##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended
    September 30, 2002                                       
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number 0-07477



---

The Enstar Group, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Georgia                                                            |  | 63-0590560                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

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 þ          No o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes þ          No o

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 þ          No o

The number of shares of Registrants Common
Stock, $.01 par value per share, outstanding at
November 12, 2002 was 5,465,753.



---






---

TABLE OF CONTENTS



|                                                 |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                    
|                                                 | Item 1. Financial Statements                                                                 
|INDEPENDENT AUDITORS REPORT                    
|                                                 | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4. Controls and Procedures                 
|PART II OTHER INFORMATION                       
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                      
|CERTIFICATIONS                                  
|EX-99.1 PRIVATE SECURITIES LITIGATION REFORM ACT
|EX-99.2 SECTION 906 CERTIFICATION               



---



##### Table of Contents



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 THIS FORM 10-Q, AND ARE
HEREBY INCORPORATED HEREIN 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



---



##### Table of Contents






PART I

FINANCIAL INFORMATION




Item 1.     Financial
Statements

THE ENSTAR GROUP, INC. AND
SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

|                                              |                                                                                                                                          |                                          |                                            |              |     |         |        |         |      |        | 
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------------ | ------------ | --- | ------- | ------ | ------- | ---- | ------ | 
|                                              |                                                                                                                                          | September 30,                            |                                            | December 31,
|                                              |                                                                                                                                          | 2002                                     |                                            | 2001        
|                                              |                                                                                                                                          |                                          |                                            |             
|                                              |                                                                                                                                          |                                         
|                                              |                                                                                                                                          | (Dollars in thousands)                  
|                                              |                                                                                                                                          | (Unaudited)                             
|ASSETS                                       
|Cash and cash equivalents                     |                                                                                                                                          | $                                        | 55,645                                     |              |     | $       | 73,366 |        
|Certificates of deposit                       |                                                                                                                                          |                                          | 4,014                                      |              |     |         | 3,991  |        
|Other assets                                  |                                                                                                                                          |                                          | 770                                        |              |     |         | 1,336  |        
|Partially owned equity affiliates             |                                                                                                                                          |                                          | 54,356                                     |              |     |         | 20,928 |        
|                                              |                                                                                                                                          |                                          |                                            |              |     |         |        |        
|                                              |                                                                                                                                          |                                          | Total assets                               |              | $   | 114,785 |        |         | $    | 99,621 | 
|                                              |                                                                                                                                          |                                          |                                            |              |     |         |        |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY     
|Accounts payable and accrued liabilities      |                                                                                                                                          | $                                        | 833                                        |              |     | $       | 899    |        
|Income taxes payable                          |                                                                                                                                          |                                          | 443                                        |              |     |         | 43     |        
|Deferred income taxes                         |                                                                                                                                          |                                          | 151                                        |              |     |         | 151    |        
|Deferred liabilities                          |                                                                                                                                          |                                          | 538                                        |              |     |         | 464    |        
|Other liabilities                             |                                                                                                                                          |                                          | 416                                        |              |     |         | 407    |        
|                                              |                                                                                                                                          |                                          |                                            |              |     |         |        |        
|                                              |                                                                                                                                          |                                          | Total liabilities                          |              |     | 2,381   |        |         |      | 1,964  | 
|                                              |                                                                                                                                          |                                          |                                            |              |     |         |        |        
|Commitments and contingencies (Notes 3 and 7) |                                                                                                                                          |                                          |                                            |              |     |         |        |        
|Shareholders equity:                         |                                                                                                                                          |                                          |                                            |              |     |         |        |        
|                                              | Common stock ($.01 par value; 55,000,000 shares
    authorized, 5,908,104 shares issued at September 30, 2002
    and December 31, 2001) |                                          |                                            | 59           |     |         |        | 59      |     
|                                              | Additional paid-in capital                                                                                                               |                                          |                                            | 188,358      |     |         |        | 188,001 |     
|                                              | Accumulated other comprehensive income
    (loss) of partially owned equity affiliates:                                                  |                                          |                                            |              |     |         |        |         |     
|                                              |                                                                                                                                          | Unrealized holding losses on investments |                                            |              | (9  | )       |        |         | (150 | )     
|                                              |                                                                                                                                          | Currency translation adjustment          |                                            |              | 124 |         |        |         | 18   |       
|                                              | Accumulated deficit                                                                                                                      |                                          |                                            | (70,318      | )   |         |        | (84,461 | )   
|                                              | Treasury stock, at cost (442,351 shares)                                                                                                 |                                          |                                            | (5,810       | )   |         |        | (5,810  | )   
|                                              |                                                                                                                                          |                                          |                                            |              |     |         |        |        
|                                              |                                                                                                                                          |                                          | Total shareholders equity                 |              |     | 112,404 |        |         |      | 97,657 | 
|                                              |                                                                                                                                          |                                          |                                            |              |     |         |        |        
|                                              |                                                                                                                                          |                                          | Total liabilities and shareholders equity |              | $   | 114,785 |        |         | $    | 99,621 | 
|                                              |                                                                                                                                          |                                          |                                            |              |     |         |        |        

The accompanying notes are an integral part of
the consolidated financial statements.

1



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | --------- | ----------------- |  | ---- | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                   |  |                                               |           |                  
|                                                                                                   |  | Three Months Ended                            |           | Nine Months Ended
|                                                                                                   |  | September 30,                                 |           | September 30,    
|                                                                                                   |  |                                               |           |                  
|                                                                                                   |  | 2002                                          |           | 2001              |  | 2002 |           | 2001
|                                                                                                   |  |                                               |           |                   |  |      |           |     
|                                                                                                   |  |                                              
|                                                                                                   |  | (Dollars in thousands, except per share data)
|                                                                                                   |  | (Unaudited)                                  
|Interest income                                                                                    |  | $                                             | 382       |                   |  | $    | 788       |      |  | $ | 1,214     |   |  | $ | 2,726     |  
|Earnings of partially owned equity affiliates                                                      |  |                                               | 2,022     |                   |  |      | 562       |      |  |   | 14,500    |   |  |   | 1,616     |  
|General and administrative expenses                                                                |  |                                               | (704      | )                 |  |      | (472      | )    |  |   | (2,130    | ) |  |   | (1,734    | )
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Income before income taxes and cumulative effect
    of a change in accounting principle           |  |                                               | 1,700     |                   |  |      | 878       |      |  |   | 13,584    |   |  |   | 2,608     |  
|Income taxes                                                                                       |  |                                               | (51       | )                 |  |      | (51       | )    |  |   | (408      | ) |  |   | (178      | )
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Income before cumulative effect of a change in
    accounting principle                            |  |                                               | 1,649     |                   |  |      | 827       |      |  |   | 13,176    |   |  |   | 2,430     |  
|Cumulative effect of a change in accounting
    principle, net of income taxes                     |  |                                               |          |                   |  |      |          |      |  |   | 967       |   |  |   |          |  
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Net income                                                                                         |  | $                                             | 1,649     |                   |  | $    | 827       |      |  | $ | 14,143    |   |  | $ | 2,430     |  
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Weighted average shares outstanding 
    basic                                                    |  |                                               | 5,465,753 |                   |  |      | 5,265,753 |      |  |   | 5,465,753 |   |  |   | 5,265,753 |  
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Weighted average shares outstanding 
    assuming dilution                                        |  |                                               | 5,771,489 |                   |  |      | 5,465,480 |      |  |   | 5,740,324 |   |  |   | 5,424,177 |  
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Income per common share before change in
    accounting principle  basic                          |  | $                                             | 0.30      |                   |  | $    | 0.16      |      |  | $ | 2.41      |   |  | $ | 0.46      |  
|Cumulative effect of a change in accounting
    principle, net of income taxes  basic             |  |                                               |          |                   |  |      |          |      |  |   | 0.18      |   |  |   |          |  
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Net income per common share  basic                                                                |  | $                                             | 0.30      |                   |  | $    | 0.16      |      |  | $ | 2.59      |   |  | $ | 0.46      |  
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Income per common share before change in
    accounting principle  assuming dilution              |  | $                                             | 0.29      |                   |  | $    | 0.15      |      |  | $ | 2.30      |   |  | $ | 0.45      |  
|Cumulative effect of a change in accounting
    principle, net of income taxes  assuming dilution |  |                                               |          |                   |  |      |          |      |  |   | 0.17      |   |  |   |          |  
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  
|Net income per common share  assuming
    dilution                                                |  | $                                             | 0.29      |                   |  | $    | 0.15      |      |  | $ | 2.47      |   |  | $ | 0.45      |  
|                                                                                                   |  |                                               |           |                   |  |      |           |      |  |   |           |   |  |   |           |  

The accompanying notes are an integral part of
the consolidated financial statements.

2



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

|                                                                     |                                                                         |                                               |       |                   |   |      |     |      |  |   |        |      |   |   |       |   | 
|-------------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------- | ----- | ----------------- | - | ---- | --- | ---- |  | - | ------ | ---- | - | - | ----- | - | 
|                                                                     |                                                                         |                                               |       |                   |   |     
|                                                                     |                                                                         | Three Months                                  |       |                  
|                                                                     |                                                                         | Ended                                         |       | Nine Months Ended
|                                                                     |                                                                         | September 30,                                 |       | September 30,    
|                                                                     |                                                                         |                                               |       |                  
|                                                                     |                                                                         | 2002                                          |       | 2001              |   | 2002 |     | 2001
|                                                                     |                                                                         |                                               |       |                   |   |      |     |     
|                                                                     |                                                                         |                                              
|                                                                     |                                                                         | (Dollars in thousands, except per share data)
|                                                                     |                                                                         | (Unaudited)                                  
|Net income                                                           |                                                                         | $                                             | 1,649 |                   |   | $    | 827 |      |  | $ | 14,143 |      |   | $ | 2,430 |  
|Other comprehensive income of partially owned
    equity affiliates: |                                                                         |                                               |       |                   |   |      |     |      |  |   |        |      |   |   |       |  
|                                                                     | Unrealized holding losses on investments                                |                                               |       | (40               | ) |      |     |     |  |   |        | (225 | ) |   |       |  | 
|                                                                     | Less: reclassification adjustment for losses
    included in net income |                                               |       | 287               |   |      |     |     |  |   |        | 366  |   |   |       |  | 
|                                                                     | Currency translation adjustment                                         |                                               |       | 45                |   |      |     |     |  |   |        | 106  |   |   |       |  | 
|                                                                     |                                                                         |                                               |       |                   |   |      |     |      |  |   |        |      |   |   |       |  
|Other comprehensive income                                           |                                                                         |                                               | 292   |                   |   |      |    |      |  |   | 247    |      |   |   |      |  
|                                                                     |                                                                         |                                               |       |                   |   |      |     |      |  |   |        |      |   |   |       |  
|Comprehensive income                                                 |                                                                         | $                                             | 1,941 |                   |   | $    | 827 |      |  | $ | 14,390 |      |   | $ | 2,430 |  
|                                                                     |                                                                         |                                               |       |                   |   |      |     |      |  |   |        |      |   |   |       |  

The accompanying notes are an integral part of
the consolidated financial statements.

3



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                             |                                                                                       |                                                                                                                          |                                           |         |         |         |        |        |       |       |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------- | ------- | ------- | ------- | ------ | ------ | ----- | ----- | -
|                                                             |                                                                                       |                                                                                                                         
|                                                             |                                                                                       | Nine Months Ended                                                                                                       
|                                                             |                                                                                       | September 30,                                                                                                           
|                                                             |                                                                                       |                                                                                                                         
|                                                             |                                                                                       | 2002                                                                                                                     |                                           | 2001   
|                                                             |                                                                                       |                                                                                                                          |                                           |        
|                                                             |                                                                                       |                                                                                                                         
|                                                             |                                                                                       | (Dollars in thousands)                                                                                                  
|                                                             |                                                                                       | (Unaudited)                                                                                                             
|Cash flows from operating activities:                        |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|                                                             | Net income                                                                            |                                                                                                                          | $                                         | 14,143  |         |         | $      | 2,430  |      
|                                                             | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                                                          |                                           |         |         |         |        |        |      
|                                                             |                                                                                       | Depreciation and amortization                                                                                            |                                           |         | 20      |         |        |        | 77    |      
|                                                             |                                                                                       | Earnings of partially owned equity affiliates,
    net of dividends received                                             |                                           |         | (11,200 | )       |        |        | 4,694 |      
|                                                             |                                                                                       | Cumulative effect of a change in accounting
    principle from partially owned equity affiliate, net of income
    taxes |                                           |         | (967    | )       |        |        |      |      
|                                                             |                                                                                       | Noncash compensation expense                                                                                             |                                           |         | 357     |         |        |        |      |      
|                                                             | Changes in assets and liabilities:                                                    |                                                                                                                          |                                           |         |         |         |        |        |      
|                                                             |                                                                                       | Accounts payable and accrued expenses                                                                                    |                                           |         | 320     |         |        |        | 81    |      
|                                                             |                                                                                       | Other, net                                                                                                               |                                           |         | 656     |         |        |        | (791  | )    
|                                                             |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|                                                             |                                                                                       |                                                                                                                          | Net cash provided by operating activities |         |         | 3,329   |        |        |       | 6,491 |  
|                                                             |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|Cash flows from investing activities:                        |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|                                                             | Capital contribution to Castlewood Holdings
    Limited                               |                                                                                                                          |                                           | (21,000 | )       |         |        |       |      
|                                                             | Purchases of certificates of deposit                                                  |                                                                                                                          |                                           | (5,396  | )       |         |        | (5,280 | )    
|                                                             | Maturities of certificates of deposit                                                 |                                                                                                                          |                                           | 5,373   |         |         |        | 5,121  |      
|                                                             | Other, net                                                                            |                                                                                                                          |                                           | (27     | )       |         |        | (11    | )    
|                                                             |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|                                                             |                                                                                       |                                                                                                                          | Net cash used in investing activities     |         |         | (21,050 | )      |        |       | (170  | )
|                                                             |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|(Decrease) increase in cash and cash equivalents             |                                                                                       |                                                                                                                          | (17,721                                   | )       |         |         | 6,321  |       
|Cash and cash equivalents at the beginning of the
    period |                                                                                       |                                                                                                                          | 73,366                                    |         |         |         | 75,252 |       
|                                                             |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|Cash and cash equivalents at the end of the period           |                                                                                       | $                                                                                                                        | 55,645                                    |         |         | $       | 81,573 |       
|                                                             |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|Supplemental disclosures of cash flow information:           |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       
|                                                             | Income taxes paid                                                                     |                                                                                                                          | $                                         | 21      |         |         | $      | 533    |      
|                                                             |                                                                                       |                                                                                                                          |                                           |         |         |         |        |       

The accompanying notes are an integral part of
the consolidated financial statements.

4



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)




|        |        
|------- | -------
|Note 1: | General

The Enstar Group, Inc. and Subsidiary, (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 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 and results of operations for the interim
period. The results of operations for the three and nine months
ended September 30, 2002 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, 2001 included in the Companys
Form 10-K as filed with the Securities and Exchange
Commission on April 1, 2002 under the Securities Exchange
Act of 1934, as amended.

The Companys common stock is traded on The
Nasdaq National Market (Nasdaq) under the ticker
symbol ESGR. Prior to September 30, 2002, the
Companys common stock was traded in the over-the-counter
market on the OTC Bulletin Board maintained by the National
Association of Security Dealers, Inc.



|        |                                
|------- | -------------------------------
|Note 2: | Significant Accounting Policies

(a) 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.

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

(c) 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 the Companys
cumulative proportionate share of losses that were not
recognized during the period the application of the equity
method was suspended.

(d) Comprehensive Income 
The Company records other comprehensive income from Castlewood
Holdings, one of its partially owned equity affiliates. Other
comprehensive income arises 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.

(e) Revenue Recognition 
Revenue consists of interest income earned from cash, cash
equivalents and certificates of deposit and the Companys
proportionate share of earnings from partially owned equity
affiliates. Interest income is recorded when earned. The
Companys proportionate share of earnings from partially

5



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

owned equity affiliates is recorded as such
earnings are recognized by the partially owned equity affiliate
with the exception of B-Line LLC (B-Line) which is
recorded three months in arrears.

(f) Reclassifications 
Certain prior period amounts have been reclassified in the
financial statements to conform with the current period
presentation.



|        |                                  
|------- | ---------------------------------
|Note 3: | Partially Owned Equity Affiliates



| |       
| | ------
| | B-Line

In November 1998, the Company purchased
membership units of B-Line for $965,000 including $15,000 in
expenses. Based in Seattle, Washington, B-Line provides services
to credit card issuers and other holders of similar receivables.
B-Line also purchases credit card receivables and recovers
payments on these accounts. At September 30, 2002, the
Companys ownership percentage was approximately 8.34%.

The Companys B-Line membership units are
accounted for under the equity method. The operations of B-Line
are reported by the Company three months in arrears.
Approximately $803,000 of the original $950,000 paid was
recorded as goodwill and was being amortized over a period of
10 years. At September 30, 2002 the Company has
approximately $552,000 of unamortized goodwill. Since the
adoption by the Company of SFAS 142 in January 2002,
goodwill is no longer being amortized. (Note 6).



| |                 
| | ----------------
| | B.H. Acquisition

In July 2000, the Company, through B.H.
Acquisition Limited (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 of PetroFina S.A., a subsidiary of
TotalFina Elf S.A. The reinsurance companies, Brittany Insurance
Company Ltd. (Brittany) and Compagnie Europeenne
dAssurances Industrielles S.A. (CEAI) were
purchased by B.H. Acquisition for $28.5 million and were
accounted for by B.H. Acquisition using the purchase method of
accounting. Brittany and CEAI are principally engaged in the
active management of books of reinsurance business from
international markets. In exchange for a capital contribution of
approximately $9.6 million, the Company received 50% of the
voting stock and a 33% economic interest in B.H. Acquisition. As
part of the transaction, Castlewood received 33% of the voting
stock and a 45% economic interest in B.H. Acquisition. In March
2001, the Company received approximately $6.3 million from
B.H. Acquisition representing the Companys proportionate
share of a dividend from B.H. Acquisition. In May 2002, the
Company received $3.3 million from B.H. Acquisition
representing the Companys proportionate share of a
dividend from 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 Limited (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). The Castlewood
Principals contributed at closing all the shares of Castlewood
to Castlewood Holdings and received in exchange a 33 1/3%
economic interest in the newly incorporated Castlewood Holdings,
plus notes and cash totaling $4.275 million. As part of the
transaction, the Company and Trident made capital commitments of
$39.5 million each, totaling $79 million, in exchange
for their 33 1/3% economic interests in Castlewood
Holdings. The Company received 50% of the voting stock of
Castlewood Holdings and the Castlewood Principals and Trident
each received 25% of Castlewood Holdings

6



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

voting stock. Castlewood is a private
Bermuda-based firm, experienced in managing and acquiring
reinsurance operations.

As a result of the contribution of
Castlewoods outstanding stock to Castlewood Holdings, the
Companys 33% direct economic interest in B.H. Acquisition
increased by an additional 15% indirect economic interest
through Castlewood Holdings. The Companys combined voting
interest in B.H. Acquisition is limited to 50%. The
Companys ownership in Castlewood Holdings is accounted for
using the equity method of accounting.

Immediately following the closing of the
Castlewood Holdings Transaction, the Company and Trident each
contributed $12.5 million to Castlewood Holdings. The
Companys capital contribution to Castlewood Holdings was
derived from cash on hand. In August 2002, the Company funded an
additional $21 million to Castlewood Holdings, which also
was derived from cash on hand. The funds were used, in part, to
capitalize Fitzwilliam (SAC) Insurance Limited
(Fitzwilliam), a wholly owned subsidiary of
Castlewood Holdings. 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 $7.0 million
(which includes $6.0 million of the original commitment
amount plus an amount increasing annually at 5% on the unfunded
portion of the original commitment amount) is to be paid by the
Company, in part or in whole, within 21 days of receipt of
a resolution of the board of directors of Castlewood Holdings
for the purpose of funding future investments and/or providing
working capital. The Company expects to use internal funds to
satisfy its remaining commitment to Castlewood Holdings.

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, River
Thames Insurance Company Limited (River Thames),
based in London, England, and Overseas Reinsurance Corporation
Limited (Overseas Reinsurance), based in Bermuda,
(collectively, the River Thames Transaction) from
Rivers Group Limited and Sedgwick Group Limited. The acquisition
of the two reinsurance companies has been accounted for by Revir
using the purchase method of accounting.

In August 2002, Castlewood Holdings purchased
Hudson Reinsurance Company Limited, a Bermuda-based subsidiary
of Amphion Holdings Inc.



| |                                     
| | ------------------------------------
| | Summarized Financial
    Information

Summarized financial information for B-Line, B.H.
Acquisition and Castlewood Holdings is as follows:

|                  |  |                        |         |              |  |   |         | 
|----------------- |  | ---------------------- | ------- | ------------ |  | - | ------- | 
|                  |  | September 30,          |         | December 31,
|                  |  | 2002                   |         | 2001        
|                  |  |                        |         |             
|                  |  |                       
|                  |  | (Dollars in thousands)
|                  |  | (Unaudited)           
|Total assets      |  | $                      | 767,179 |              |  | $ | 693,955 | 
|Total liabilities |  |                        | 579,298 |              |  |   | 593,216 | 
|Total equity      |  |                        | 187,881 |              |  |   | 100,739 | 

|                 |  |                        |        |                   |  |      |       |      |  |   |        |  |  |   |        | 
|---------------- |  | ---------------------- | ------ | ----------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                 |  |                        |        |                  
|                 |  | Three Months Ended     |        | Nine Months Ended
|                 |  | September 30,          |        | September 30,    
|                 |  |                        |        |                  
|                 |  | 2002                   |        | 2001              |  | 2002 |       | 2001
|                 |  |                        |        |                   |  |      |       |     
|                 |  |                       
|                 |  | (Dollars in thousands)
|                 |  | (Unaudited)           
|Revenue          |  | $                      | 13,387 |                   |  | $    | 5,108 |      |  | $ | 36,290 |  |  | $ | 14,407 | 
|Operating income |  |                        | 4,650  |                   |  |      | 1,429 |      |  |   | 38,619 |  |  |   | 3,714  | 
|Net income       |  |                        | 8,888  |                   |  |      | 3,303 |      |  |   | 54,399 |  |  |   | 9,617  | 

7



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

This summarized financial information reflects
the results of B-Line and B.H. Acquisition for all periods
presented. The results of Castlewood Holdings are presented from
its respective date of ownership.



|        |                    
|------- | -------------------
|Note 4: | Segment Information

The Company evaluates the performance of B-Line,
B.H. Acquisition and Castlewood Holdings, the Companys
only operating segments, based on 100% of their financial
results. B-Lines, B.H. Acquisitions and Castlewood
Holdings consolidated financial information as of and for
the three and nine months ended September 30, 2002 and 2001
is as follows:

|                                            |  |                                       |        |             |  |            |      |       |  |   |        |   |  |   |        |  
|------------------------------------------- |  | ------------------------------------- | ------ | ----------- |  | ---------- | ---- | ----- |  | - | ------ | - |  | - | ------ | -
|                                            |  |                                      
|                                            |  | Three Months Ended September 30, 2002
|                                            |  |                                      
|                                            |  |                                       |        | B.H.        |  | Castlewood |      |      
|                                            |  | B-Line                                |        | Acquisition |  | Holdings   |      | Total
|                                            |  |                                       |        |             |  |            |      |      
|                                            |  |                                      
|                                            |  | (Dollars in thousands)               
|                                            |  | (Unaudited)                          
|Net underwriting loss                       |  |                                       |        |             |  | $          | (201 | )     |  |   |        |   |  | $ | (201   | )
|Revenue                                     |  | $                                     | 7,044  |             |  |            |      |       |  | $ | 6,343  |   |  |   | 13,387 |  
|Net investment income                       |  |                                       |        |             |  |            | 364  |       |  |   | 1,772  |   |  |   | 2,136  |  
|Share of net income of partly-owned company |  |                                       |        |             |  |            |      |       |  |   | 237    |   |  |   | 237    |  
|General and administrative expenses         |  |                                       | (2,641 | )           |  |            | (817 | )     |  |   | (4,648 | ) |  |   | (8,106 | )
|Amortization of run-off provision           |  |                                       |        |             |  |            | 563  |       |  |   |        |   |  |   | 563    |  
|Interest expense                            |  |                                       | (648   | )           |  |            |      |       |  |   | (20    | ) |  |   | (668   | )
|Foreign exchange gain                       |  |                                       |        |             |  |            | 617  |       |  |   | 1,187  |   |  |   | 1,804  |  
|                                            |  |                                       |        |             |  |            |      |       |  |   |        |   |  |   |        |  
|Income before income taxes                  |  |                                       | 3,755  |             |  |            | 526  |       |  |   | 4,871  |   |  |   | 9,152  |  
|Income taxes                                |  |                                       |        |             |  |            |      |       |  |   | (264   | ) |  |   | (264   | )
|                                            |  |                                       |        |             |  |            |      |       |  |   |        |   |  |   |        |  
|Net income                                  |  | $                                     | 3,755  |             |  | $          | 526  |       |  | $ | 4,607  |   |  | $ | 8,888  |  
|Companys economic ownership %              |  |                                       | 8.34   | %           |  |            | 33   | %     |  |   | 33 1/3 | % |  |   |        |  
|                                            |  |                                       |        |             |  |            |      |       |  |   |        |   |  |   |        |  
|Companys earnings of equity affiliates     |  | $                                     | 313    |             |  | $          | 173  |       |  | $ | 1,536  |   |  | $ | 2,022  |  
|                                            |  |                                       |        |             |  |            |      |       |  |   |        |   |  |   |        |  

|                                                                                         |  |                                      |        |             |  |            |        |       |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ----------- |  | ---------- | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                                                                                         |  |                                     
|                                                                                         |  | Nine Months Ended September 30, 2002
|                                                                                         |  |                                     
|                                                                                         |  |                                      |        | B.H.        |  | Castlewood |        |      
|                                                                                         |  | B-Line                               |        | Acquisition |  | Holdings   |        | Total
|                                                                                         |  |                                      |        |             |  |            |        |      
|                                                                                         |  |                                     
|                                                                                         |  | (Dollars in thousands)              
|                                                                                         |  | (Unaudited)                         
|Net underwriting gain                                                                    |  |                                      |        |             |  | $          | 19,403 |       |  |   |         |   |  | $ | 19,403  |  
|Revenue                                                                                  |  | $                                    | 21,107 |             |  |            | (11    | )     |  | $ | 15,194  |   |  |   | 36,290  |  
|Net investment income                                                                    |  |                                      |        |             |  |            | 1,480  |       |  |   | 6,389   |   |  |   | 7,869   |  
|Share of net income of partly-owned company                                              |  |                                      |        |             |  |            |        |       |  |   | 9,329   |   |  |   | 9,329   |  
|General and administrative expenses                                                      |  |                                      | (9,893 | )           |  |            | (2,137 | )     |  |   | (13,371 | ) |  |   | (25,401 | )
|Amortization of run-off provision                                                        |  |                                      |        |             |  |            | 1,688  |       |  |   |         |   |  |   | 1,688   |  
|Interest expense                                                                         |  |                                      | (917   | )           |  |            |        |       |  |   | (86     | ) |  |   | (1,003  | )
|Foreign exchange gain                                                                    |  |                                      |        |             |  |            | 309    |       |  |   | 3,376   |   |  |   | 3,685   |  
|                                                                                         |  |                                      |        |             |  |            |        |       |  |   |         |   |  |   |         |  
|Income before income taxes and cumulative effect
    of a change in accounting principle |  |                                      | 10,297 |             |  |            | 20,732 |       |  |   | 20,831  |   |  |   | 51,860  |  
|Income taxes                                                                             |  |                                      |        |             |  |            |        |       |  |   | (430    | ) |  |   | (430    | )
|                                                                                         |  |                                      |        |             |  |            |        |       |  |   |         |   |  |   |         |  
|Income before cumulative effect of a change in
    accounting principle                  |  |                                      | 10,297 |             |  |            | 20,732 |       |  |   | 20,401  |   |  |   | 51,430  |  
|Cumulative effect of a change in accounting
    principle, net of income taxes           |  |                                      |        |             |  |            | 2,969  |       |  |   |         |   |  |   | 2,969   |  
|                                                                                         |  |                                      |        |             |  |            |        |       |  |   |         |   |  |   |         |  

8



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                        |  |                                      |        |             |  |            |        |       |  |   |        |   |  |   |        | 
|--------------------------------------- |  | ------------------------------------ | ------ | ----------- |  | ---------- | ------ | ----- |  | - | ------ | - |  | - | ------ | 
|                                        |  |                                     
|                                        |  | Nine Months Ended September 30, 2002
|                                        |  |                                     
|                                        |  |                                      |        | B.H.        |  | Castlewood |        |      
|                                        |  | B-Line                               |        | Acquisition |  | Holdings   |        | Total
|                                        |  |                                      |        |             |  |            |        |      
|                                        |  |                                     
|                                        |  | (Dollars in thousands)              
|                                        |  | (Unaudited)                         
|Net income                              |  | $                                    | 10,297 |             |  | $          | 23,701 |       |  | $ | 20,401 |   |  | $ | 54,399 | 
|Companys economic ownership %          |  |                                      | 8.34   | %           |  |            | 33     | %     |  |   | 33 1/3 | % |  |   |        | 
|                                        |  |                                      |        |             |  |            |        |       |  |   |        |   |  |   |        | 
|Companys earnings of equity affiliates |  | $                                    | 859    |             |  | $          | 7,821  |       |  | $ | 6,800  |   |  | $ | 15,480 | 
|                                        |  |                                      |        |             |  |            |        |       |  |   |        |   |  |   |        | 
|Partially owned equity affiliates       |  | $                                    | 2,660  |             |  | $          | 11,879 |       |  | $ | 39,817 |   |  | $ | 54,356 | 
|                                        |  |                                      |        |             |  |            |        |       |  |   |        |   |  |   |        | 

|                                        |  |                        |        |             |  |       |       |   |  |   |        |  
|--------------------------------------- |  | ---------------------- | ------ | ----------- |  | ----- | ----- | - |  | - | ------ | -
|                                        |  |                       
|                                        |  | Three Months Ended    
|                                        |  | September 30, 2001    
|                                        |  |                       
|                                        |  |                        |        | B.H.        |  |      
|                                        |  | B-Line                 |        | Acquisition |  | Total
|                                        |  |                        |        |             |  |      
|                                        |  |                       
|                                        |  | (Dollars in thousands)
|                                        |  | (Unaudited)           
|Net underwriting loss                   |  |                        |        |             |  | $     | (73   | ) |  | $ | (73    | )
|Revenue                                 |  | $                      | 5,106  |             |  |       | 2     |   |  |   | 5,108  |  
|Net investment income                   |  |                        |        |             |  |       | 1,038 |   |  |   | 1,038  |  
|General and administrative expenses     |  |                        | (2,044 | )           |  |       | (640  | ) |  |   | (2,684 | )
|Amortization of negative goodwill       |  |                        |        |             |  |       | 212   |   |  |   | 212    |  
|Amortization of run-off provision       |  |                        |        |             |  |       | 563   |   |  |   | 563    |  
|Interest expense                        |  |                        | (922   | )           |  |       |       |   |  |   | (922   | )
|Foreign exchange gain                   |  |                        |        |             |  |       | 62    |   |  |   | 62     |  
|                                        |  |                        |        |             |  |       |       |   |  |   |        |  
|Net income                              |  | $                      | 2,140  |             |  | $     | 1,164 |   |  | $ | 3,304  |  
|Companys economic ownership %          |  |                        | 8.34   | %           |  |       | 33    | % |  |   |        |  
|                                        |  |                        |        |             |  |       |       |   |  |   |        |  
|Companys earnings of equity affiliates |  | $                      | 178    |             |  | $     | 384   |   |  | $ | 562    |  
|                                        |  |                        |        |             |  |       |       |   |  |   |        |  

|                                                          |  |                        |        |             |  |       |        |   |  |   |        |  
|--------------------------------------------------------- |  | ---------------------- | ------ | ----------- |  | ----- | ------ | - |  | - | ------ | -
|                                                          |  |                       
|                                                          |  | Nine Months Ended     
|                                                          |  | September 30, 2001    
|                                                          |  |                       
|                                                          |  |                        |        | B.H.        |  |      
|                                                          |  | B-Line                 |        | Acquisition |  | Total
|                                                          |  |                        |        |             |  |      
|                                                          |  |                       
|                                                          |  | (Dollars in thousands)
|                                                          |  | (Unaudited)           
|Net underwriting loss                                     |  |                        |        |             |  | $     | (214   | ) |  | $ | (214   | )
|Revenue                                                   |  | $                      | 14,387 |             |  |       | 21     |   |  |   | 14,408 |  
|Net investment income                                     |  |                        |        |             |  |       | 3,837  |   |  |   | 3,837  |  
|General and administrative expenses                       |  |                        | (5,509 | )           |  |       | (2,299 | ) |  |   | (7,808 | )
|Amortization of negative goodwill                         |  |                        |        |             |  |       | 636    |   |  |   | 636    |  
|Amortization of run-off provision                         |  |                        |        |             |  |       | 1,688  |   |  |   | 1,688  |  
|Interest expense                                          |  |                        | (2,671 | )           |  |       |        |   |  |   | (2,671 | )
|Foreign exchange loss                                     |  |                        |        |             |  |       | (334   | ) |  |   | (334   | )
|                                                          |  |                        |        |             |  |       |        |   |  |   |        |  
|Net income before extraordinary item                      |  |                        | 6,207  |             |  |       | 3,335  |   |  |   | 9,542  |  
|Extraordinary item  gain on early
    retirement of debt |  |                        | 75     |             |  |       |        |   |  |   | 75     |  
|                                                          |  |                        |        |             |  |       |        |   |  |   |        |  
|Net income                                                |  | $                      | 6,282  |             |  | $     | 3,335  |   |  | $ | 9,617  |  

9



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                        |  |                        |       |             |  |       |       |   |  |   |       | 
|--------------------------------------- |  | ---------------------- | ----- | ----------- |  | ----- | ----- | - |  | - | ----- | 
|                                        |  |                       
|                                        |  | Nine Months Ended     
|                                        |  | September 30, 2001    
|                                        |  |                       
|                                        |  |                        |       | B.H.        |  |      
|                                        |  | B-Line                 |       | Acquisition |  | Total
|                                        |  |                        |       |             |  |      
|                                        |  |                       
|                                        |  | (Dollars in thousands)
|                                        |  | (Unaudited)           
|Companys economic ownership %          |  |                        | 8.21  | %           |  |       | 33    | % |  |   |       | 
|                                        |  |                        |       |             |  |       |       |   |  |   |       | 
|Companys earnings of equity affiliates |  | $                      | 516   |             |  | $     | 1,100 |   |  | $ | 1,616 | 
|                                        |  |                        |       |             |  |       |       |   |  |   |       | 
|Partially owned equity affiliates       |  | $                      | 1,680 |             |  | $     | 6,875 |   |  | $ | 8,555 | 
|                                        |  |                        |       |             |  |       |       |   |  |   |       | 

The operations of B-Line are reported by the
Company three months in arrears. The Companys ownership
percentage for B-Line used in the table for the nine months
ended September 30, 2001 represents a weighted average. The
Companys ownership percentages in B-Line were 7.99% at
December 31, 2000 and 8.34% thereafter.



|        |                 
|------- | ----------------
|Note 5: | 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 nine months ended September 30, 2002 and 2001.
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.

|                                                                                                   |  |                                               |       |                   |  |      |      |      |  |   |        |  |  |   |       | 
|-------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ----- | ----------------- |  | ---- | ---- | ---- |  | - | ------ |  |  | - | ----- | 
|                                                                                                   |  |                                               |       |                  
|                                                                                                   |  | Three Months Ended                            |       | Nine Months Ended
|                                                                                                   |  | September 30,                                 |       | September 30,    
|                                                                                                   |  |                                               |       |                  
|                                                                                                   |  | 2002                                          |       | 2001              |  | 2002 |      | 2001
|                                                                                                   |  |                                               |       |                   |  |      |      |     
|                                                                                                   |  |                                              
|                                                                                                   |  | (Dollars in thousands, except per share data)
|                                                                                                   |  | (Unaudited)                                  
|Income before cumulative effect of a change in
    accounting principle                            |  | $                                             | 1,649 |                   |  | $    | 827  |      |  | $ | 13,176 |  |  | $ | 2,430 | 
|Cumulative effect of a change in accounting
    principle, net of income taxes                     |  |                                               |      |                   |  |      |     |      |  |   | 967    |  |  |   |      | 
|                                                                                                   |  |                                               |       |                   |  |      |      |      |  |   |        |  |  |   |       | 
|Net income                                                                                         |  | $                                             | 1,649 |                   |  | $    | 827  |      |  | $ | 14,143 |  |  | $ | 2,430 | 
|                                                                                                   |  |                                               |       |                   |  |      |      |      |  |   |        |  |  |   |       | 
|Income per common share before change in
    accounting principle  basic                          |  | $                                             | 0.30  |                   |  | $    | 0.16 |      |  | $ | 2.41   |  |  | $ | 0.46  | 
|Cumulative effect of a change in accounting
    principle, net of income taxes  basic             |  |                                               |      |                   |  |      |     |      |  |   | 0.18   |  |  |   |      | 
|                                                                                                   |  |                                               |       |                   |  |      |      |      |  |   |        |  |  |   |       | 
|Net income per common share  basic                                                                |  | $                                             | 0.30  |                   |  | $    | 0.16 |      |  | $ | 2.59   |  |  | $ | 0.46  | 
|                                                                                                   |  |                                               |       |                   |  |      |      |      |  |   |        |  |  |   |       | 
|Income per common share before change in
    accounting principle  assuming dilution              |  | $                                             | 0.29  |                   |  | $    | 0.15 |      |  | $ | 2.30   |  |  | $ | 0.45  | 
|Cumulative effect of a change in accounting
    principle, net of income taxes  assuming dilution |  |                                               |      |                   |  |      |     |      |  |   | 0.17   |  |  |   |      | 
|                                                                                                   |  |                                               |       |                   |  |      |      |      |  |   |        |  |  |   |       | 

10



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                            |  |                                               |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|----------------------------------------------------------- |  | --------------------------------------------- | --------- | ----------------- |  | ---- | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                                            |  |                                               |           |                  
|                                                            |  | Three Months Ended                            |           | Nine Months Ended
|                                                            |  | September 30,                                 |           | September 30,    
|                                                            |  |                                               |           |                  
|                                                            |  | 2002                                          |           | 2001              |  | 2002 |           | 2001
|                                                            |  |                                               |           |                   |  |      |           |     
|                                                            |  |                                              
|                                                            |  | (Dollars in thousands, except per share data)
|                                                            |  | (Unaudited)                                  
|Net income per common share  assuming
    dilution         |  | $                                             | 0.29      |                   |  | $    | 0.15      |      |  | $ | 2.47      |  |  | $ | 0.45      | 
|                                                            |  |                                               |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|Weighted average shares outstanding  basic                 |  |                                               | 5,465,753 |                   |  |      | 5,265,753 |      |  |   | 5,465,753 |  |  |   | 5,265,753 | 
|Common share equivalents                                    |  |                                               | 305,736   |                   |  |      | 199,727   |      |  |   | 274,571   |  |  |   | 158,424   | 
|                                                            |  |                                               |           |                   |  |      |           |      |  |   |           |  |  |   |           | 
|Weighted average shares outstanding 
    assuming dilution |  |                                               | 5,771,489 |                   |  |      | 5,465,480 |      |  |   | 5,740,324 |  |  |   | 5,424,177 | 
|                                                            |  |                                               |           |                   |  |      |           |      |  |   |           |  |  |   |           | 



|        |                                 
|------- | --------------------------------
|Note 6: | Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS 142, Goodwill and
Other Intangible Assets. This statement is effective for
fiscal years beginning after December 15, 2001 and
prescribes that goodwill should no longer be amortized upon
adoption of the standard. Instead, goodwill will be tested
annually for impairment, and on an interim basis if certain
impairment indicators are present.

The Company had approximately $552,000 of
unamortized goodwill related to B-Line classified as a component
of partially owned equity affiliates at December 31, 2001.
Upon adoption of SFAS 142 on January 1, 2002, the Company
performed its transitional impairment analysis and concluded
that its recorded goodwill was not impaired. In addition, B.H.
Acquisition had negative goodwill of approximately
$3.0 million recorded on its financial statements as of
December 31, 2001. In accordance with SFAS 142, B.H.
Acquisition reversed this negative goodwill into earnings upon
adoption of SFAS 142 and presented it as a cumulative effect of
a change in accounting principle. The Companys
proportionate share of this reversal was $967,000, net of income
taxes, and has been presented as a cumulative effect of a change
in accounting principle in the consolidated statement of income
for the nine months ended September 30, 2002.

SFAS 142 requires disclosure of what
reported income before extraordinary items and net income would
have been in all periods presented exclusive of amortization
expense (including any related tax effects) recognized in those
periods related to goodwill, any deferred credit related to an
excess over cost (negative goodwill) and equity method goodwill.
Additionally, adjusted per-share amounts are required to be
disclosed for all periods presented. The table below reconciles
reported net income and earnings per share amounts to adjusted
net income and per share amounts exclusive of amortization
expense for the three and nine months ended September 30,
2002 and 2001.

11



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |           |  
|--------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | --------------------------------------------- | --------- | ----------------- |  | ---- | --------- | --------- | - | - | --------- | --------- |  | - | --------- | --------- | -
|                                                                                        |                                                                                         |                                               |           |                  
|                                                                                        |                                                                                         | Three Months Ended                            |           | Nine Months Ended
|                                                                                        |                                                                                         | September 30,                                 |           | September 30,    
|                                                                                        |                                                                                         |                                               |           |                  
|                                                                                        |                                                                                         | 2002                                          |           | 2001              |  | 2002 |           | 2001     
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |          
|                                                                                        |                                                                                         |                                              
|                                                                                        |                                                                                         | (Dollars in thousands, except per share data)
|                                                                                        |                                                                                         | (Unaudited)                                  
|Reported income before cumulative effect of a
    change in accounting principle        |                                                                                         | $                                             | 1,649     |                   |  | $    | 827       |           |   | $ | 13,176    |           |  | $ | 2,430     |          
|Reported cumulative effect of a change in
    accounting principle, net of income taxes |                                                                                         |                                               |          |                   |  |      |          |           |   |   | 967       |           |  |   |          |          
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|Reported net income                                                                     |                                                                                         |                                               | 1,649     |                   |  |      | 827       |           |   |   | 14,143    |           |  |   | 2,430     |          
|                                                                                        | Goodwill amortization                                                                   |                                               |           |                  |  |      |           | 19        |   |   |           |          |  |   |           | 57        |  
|                                                                                        | Negative goodwill amortization (through B.H.
    Acquisition)                           |                                               |           |                  |  |      |           | (66       | ) |   |           |          |  |   |           | (198      | )
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|Adjusted net income                                                                     |                                                                                         | $                                             | 1,649     |                   |  | $    | 780       |           |   | $ | 14,143    |           |  | $ | 2,289     |          
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|Earnings per common share  basic:                                                      |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|                                                                                        | Reported income before a change in accounting
    principle                             |                                               | $         | 0.30              |  |      | $         | 0.16      |   |   | $         | 2.41      |  |   | $         | 0.46      |  
|                                                                                        | Reported cumulative effect of a change in
    accounting principle, net of income taxes |                                               |           |                  |  |      |           |          |   |   |           | 0.18      |  |   |           |          |  
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|                                                                                        | Reported net income                                                                     |                                               |           | 0.30              |  |      |           | 0.16      |   |   |           | 2.59      |  |   |           | 0.46      |  
|                                                                                        | Goodwill amortization                                                                   |                                               |           |                  |  |      |           | 0.00      |   |   |           |          |  |   |           | 0.01      |  
|                                                                                        | Negative goodwill amortization                                                          |                                               |           |                  |  |      |           | (0.01     | ) |   |           |          |  |   |           | (0.04     | )
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|                                                                                        | Adjusted net income                                                                     |                                               | $         | 0.30              |  |      | $         | 0.15      |   |   | $         | 2.59      |  |   | $         | 0.43      |  
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|Earnings per common share  assuming
    dilution:                                      |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|                                                                                        | Reported income before a change in accounting
    principle                             |                                               | $         | 0.29              |  |      | $         | 0.15      |   |   | $         | 2.30      |  |   | $         | 0.45      |  
|                                                                                        | Reported cumulative effect of a change in
    accounting principle, net of income taxes |                                               |           |                  |  |      |           |          |   |   |           | 0.17      |  |   |           |          |  
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|                                                                                        | Reported net income                                                                     |                                               |           | 0.29              |  |      |           | 0.15      |   |   |           | 2.47      |  |   |           | 0.45      |  
|                                                                                        | Goodwill amortization                                                                   |                                               |           |                  |  |      |           | 0.00      |   |   |           |          |  |   |           | 0.01      |  
|                                                                                        | Negative goodwill amortization                                                          |                                               |           |                  |  |      |           | (0.01     | ) |   |           |          |  |   |           | (0.04     | )
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|                                                                                        | Adjusted net income                                                                     |                                               | $         | 0.29              |  |      | $         | 0.14      |   |   | $         | 2.47      |  |   | $         | 0.42      |  
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|Weighted average shares outstanding                                                    |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|                                                                                        | Basic                                                                                   |                                               |           | 5,465,753         |  |      |           | 5,265,753 |   |   |           | 5,465,753 |  |   |           | 5,265,753 |  
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          
|Weighted average shares outstanding assuming
    dilution                               |                                                                                         |                                               | 5,771,489 |                   |  |      | 5,465,480 |           |   |   | 5,740,324 |           |  |   | 5,424,177 |          
|                                                                                        |                                                                                         |                                               |           |                   |  |      |           |           |   |   |           |           |  |   |           |          

Also on January 1, 2002, the Company adopted
SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting
and reporting for the impairment and disposition

12



---



##### Table of Contents



THE ENSTAR GROUP, INC. AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of long-lived assets. The adoption of
SFAS 144 did not have an impact on the Companys
financial position or results of operations.

In April 2002, the FASB issued SFAS 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections which provides for the rescission of several
previously issued accounting standards, new accounting guidance
for the accounting of certain lease modifications and various
technical corrections that are not substantive in nature to
existing pronouncements. The Company will adopt SFAS 145 on
January 1, 2003, except for the provisions relating to the
amendment of SFAS 13, which was adopted for transactions
occurring subsequent to May 15, 2002. The Company is
currently assessing the impact of SFAS 145 on its financial
position and results of operations.

In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31,
2002. The Company is currently assessing the impact of
SFAS 146 on its financial position and results of
operations.

Note 7:     Subsequent
Events

In November 2002, the Company received a
commitment fee of approximately $208,000 in connection with a
standby purchase commitment entered into by the Company through
a newly-formed Canadian limited partnership with J.C.
Flowers I LP, Shinsei Bank, Ltd. and Fitzwilliam
(SAC) Insurance Limited. The commitment was for the
purchase of ordinary shares of Zurich Financial Services, a
Swiss company (Zurich), to be issued in connection
with a rights offering by Zurich to its existing shareholders.
The Companys participation in this commitment was
previously announced in September 2002. The commitment was never
executed and no funds were contributed by the Company. J.C.
Flowers I LP is a fund managed by J. Christopher
Flowers, Vice Chairman of the Companys board of directors
and the Companys largest shareholder. Mr. Flowers
also is a director of Shinsei Bank, Ltd.

13



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

Board of Directors and Shareholders of

The Enstar Group, Inc.


Montgomery, Alabama


We have reviewed the accompanying consolidated
balance sheet of The Enstar Group, Inc. and Subsidiary
(Enstar) as of September 30, 2002, and the
related consolidated statements of income, comprehensive income,
and cash flows for the three-month and nine-month periods ended
September 30, 2002 and 2001. These financial statements are
the responsibility of Enstars management.

We conducted our review in accordance with
standards established by the American Institute of Certified
Public Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible
for financial and accounting matters. It is substantially less
in scope than an audit conducted in accordance with auditing
standards generally accepted in the United States of America,
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 review, we are not aware of any
material modifications that should be made to such consolidated
financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.

As discussed in Note 6 to the consolidated
financial statements, effective January 1, 2002, Enstar
changed its method of accounting for goodwill pursuant to
Statement of Financial Accounting Standards No. 142.

We have previously audited, in accordance with
auditing standards generally accepted in the United States of
America, the consolidated balance sheet of Enstar as of
December 31, 2001 and the related consolidated statements
of income, comprehensive income, shareholders equity, and
cash flows for the year then ended (not presented herein), and
in our report dated March 25, 2002, we expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2001 is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.



| |                          
| | -------------------------
| | /s/ DELOITTE & TOUCHE LLP

November 11, 2002

14



---



##### Table of Contents






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 has acquired
and manages books of reinsurance business from the international
markets. 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 this Form 10-Q.

In November 2001, the Company, together with
Trident and 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 Principals contributed at
closing all the shares of Castlewood to Castlewood Holdings and
received in exchange a 33 1/3% economic interest in the
newly-formed Castlewood Holdings, plus notes and cash totaling
$4.275 million. As part of the transaction, the Company and
Trident made capital commitments of $39.5 million each,
totaling $79 million, in exchange for their 33 1/3%
economic interests in Castlewood Holdings. The Company received
50% of the voting stock of Castlewood Holdings and the
Castlewood Principals and Trident each received 25% of
Castlewood Holdings voting stock. 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.

Immediately following the closing of the
Castlewood Holdings transaction, the Company and Trident each
contributed $12.5 million to Castlewood Holdings. The
Companys capital contribution to Castlewood Holdings was
derived from cash on hand. In August 2002, the Company funded an
additional $21 million to Castlewood Holdings, which also
was derived from cash on hand. The funds were used, in part, to
capitalize Fitzwilliam, a wholly owned subsidiary of Castlewood
Holdings. 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 $7.0 million (which
includes $6.0 million of the original commitment amount
plus an amount increasing annually at 5% on the unfunded portion
of the original commitment amount) is to be paid by the Company,
in part or in whole, within 21 days of receipt of a
resolution of the board of directors of Castlewood Holdings for
the purpose of funding future investments and/or providing
working capital. The Company expects to use internal funds to
satisfy its remaining commitment to Castlewood Holdings.

In conjunction with the closing of the Castlewood
Holdings transaction, the Company also transferred its shares in
Revir, a newly-formed Bermuda holding company, at cost to
Castlewood Holdings. Revir then completed the acquisition of two
reinsurance companies, River Thames, based in London, England,
and Overseas Reinsurance, based in Bermuda, from Rivers Group
Limited and Sedgwick Group Limited.

In August 2002, Castlewood Holdings purchased
Hudson Reinsurance Company Limited, a Bermuda-based subsidiary
of Amphion Holdings Inc.

In July 2000, the Company, through B.H.
Acquisition, a joint venture with Castlewood and an entity
controlled by Trident, acquired as an operating business, two
reinsurance companies of PetroFina S.A., a subsidiary of
TotalFina Elf S.A. In exchange for a capital contribution of
approximately $9.6 million, the Company received 50% of the
voting stock and a 33% economic interest in B.H. Acquisition. As
part of the transaction, Castlewood received 33% of the voting
stock and a 45% economic interest in B.H. Acquisition. As a
result of the contribution of Castlewoods outstanding
stock to Castlewood Holdings, the Companys 33% direct
economic interest in B.H. Acquisition increased by an additional
15% indirect economic interest through Castlewood Holdings. The
Companys combined voting interest in B.H. Acquisition is
limited to 50%.

15



---



##### Table of Contents



Liquidity and Capital Resources

The Companys assets, aggregating
approximately $114.8 million at September 30, 2002,
consist primarily of approximately $55.6 million in cash
and cash equivalents, approximately $4.0 million in
certificates of deposit and approximately $54.4 million in
partially owned equity affiliates.

The Companys net decrease in cash and cash
equivalents for the nine months ended September 30, 2002
was approximately $17.7 million. This decrease can
primarily be attributed to a capital contribution of
$21 million to Castlewood Holdings in August 2002,
partially offset by the receipt of a dividend of
$3.3 million from B.H. Acquisition in May 2002.

The Company is currently engaged in the active
search for one or more additional operating businesses. The
Company primarily focuses on the financial services industry in
a global market which would complement its current operating
businesses, investigating acquisition opportunities both within
and outside the United States when management believes that such
opportunities might be attractive. The Company may pay
consideration in the form of cash, securities of the Company or
some combination of both. The Company may also borrow money in
connection with an acquisition.

With the exception of various expenses incurred
in connection with the Companys search for one or more
suitable acquisitions, its only needs are to fund normal
operating expenses and its remaining commitment to Castlewood
Holdings. The remaining commitment of approximately
$7.0 million is to be paid, in part or in whole, within
21 days of receipt of a resolution of the board of
directors of Castlewood Holdings for the purpose of funding
future investments and/or providing working capital. The Company
expects to use internal funds to satisfy its remaining
commitment to Castlewood Holdings.

Financial Condition

The Company had total assets of
$114.8 million at September 30, 2002 compared to
$99.6 million at December 31, 2001. The increase in
total assets was due primarily to earnings of partially owned
equity affiliates.

Results of Operations

The Company reported net income of approximately
$1.6 million and approximately $14.1 million for the
three and nine month periods ended September 30, 2002,
respectively, compared to net income of $827,000 and
approximately $2.4 million for the same periods in the
prior year. The changes in net income from the three and nine
month periods ended September 30, 2002 compared to the same
periods in the prior year are primarily a result of an increase
in earnings from partially owned equity affiliates, offset by a
decrease in interest income.

Interest income was $382,000 and approximately
$1.2 million for the three and nine months periods ended
September 30, 2002, respectively, compared to $788,000 and
approximately $2.7 million for the same periods in the
prior year. Interest income was earned from cash, cash
equivalents and certificates of deposit. Interest income
decreased due to a reduction of interest rates earned on the
Companys cash, cash equivalents and certificates of
deposit and a reduction in cash and cash equivalents resulting
from the capital contribution of $21 million to Castlewood
Holdings in August 2002.

Earnings of partially owned equity affiliates
were approximately $2.0 million and approximately
$14.5 million for the three and nine month periods ended
September 30, 2002, respectively, compared to $562,000 and
approximately $1.6 million for the same periods in the
prior year. The Company recorded equity in earnings of
approximately $173,000 and approximately $6.8 million from
B.H. Acquisition for the three and nine month periods ended
September 30, 2002, respectively, compared to $384,000 and
approximately $1.1 million for the same periods in 2001.
The Companys increased earnings attributable to B.H.
Acquisition for the nine month period ended September 30,
2002 arose primarily from a re-evaluation based on actuarial
studies of the required insurance reserves for losses and loss
adjustment expenses of B.H. Acquisitions subsidiaries. The
reserves for losses and loss adjustment expenses continue to be
within the range projected by B.H. Acquisitions external
actuaries. The Companys equity in earnings from B-Line LLC
(B-Line) was

16



---



##### Table of Contents



$313,000 and $859,000 for the three and nine
month periods ended September 30, 2002, respectively,
compared to $178,000 and $516,000 for the same periods in 2001.
The Company recorded equity in earnings of approximately
$1.5 million and approximately $6.8 million from
Castlewood Holdings for the three and nine months ended
September 30, 2002. In addition, the Company reported
income of $967,000, net of income taxes, as its proportionate
share of a cumulative effect of a change in accounting principle
incurred by B.H. Acquisition associated with the implementation
of SFAS 142 in the first quarter of 2002. For further discussion
of Castlewood Holdings and B.H. Acquisitions results
of operations, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Results of Operations 
Partially Owned Equity Affiliates.


General and administrative expenses were $704,000
and approximately $2.1 million for the three and nine month
periods ended September 30, 2002, respectively, compared to
$472,000 and approximately $1.7 million for the same
periods in 2001. In September 2002, the Company paid a $99,000
entry fee for the Companys initial inclusion on Nasdaq.
The Company recorded $66,000 and $357,000 in non-cash
compensation expense in the three and nine month periods ended
September 30, 2002, respectively, relating to stock option
agreements (the Company will incur additional non-cash
compensation expense of $266,000 through June 2004 relating to
these stock option agreements). This increase was partially
offset by a substantial decrease in expense for Alabama shares
tax in 2002 due to a change in Alabama tax law. 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. Most variances in legal and professional fees and
travel expenses can be attributed to the number of potential
acquisition candidates the Company locates as well as the degree
of interest the Company may have in such candidates. The
stronger the interest in a candidate, the more rigorous
financial and legal due diligence the Company will incur with
respect to that candidate.

Income tax expense, including $13,000 recorded as
a result of the cumulative effect of a change in accounting
principle in the first quarter of 2002, was $51,000 and $421,000
for the three and nine month periods ended September 30,
2002 compared to $51,000 and $178,000 for the same periods in
2001. The Companys effective tax rate remains
substantially less than statutory rates primarily due to the
availability of net operating loss carryforwards
(NOLs) for federal tax purposes.

Results of Operations  Partially
Owned Equity Affiliates

Due to the substantial dependence of
Enstars results of operations on 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
income of approximately $4.6 and $20.4 million for the
three and nine month periods ended September 30, 2002,
respectively. Comparative information is not applicable, as
Castlewood Holdings was formed in November 2001.

Castlewood Holdings earned revenues from
consulting fees of approximately $6.3 million and
$15.2 million for the three and nine month periods ended
September 30, 2002, respectively. The company generates the
income based on a combination of fixed and success based fee
arrangements. Fees will vary on a quarterly basis dependent on
the success and timing of completion of success based fee
arrangements. Included in these amounts were $313,000 and
$938,000 for the three and nine month periods, respectively, in
consulting fees charged to B.H. Acquisition, a related party.

Castlewood Holdings also recorded equity in
earnings of B.H. Acquisition of $237,000 and approximately
$9.3 million for the three and nine month periods ended
September 30, 2002, respectively. Investment income, earned
on cash, cash equivalents and fixed income securities, was
approximately $1.8 million and $6.4 million for the
three and nine months periods ended September 30, 2002,
respectively.

17



---



##### Table of Contents



General and administrative expenses were
approximately $4.7 and $13.4 million for the three and nine
months ended September 30, 2002, respectively. General and
administrative expenses include salaries and benefits, rent and
rent related costs, professional fees (legal, audit and
actuarial), travel expenses and other operating expenses.
Castlewood Holdings operates in both the UK and Bermuda and its
staff travels frequently in connection with its search for
acquisition opportunities and in the general management of the
business.

Castlewood Holdings recorded foreign exchange
gains of approximately $1.2 million and $3.4 million
for the three and nine months ended September 30, 2002.
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 years. The resulting exchange gains or losses are
included in net income.

Income taxes of $264,000 and $430,000 were
recorded for the three and nine month periods ended
September 30, 2002. 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 subsidiaries record income
taxes based on their graduated statutory rates, net of tax
benefits arising from tax loss carryforwards.



| |                 
| | ----------------
| | B.H. Acquisition

B.H. Acquisition reported net income of $526,000
and approximately $23.7 million for the three and nine
month periods ended September 30, 2002, respectively,
compared to net income of approximately $1.2 million and
$3.3 million for the same periods in the prior year.

B.H. Acquisition recorded an underwriting loss of
$201,000 and underwriting income of approximately
$19.4 million for the three and nine month periods ended
September 30, 2002, respectively, compared to an
underwriting loss of $73,000 and $214,000 for the same periods
in the prior year. The increased underwriting income for the
nine month period was attributable primarily to the
re-evaluation of required insurance reserves for loss and loss
adjustment expenses in its subsidiaries. This re-evaluation was
made based on an independent actuarial review. Investment
income, primarily from cash, cash equivalents and mutual funds,
was $364,000 and approximately $1.5 million for the three
and nine months periods ended September 30, 2002,
respectively, compared to $1.0 and $3.8 million,
respectively. The decrease was due to decreased interest rates
and the payment of cash dividends to shareholders.

General and administrative expenses, net of
amortization of the run-off provision, were $254,000 and
$449,000 for the three and nine months ended September 30,
2002, respectively, compared to $77,000 and $611,000 for the
same periods in the prior year. General and administrative
expenses include legal, audit, management and actuarial expenses.

B.H. Acquisition recorded foreign exchange gains
of $617,000 and $309,000 for the three and nine months ended
September 30, 2002, respectively, compared to a gain of
$62,000 and a loss of $334,000 for the same periods in the prior
year. Through its subsidiaries, BH 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.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS 142,
Goodwill and Other Intangible Assets. This statement
is effective for fiscal years beginning after December 15,
2001 and prescribes that goodwill should no longer be

18



---



##### Table of Contents



amortized upon adoption of the standard. Instead,
goodwill will be tested annually for impairment, and on an
interim basis if certain impairment indicators are present.


The Company had approximately $552,000 of
unamortized goodwill related to B-Line classified as a component
of partially owned equity affiliates at December 31, 2001.
Upon adoption of SFAS 142 on January 1, 2002, the
Company performed its transitional impairment analysis and
concluded that its recorded goodwill was not impaired. In
addition, B.H. Acquisition had negative goodwill of
approximately $3.0 million recorded on its financial
statements as of December 31, 2001. In accordance with
SFAS 142, B.H. Acquisition reversed this negative goodwill
into earnings upon adoption of SFAS 142 and presented it as
a cumulative effect of a change in accounting principle. The
Companys proportionate share of this reversal was
$967,000, net of income taxes, and has been presented as a
cumulative effect of a change in accounting principle in the
consolidated statement of income for the nine months ended
September 30, 2002.

Also on January 1, 2002, the Company adopted
SFAS 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, which addresses financial accounting
and reporting for the impairment and disposition of long-lived
assets. The adoption of SFAS 144 did not have an impact on
the Companys financial position or results of operations.

In April 2002, the FASB issued SFAS 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. which provides for the rescission of several
previously issued accounting standards, new accounting guidance
for the accounting of certain lease modifications and various
technical corrections that are not substantive in nature to
existing pronouncements. The Company will adopt SFAS 145 on
January 1, 2003, except for the provisions relating to the
amendment of SFAS 13, which was adopted for transactions
occurring subsequent to May 15, 2002. The Company is
currently assessing the impact of SFAS 145 on its financial
position and results of operations.

In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31,
2002. The Company is currently assessing the impact of
SFAS 146 on its 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 the Companys evaluation of
income tax reserves.

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 loss carryforwards 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 September 30, 2002 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. 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

19



---



##### Table of Contents



values requiring the most inherently subjective
and complex estimates. As such, the accounting policies for
these amounts are of critical importance to their consolidated
financial statements.


Loss and Loss Adjustment Expense
Provisions 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 estimated by management
based upon reports received from ceding companies, supplemented
by Castlewood Holdings and B.H. Acquisitions own
actuarial estimates of reserves for which ceding company reports
have not been received, and also include their own historical
experience. To the extent that Castlewood Holdings or B.H.
Acquisitions own historical experience is inadequate for
estimating reserves, such estimates may be actuarially
determined based upon industry experience and managements
judgment. These estimates are continually reviewed and
Castlewood Holdings and B.H. Acquisitions ultimate
liability may be 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
Recoverables 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 adopted SFAS 142
and is required to assess its goodwill for impairment on at
least an annual basis. In assessing the recoverability of
Castlewood Holdings goodwill, Castlewood Holdings must
make assumptions regarding estimated future cash flows to
determine the fair value of the respective assets. If these
estimates or there related assumptions change in the future,
Castlewood Holdings may be required to record impairment charges
for these assets.

Recent Developments

In November 2002, the Company received a
commitment fee of approximately $208,000 in connection with a
standby purchase commitment entered into by the Company through
a newly-formed Canadian limited partnership with J.C.
Flowers I LP, Shinsei Bank, Ltd. and Fitzwilliam. The
commitment was for the purchase of ordinary shares of Zurich
Financial Services, a Swiss company (Zurich), to be
issued in connection with a rights offering by Zurich to its
existing shareholders. The Companys participation in this
commitment was previously announced in September 2002. The
commitment was never executed and no funds were contributed by
the Company. J.C. Flowers I LP is a fund managed by J.
Christopher Flowers, Vice Chairman of the Companys board
of directors and the Companys largest shareholder.
Mr. Flowers also is a director of Shinsei Bank, Ltd.




Item 3.     Quantitative
and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from
changes in interest rates. The Company had cash and cash
equivalents of approximately $55.6 million in interest
bearing accounts (interest at floating rates) and approximately
$4.0 million of short-term certificates of deposit
(interest at fixed rates) at September 30, 2002.
Accordingly, each one percent change in market interest rates
would change interest income by approximately $596,000 per
annum. 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
September 30, 2002 was approximately six months. The
short-term nature of these certificates limits the
Companys risk of changes in the fair value of these
certificates.

20



---



##### Table of Contents



The Company is also exposed to foreign currency
risk through its investments 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

Based on their evaluation of the Companys
disclosure controls and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act
of 1934), as of a date within 90 days of the filing of this
Form 10-Q, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that these controls and
procedures are effective. There have been no significant changes
in internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation, nor have there been any significant
deficiencies or material weaknesses. As a result, no corrective
actions were required or undertaken.




PART II

OTHER INFORMATION






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

|          |     |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|--------- | --- |  |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Reference |     |  |  |                        
|Number    |     |  |  | Description of Exhibits
|          |     |  |  |                        
|          | 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 3, 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 Exhibit 2.2 to the Current Report on
    Form 8-K, dated December 13, 2001).                                                                                                                                
|          | 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).                                                                                                                                                                                                                                     

21



---



##### Table of Contents



|          |      |  |  |                         |  |                                                                                                                                                                                                                                                                                                
|--------- | ---- |  |  | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Reference |      |  |  |                        
|Number    |      |  |  | Description of Exhibits
|          |      |  |  |                        
|          | 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).
|          | 99.1 |  |  |                        |  | The Enstar Group, Inc. Private Securities
    Litigation Reform Act of 1995 Safe Harbor Compliance Statement
    For Forward-Looking Statements.                                                                                                                                               
|          | 99.2 |  |  |                        |  | Certifications Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                                               

(b) Reports on Form 8-K

On August 30, 2002 the Company filed a
Current Report on Form 8-K pursuant to
Item 5  Other Events.

22



---



##### Table of Contents






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: November 14, 2002

23



---



##### Table of Contents






CERTIFICATIONS

I, Nimrod T. Frazer, Chairman of the Board of
Directors and Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of The Enstar Group, Inc.;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                     
| | --- | --------------------
| | By: | /s/ NIMROD T. FRAZER

| |                                   
| | ----------------------------------
| |                                   
| | Nimrod T. Frazer                  
| | Chairman of the Board of Directors
| | and Chief Executive Officer       

Date: November 14, 2002

24



---



##### Table of Contents



I, Cheryl D. Davis, Chief Financial Officer, Vice
President of Corporate Taxes and Secretary, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of The Enstar Group, Inc.;

2. Based on my knowledge, this quarterly
report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                    
| | --- | -------------------
| | By: | /s/ CHERYL D. DAVIS

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Cheryl D. Davis                                 
| | Chief Financial Officer,                        
| | Vice President of Corporate Taxes,
    Secretary

Date: November 14, 2002

25