 2004. In February 2002, the Company entered into an agreement with
J.C. Flowers & Co. LLC running through November 2005 for the use of certain
office space and administrative services from J.C. Flowers & Co. LLC for an
annual payment of $66,000. J.C. Flowers & Co. LLC is managed by Mr. Flowers, a
member of the Company's board of directors and the Company's largest
shareholder.

  AFFIRMATIVE INVESTMENT LLC

     In June 2005, the Company committed to contribute up to $10 million for a
14%, non-voting interest in Affirmative Investment LLC ("Affirmative
Investment"), a newly formed Delaware limited liability company. J.C. Flowers I
LP committed the capital necessary for the remaining 86% interest in Affirmative
Investment. Both J.C. Flowers I LP and Affirmative Associates LLC, the managing
member of Affirmative Investment, are controlled by Mr. Flowers, a member of the
Company's board of directors and the Company's largest shareholder. At June 30,
2005 the Company accrued its initial capital contribution of approximately $2.6
million, which was paid on July 1, 2005.

     Affirmative Investment currently holds 1,183,000 shares of common stock of
Affirmative Insurance Holdings, Inc. ("Affirmative Insurance"), which were
acquired through open market purchases. In addition, in June 2005, Affirmative
Investment acquired 50% of the membership interests of New Affirmative LLC
("NAL"). The remaining 50% of the membership interests of NAL are held by
Delaware Street Capital Master Fund, LP or its affiliates ("DSC"). In turn, NAL,
pursuant to a Stock Purchase Agreement with Vesta Insurance Group, Inc. ("VIG")
and Vesta Fire Insurance Corporation, a subsidiary of VIG (together with VIG,
"Vesta"), has agreed to acquire from Vesta an aggregate of 5,218,228 shares of
Affirmative Insurance common stock for a purchase price of $15.00 per share
(subject to regulatory approval). At or simultaneously with the closing of the
transaction with Vesta and subject to regulatory approval, Affirmative
Investment will contribute the 1,183,000 shares of Affirmative Insurance that it
currently holds, and DSC will
                                        22
<PAGE>

contribute the 1,459,699 shares of Affirmative Insurance common stock that it
currently holds, to NAL. The Company expects to fund approximately $5.5 million
upon closing of the Stock Purchase Agreement between NAL and Vesta.

RECENT DEVELOPMENTS

     In July 2005, the Company funded its initial capital call from Affirmative
Investment of approximately $2.6 million. This amount was accrued in the
Company's consolidated financial statements at June 30, 2005.

     In July 2005, the Company sold a portion of its marketable securities for
total proceeds of approximately $1.4 million. The Company realized a pre-tax
gain of $207,000 on the sale.

RESULTS OF OPERATIONS

     The Company reported net income of $796,000 and $835,000 for the three and
six months ended June 30, 2005, compared to net income of $703,000 and
approximately $1.8 million for the same periods in the prior year. The changes
in net income for the three and six month periods ended June 30, 2005 compared
to the same periods in the prior year were primarily attributable to an increase
in interest income and an increase in other investment income offset by
decreased earnings from the Company's partially owned equity affiliates.

     Interest income was $561,000 and approximately $1.0 million for the three
and six months periods ended June 30, 2005, respectively, compared to $201,000
and $378,000 for the same periods in the prior year. Interest income was earned
from cash, cash equivalents and certificates of deposit. Interest income
increased primarily as a result of an increase in cash resulting from the sale
of the Company's interest in Green Tree in July 2004. In addition, interest
rates earned on the Company's cash, cash equivalents and certificates of deposit
have increased an average of 1.3 percent during the six months ended June 30,
2005 compared to the same period in 2004.

     Other investment income of $604,000 resulted from the gain on the sale of
certain marketable securities in June 2005.

     Earnings of partially owned equity affiliates were approximately $1.0
million and approximately $1.3 million for the three and six month periods ended
June 30, 2005, respectively, compared to approximately $2.0 million and
approximately $5.0 million for the same periods in the prior year. The Company
recorded equity in earnings of $23,000 and equity in losses of $23,000 from B.H.
Acquisition for the three and six month periods ended June 30, 2005,
respectively, compared to equity in losses of $160,000 and $245,000 for the same
periods in 2004. The Company recorded equity in earnings of approximately $1.0
million and approximately $1.3 million from Castlewood Holdings for the three
and six months ended June 30, 2005, respectively, compared to $479,000 and
approximately $1.2 million for the same periods in 2004. The Company reported
equity in earnings of approximately $1.7 million and approximately $4.0 million
from Green Tree for the three and six months ended June 30, 2004, respectively,
with $446,000 and approximately $1.1 million reported as a minority interest,
respectively. In July 2004, the JCF CFN Entities completed the sale of their
entire interest in Green Tree. For further discussion of the reasons underlying
the changes in earnings (losses) from B.H. Acquisition and Castlewood Holdings,
see "-- Results of Operations -- Partially Owned Equity Affiliates".

     Other income consists primarily of investment management fees charged to
Castlewood Holdings, one of the Company's partially owned equity affiliates.

     General and administrative expenses were $861,000 and approximately $1.6
million for the three and six month periods ended June 30, 2005, respectively,
compared to $780,000 and approximately $1.5 million for the same periods in
2004. Of these amounts, $335,000 and $633,000 related to employee expenses for
the three and six month periods ended June 30, 2005, respectively, compared to
$291,000 and $593,000 for the same periods in 2004. General and administrative
expenses also include legal and professional fees as well as travel expenses
incurred in connection with the Company's search for one or more additional
operating companies. Additionally, the Company incurs legal and professional
fees in connection with reporting requirements associated with being a publicly
traded company, and in connection with handling various other accounting and tax
matters. Legal and professional fees and travel expenses were $350,000 and
$690,000 for
                                        23
<PAGE>

the three and six months ended June 30, 2005, respectively, compared to $332,000
and $574,000 for the same periods in 2004.

     Income tax expense was $655,000 and $683,000 for the three and six months
ended June 30, 2005, respectively, compared to $450,000 and approximately $1.3
million for the same periods in 2004. The Company's effective tax rates for 2005
and 2004 differ from the statutory rate primarily due to changes in the
valuation allowance related to deferred tax assets, tax contingencies and state
income taxes.

RESULTS OF OPERATIONS -- PARTIALLY OWNED EQUITY AFFILIATES

     Since a substantial portion of the Company's results of operations are
comprised of the results of operations of Castlewood Holdings and B.H.
Acquisition, the following additional summary information is provided with
respect to those companies' results of operations:

  CASTLEWOOD HOLDINGS

     Castlewood Holdings reported consolidated net earnings of $3.1 million and
$4.1 million for the three and six months ended June 30, 2005, respectively,
compared to net earnings of $2.1 million and $5.3 million for the same periods
in 2004. The reduction in earnings of $1.2 million for the six months ended June
30, 2005 was due to a combination of higher salary costs and an increased
foreign exchange loss offset by increased investment income.

     Underwriting income was $3.9 million and $5.4 million for the three and six
months ended June 30, 2005, respectively, compared to $2.3 million and $4.2
million for the same period in 2004. The increase for the six months ended June
2005 over 2004 is due primarily to the inclusion of Harper Insurance Limited
("Harper") results for the current year. (Harper was acquired in October 2004).

     Castlewood Holdings earned consulting fees of $3.9 million and $8.3 million
for the three and six months ended June 30, 2005, respectively, compared to $6.3
million and $10.7 million for the same periods in 2004. Castlewood Holdings
generates its consulting fees based on a combination of fixed and success based
fee arrangements. Consulting income will vary dependent on the success and
timing of completion of success based fee arrangements. Included in these
amounts were $313,000 and $625,000 in consulting fees charged to B.H.
Acquisition, a partly-owned company, for each of the three and six months ended
June 30, 2005 and 2004, respectively.

     Castlewood Holdings' share of equity in earnings from its partly-owned
companies was $32,000 and $79,000 for the three and six months ended June 30,
2005, respectively, and $342,000 and $1.0 million for the same periods in 2004.
For 2005 the amounts represent Castlewood Holdings' proportionate share of
equity in the earnings of B.H. Acquisition and Cassandra Equity (Cayman) LP
("Cassandra"). For 2004 it represented Castlewood Holdings' proportionate share
of equity in the earnings of B.H. Acquisition plus that of the JCF CFN Entities.
In March 2005, Cassandra's underlying assets were sold for approximately $40.0
million. Castlewood Holdings' proportionate share of the proceeds was
approximately $10.8 million.

     Net investment income, excluding unrealized gains and losses, was $8.3
million and $13.3 million for the three and six months ended June 30, 2005,
respectively, compared to $481,000 and $2.7 million for the same periods in
2004. Investment income includes interest income earned from cash, cash
equivalents and debt securities. The increase in income for the six months ended
2005 compared to the same period in 2004 is primarily attributable to the
acquisition of Harper's invested assets along with an increase in interest
rates.

     Salaries and benefits were $8.5 million and $13.4 million for the three and
six months ended June 30, 2005, respectively, compared to $4.2 million and $8.4
million for the same periods in 2004. Castlewood Holdings is a service based
company and, as such, employee salaries and benefits are its largest cost.
Additionally, Castlewood Holdings has a discretionary bonus plan included as a
part of its employee compensation. In the third quarter of 2004, the Company
implemented an employee share plan whereby the Company has the ability to grant
shares to employees up to a maximum of 7.5% of the Company's outstanding
ordinary shares. The charge associated with these shares for the six months
ended June 30 2005 was

                                        24
<PAGE>

$1.5 million. The charge is being amortized to income over the vesting periods
associated with the share grants. For the quarter ended June 30, 2005, an
additional $2.4 million was expensed related to a new employee joining
Castlewood Holdings.

     General and administrative expenses were $2.5 million and $5.1 million for
the three and six months ended June 30, 2005, respectively, compared to $2.8
million and $5.0 million for the same periods in 2004. General and
administrative expenses include rent and rent related costs, professional fees
(legal, investment, audit and actuarial) and travel expenses. Castlewood
Holdings operates in both the UK and Bermuda and staff travel frequently in
connection with Castlewood Holdings' search for acquisition opportunities and in
the general management of the business.

     Castlewood Holdings has recorded a foreign exchange loss of $1.1 million
and $2.2 million for the three and six months ended June 30, 2005, respectively,
compared to a loss $104,000 and a foreign exchange gain of $1.0 million for the
same periods in 2004. Through its subsidiaries, Castlewood Holdings conducts
business in a variety of foreign (non-U.S.) currencies, the principal exposures
being Euros and British pounds. At each balance sheet date, recorded balances
that are denominated in a currency other than the functional currency of
Castlewood Holdings are adjusted to reflect the current exchange rate. Revenue
and expense items are translated into U.S. dollars at average rates of exchange
for the periods. The resulting exchange gains or losses are included in net
earnings.

     Income taxes of $151,000 and $1.3 million were recorded for the three and
six months ended June 30, 2005, respectively, compared to $188,000 and $454,000
for the same periods in 2004. Under current Bermuda law, Castlewood Holdings and
its Bermuda subsidiaries are not required to pay taxes in Bermuda on either
income or capital gains. Castlewood Holdings and its Bermuda subsidiaries have
received an undertaking from the Bermuda government that, in the event of income
or capital gains taxes being imposed, Castlewood Holdings and its Bermuda
subsidiaries will be exempted from such taxes until the year 2016. United
Kingdom and United States subsidiaries record income taxes based on their
graduated statutory rates, net of any tax benefits arising from tax loss
carryforwards.

     Castlewood Holdings has recorded a minority interest in earnings of
$612,000 and $991,000 for the three and six months ended June 30, 2005,
respectively, compared to a minority interest in (losses) earnings of $(44,000)
and $412,000 for the same periods in 2004. The minority interest amounts
represent minority shareholders' 49.9% share of earnings from Hillcot.

  B.H. ACQUISITION

     B.H. Acquisition reported net earnings of $70,000 and net losses of $71,000
for the three and six months ended June 30, 2005, respectively, compared to net
losses of $485,000 and $742,000 for the same periods in the prior year.

     The Company had net underwriting losses of $290,000 and $580,000 for each
of the three and six months ended June 30, 2005 and 2004, respectively.

     Net investment income was $555,000 and $898,000 for the three and six
months ended June 30, 2005, respectively, compared to $55,000 and $513,000 for
the same periods in 2004. The principal source of net investment income was
interest income earned from cash, cash equivalents and mutual funds. The
increase in income is due primarily to an increase in interest rates.

     Amortization of the run-off provision was $333,000 and $666,000 for each of
the three and six months ended June 30, 2005 and 2004, respectively. The Company
established a provision at the date of acquisition equal to the anticipated
expenses to be incurred over the expected life of the run-off. This provision is
amortized on a straight-line basis over this period.

     General and administrative expenses were $480,000 and $999,000 for the
three and six months ended June 30, 2005, respectively, compared to $224,000 and
$1.1 million for the same periods in 2004. General and administrative expenses
include legal, audit, management and actuarial expenses.

                                        25
<PAGE>

     B.H. Acquisition recorded foreign exchange losses of $48,000 and $56,000
for the three and six months ended June 30, 2005, respectively, compared to
foreign exchange losses of $359,000 and $202,000 for the same periods in 2004.
Through its subsidiaries, B.H. Acquisition conducts business in a variety of
foreign (non-U.S.) currencies, the principal exposures being Euros and British
pounds. At each balance sheet date, recorded balances that are denominated in a
currency other than the functional currency of B.H. Acquisition are adjusted to
reflect the current exchange rate. Revenue and expense items are translated into
U.S. dollars at average rates of exchange for the years. The resulting exchange
gains or losses are included in net income.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risk from changes in interest rates. At
June 30, 2005, the Company had cash and cash equivalents of approximately $74.9
million in interest bearing accounts (interest at floating rates) and
approximately $4.1 million of short-term certificates of deposit (interest at
fixed rates). Accordingly, each one percent change in market interest rates
would change interest income by approximately $790,000 per year. However, any
future transactions affecting the Company's cash and cash equivalents and
certificates of deposit will change this estimate. Additionally, although
interest rate changes would affect the fair value of the Company's certificates
of deposits, the weighted average original term of certificates held by the
Company at June 30, 2005 is approximately six months. The short-term nature of
these certificates limits the Company's risk of changes in the fair value of
these certificates. In addition, the Company is also exposed to market risk
relating to the marketable securities held as available-for-sale. Management
continually monitors market conditions and the performance of the Company's
marketable securities as it relates to the Company's investment objectives. The
Company recorded the securities at a fair value of approximately $6.5 million at
June 30, 2005, with an unrealized gain of $495,000, net of income taxes, as a
component of accumulated other comprehensive income.

     The Company is also exposed to foreign currency risk through its holdings
in partially owned equity affiliates and their subsidiaries. Foreign currency
risk is the risk that the Company will incur economic losses due to adverse
changes in foreign currency exchange rates. These entities conduct business in a
variety of foreign (non-U.S.) currencies, the principal exposures being in Euros
and British pounds. Assets and liabilities denominated in foreign currencies are
exposed to risk stemming from changes in currency exchange rates. Exchange rate
fluctuations impact the Company's and its partially owned equity affiliates'
reported consolidated financial condition, results of operations and cash flows
from year to year.

ITEM 4.  CONTROLS AND PROCEDURES

     As required by Securities and Exchange Commission ("SEC") rules, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of the end of the period covered by this
quarterly report. This evaluation was carried out under the supervision and with
the participation of the Company's management, including its principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of the Company's
disclosure controls and procedures are effective. There were no changes to the
Company's internal controls over financial reporting during the period covered
by this report that materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting subsequent to
the date of their evaluation.

     Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act,
is recorded, processed, summarized and reported, within the time periods
specified in SEC rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act are accumulated and communicated to the Company's
management, including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.

                                        26
<PAGE>

                                    PART II

                               OTHER INFORMATION

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

     The Company held its Annual Meeting of Shareholders on June 2, 2005.
Matters voted upon at the meeting and the number of votes cast for, against or
withheld, are as follows:

     (1) To consider and act upon a proposal to elect the following nominees to
be directors for three year terms until the 2008 annual meeting of shareholders:

<Table>
<Caption>
                                                                           VOTES
NOMINEE                                                       VOTES FOR   WITHHELD
-------                                                       ---------   --------
<S>                                                           <C>         <C>
Nimrod T. Frazer............................................  5,041,838   101,396
John J. Oros................................................  5,042,360   100,874
</Table>

     In addition to Messrs. Frazer and Oros, the continuing directors are T.
Whit Armstrong, T. Wayne Davis, J. Christopher Flowers, Gregory L. Curl and Paul
J. Collins. Messrs. Armstrong and Davis' terms expire in the year 2006 while
Messrs. Flowers, Curl and Collins' terms expire in the year 2007.

     (2) To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the year ended December 31, 2005. Votes cast were: 5,109,526 for,
2,721 against and 30,987 abstentions.

ITEM 6.  EXHIBITS

<Table>
<Caption>
 REFERENCE
   NUMBER                              DESCRIPTION OF EXHIBITS
------------                           -----------------------
<S>            <C>   <C>
     2.1       --    Shareholders Agreement, dated as of July 3, 2000, among B.H.
                     Acquisition Limited, the Company and the other parties
                     thereto (incorporated by reference to Exhibit 2.1 to the
                     Current Report on Form 8-K, dated July 18, 2000).
     2.2       --    Investment Agreement, dated as of July 3, 2000, among B.H.
                     Acquisition Limited, the Company and the other parties
                     thereto (incorporated by reference to Exhibit 2.2 to the
                     Current Report on Form 8-K, dated July 18, 2000).
     2.3       --    Share Sale and Purchase Agreement, dated as of March 31,
                     2000, between PetroFina S.A. and B.H. Acquisition Limited
                     (incorporated by reference to Exhibit 2.3 to the Current
                     Report on Form 8-K, dated July 18, 2000).
     2.4       --    Share Sale and Purchase Agreement, dated as of March 31,
                     2000, between PetroFina S.A., Brittany Holdings Limited and
                     B.H. Acquisition Limited (incorporated by reference to
                     Exhibit 2.4 to the Current Report on Form 8-K, dated July
                     18, 2000).
     2.5       --    Share Purchase and Capital Commitment Agreement, dated as of
                     October 1, 2001, between the Company, Castlewood Holdings,
                     Trident, Marsh & McLennan Capital Professionals Fund, L.P.,
                     Marsh & McLennan Employees' Securities Company, L.P. and the
                     other parties thereto (incorporated by reference to Exhibit
                     2.1 to the Current Report on Form 8-K, dated December 13,
                     2001).
     2.6       --    Amendment No. 1 and Waiver of Certain Closing Conditions to
                     the Share Purchase and Capital Commitment Agreement, dated
                     as of November 29, 2001 (incorporated by reference to Ex-
                     hibit 2.2 to the Current Report on Form 8-K, dated December
                     13, 2001).
     2.7       --    Agreement Relating to the Sale and Purchase of the Entire
                     Issued Share Capital of Toa-UK, dated as of March 28, 2003,
                     between The Toa Reinsurance Company, Limited, Castlewood
                     Holdings and Shinsei (incorporated by reference to Exhibit
                     2.1 to the Current Report on Form 8-K, dated April 11,
                     2003).
     2.8       --    Purchase and Sale Agreement, dated March 10, 2004, by and
                     among J.C. Flowers I L.P., JCF CFN LLC, JCF CFN II LLC, JCF
                     AIV II LP, JCF AIV III LP, JCF Associates I LLC and FIT CFN
                     Holdings LLC (incorporated by reference to Exhibit 99.2 to
                     the Current Report on Form 8-K, dated March 23, 2004).
</Table>

                                        27
<PAGE>

<Table>
<Caption>
 REFERENCE
   NUMBER                              DESCRIPTION OF EXHIBITS
------------                           -----------------------
<S>            <C>   <C>
     2.9       --    Purchase and Sale Agreement, dated October 29, 2004, by and
                     among Zurich Insurance Company, Harper Holding Sarl and
                     Kenmare Holdings Limited (incorporated by reference to
                     Exhibit 99.2 to the Current Report on Form 8-K, dated
                     November 4, 2004).
     3.1       --    Articles of Incorporation of the Company, as amended on June
                     10, 1998 (incorporated by reference to Exhibit 3.1 to the
                     Quarterly Report on Form 10-Q, dated August 4, 1998).
     3.2       --    Bylaws of the Company, as amended on May 20, 1999
                     (incorporated by reference to Exhibit 3.2 to the Quarterly
                     Report on Form 10-Q, dated August 6, 1999).
     4.1       --    Rights Agreement between the Company and American Stock
                     Transfer & Trust Company, as Rights Agent, dated as of
                     January 20, 1997 (incorporated by reference to Exhibit 4.1
                     to Amendment No. 2 to the Registration Statement on Form 10,
                     dated March 27, 1997).
     4.2       --    Amendment Agreement, dated as of October 20, 1998, to the
                     Rights Agreement, dated as of January 20, 1997, between the
                     Company and American Stock Transfer & Trust Company
                     (incorporated by reference to Exhibit 10.2 to the Current
                     Report on Form 8-K dated October 20, 1998).
    10.1       --    Subscription Agreement, dated as of June 30, 2005, between
                     Affirmative Investment LLC, J.C. Flowers I LP and the
                     Company.
    10.2       --    Limited Liability Company Agreement of Affirmative
                     Investment LLC, dated as of June 30, 2005, between
                     Affirmative Associates LLC, J.C. Flowers I LP and the
                     Company.
    31.1       --    Certification of Chief Executive Officer pursuant to Rule
                     13a -- 14(a) or Rule 15d -- 14(a) of the Securities Exchange
                     Act of 1934 as adopted under Section 302 of the
                     Sarbanes-Oxley Act of 2002.
    31.2       --    Certification of Chief Financial Officer pursuant to Rule
                     13a -- 14(a) or Rule 15d -- 14(a) of the Securities Exchange
                     Act of 1934 as adopted under Section 302 of the
                     Sarbanes-Oxley Act of 2002.
    32.1       --    Certification of Chief Executive Officer pursuant to 18
                     U.S.C. Section 1350, as adopted pursuant to Section 906 of
                     the Sarbanes-Oxley Act of 2002.
    32.2       --    Certification of Chief Financial Officer pursuant to 18
                     U.S.C. Section 1350, as adopted pursuant to Section 906 of
                     the Sarbanes-Oxley Act of 2002.
    99.1       --    The Enstar Group, Inc. Private Securities Litigation Reform
                     Act of 1995 Safe Harbor Compliance Statement For
                     Forward-Looking Statements (incorporated by reference to
                     Exhibit 99.1 to the Annual Report on Form 10-K, dated March
                     30, 2005).
</Table>

                                        28
<PAGE>

                                   SIGNATURES

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

                                          THE ENSTAR GROUP, INC.

                                          By:      /s/ CHERYL D. DAVIS
                                            ------------------------------------
                                                      Cheryl D. Davis
                                               Chief Financial Officer, Vice
                                                          President
                                               of Corporate Taxes, Secretary
                                                    (Authorized Officer)
                                               (Principal Financial Officer)

Date: August 9, 2005

                                        29