##### 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 March 31, 2006                                               
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from          to                                              

Commission file number 0-07477





The Enstar Group, Inc.


(Exact name of registrant as specified in its charter)


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

401 Madison Avenue


Montgomery, Alabama 36104





(334) 834-5483




þ o


12b-2


o þ o


12b-2 o þ












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TABLE OF CONTENTS



|                                                        |                                                                                               |                                                           |  |  |  |  |  | 
|------------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I                                                 
|                                                        | Item 1. Financial Statements                                                                 
|                                                        |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                    
|                                                        |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME              
|                                                        |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|                                                        |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS          
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|                                                        | 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                                                
|                                                        | Item 6. Exhibits                                                                             
|SIGNATURES                                             
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO           
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO           
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO           
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO           



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##### 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. THERE ARE A NUMBER OF IMPORTANT FACTORS THAT COULD
CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS
INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH IN ITEM 1A.
RISK FACTORS TO THE ENSTAR GROUP, INC. ANNUAL REPORT
ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2005. 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.


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##### Table of Contents






PART I


FINANCIAL INFORMATION







|        |                     
|------- | --------------------
|Item 1. | Financial Statements

THE ENSTAR GROUP, INC. AND SUBSIDIARIES







CONDENSED CONSOLIDATED BALANCE SHEETS


|                                       |                                                                                                                                      |                                            |         |         |              |  |         |         |         | 
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------- | ------------ |  | ------- | ------- | ------- | 
|                                       |                                                                                                                                      | March 31,                                  |         |         | December 31, | 
|                                       |                                                                                                                                      | 2006                                       |         |         | 2005         | 
|                                       |                                                                                                                                      |                                            |         |         |              | 
|                                       |                                                                                                                                      | (Dollars in thousands)                     |        
|                                       |                                                                                                                                      | (Unaudited)                                |        
|ASSETS                                
|Current assets:                        |                                                                                                                                      |                                            |         |         |              |  |         |        
|                                       | Cash and cash equivalents                                                                                                            |                                            | $       | 53,485  |              |  | $       | 54,032  |        
|                                       | Certificates of deposit                                                                                                              |                                            |         | 19,891  |              |  |         | 19,686  |        
|                                       | Other current assets                                                                                                                 |                                            |         | 357     |              |  |         | 129     |        
|                                       |                                                                                                                                      |                                            |         |         |              | 
|                                       |                                                                                                                                      | Total current assets                       |         |         | 73,733       |  |         |         | 73,847  | 
|Partially owned equity affiliates      |                                                                                                                                      |                                            | 111,365 |         |              |  | 107,329 |        
|Other investments                      |                                                                                                                                      |                                            | 3,486   |         |              |  | 3,542   |        
|Other assets                           |                                                                                                                                      |                                            | 513     |         |              |  | 502     |        
|                                       |                                                                                                                                      |                                            |         |         |              | 
|                                       |                                                                                                                                      | Total assets                               |         | $       | 189,097      |  |         | $       | 185,220 | 
|                                       |                                                                                                                                      |                                            |         |         |              | 
|                                      
|LIABILITIES AND SHAREHOLDERS EQUITY  
|Current liabilities:                   |                                                                                                                                      |                                            |         |         |              |  |         |        
|                                       | Accounts payable and accrued liabilities                                                                                             |                                            | $       | 850     |              |  | $       | 595     |        
|                                       | Income taxes payable                                                                                                                 |                                            |         | 5,724   |              |  |         | 5,467   |        
|                                       |                                                                                                                                      |                                            |         |         |              | 
|                                       |                                                                                                                                      | Total current liabilities                  |         |         | 6,574        |  |         |         | 6,062   | 
|Deferred income tax liabilities        |                                                                                                                                      |                                            | 11,151  |         |              |  | 10,401  |        
|Accrued taxes                          |                                                                                                                                      |                                            | 2,125   |         |              |  | 2,325   |        
|Deferred compensation                  |                                                                                                                                      |                                            | 898     |         |              |  | 853     |        
|Other liabilities                      |                                                                                                                                      |                                            | 459     |         |              |  | 456     |        
|                                       |                                                                                                                                      |                                            |         |         |              | 
|                                       |                                                                                                                                      | Total liabilities                          |         |         | 21,207       |  |         |         | 20,097  | 
|                                       |                                                                                                                                      |                                            |         |         |              | 
|Commitments and contingencies (Note 5) |                                                                                                                                      |                                            |         |         |              |  |         |        
|Shareholders equity:                  |                                                                                                                                      |                                            |         |         |              |  |         |        
|                                       | Common stock ($.01 par value; 55,000,000 shares
    authorized, 5,960,260 shares issued at March 31, 2006
    and December 31, 2005) |                                            |         | 60      |              |  |         | 60      |        
|                                       | Additional paid-in capital                                                                                                           |                                            |         | 190,039 |              |  |         | 189,968 |        
|                                       | Accumulated other comprehensive income of partially owned equity
    affiliates, net                                                 |                                            |         | 203     |              |  |         | 210     |        
|                                       | Accumulated deficit                                                                                                                  |                                            |         | (16,602 | )            |  |         | (19,305 | )      
|                                       | Treasury stock, at cost (442,351 shares)                                                                                             |                                            |         | (5,810  | )            |  |         | (5,810  | )      
|                                       |                                                                                                                                      |                                            |         |         |              | 
|                                       |                                                                                                                                      | Total shareholders equity                 |         |         | 167,890      |  |         |         | 165,123 | 
|                                       |                                                                                                                                      |                                            |         |         |              | 
|                                       |                                                                                                                                      | Total liabilities and shareholders equity |         | $       | 189,097      |  |         | $       | 185,220 | 
|                                       |                                                                                                                                      |                                            |         |         |              | 



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES







CONDENSED CONSOLIDATED STATEMENTS OF INCOME


|                                                                           |  |                               |           |   |      |   |           |  
|-------------------------------------------------------------------------- |  | ----------------------------- | --------- | - | ---- | - | --------- | -
|                                                                           |  | Three Months Ended            |          
|                                                                           |  | March 31,                     |          
|                                                                           |  |                               |          
|                                                                           |  | 2006                          |           |   | 2005 |  
|                                                                           |  |                               |           |   |      |  
|                                                                           |  | (Dollars in thousands, except |          
|                                                                           |  | per share data)               |          
|                                                                           |  | (Unaudited)                   |          
|Interest income                                                            |  | $                             | 782       |   |      | $ | 482       |  
|Other investment income                                                    |  |                               | 199       |   |      |   |          |  
|Earnings of partially owned equity affiliates                              |  |                               | 2,630     |   |      |   | 265       |  
|Other income (includes related party income of $100 for 2006 and
    2005) |  |                               | 103       |   |      |   | 100       |  
|General and administrative expenses                                        |  |                               | (567      | ) |      |   | (780      | )
|                                                                           |  |                               |           |   |      |  
|Income before income taxes and extraordinary gain                          |  |                               | 3,147     |   |      |   | 67        |  
|Income taxes                                                               |  |                               | (1,319    | ) |      |   | (28       | )
|                                                                           |  |                               |           |   |      |  
|Income before extraordinary gain                                           |  |                               | 1,828     |   |      |   | 39        |  
|Extraordinary gain, net of income taxes of $543                            |  |                               | 875       |   |      |   |          |  
|                                                                           |  |                               |           |   |      |  
|Net income                                                                 |  | $                             | 2,703     |   |      | $ | 39        |  
|                                                                           |  |                               |           |   |      |  
|Weighted average shares outstanding  basic                                |  |                               | 5,517,909 |   |      |   | 5,517,909 |  
|                                                                           |  |                               |           |   |      |  
|Weighted average shares outstanding  assuming dilution                    |  |                               | 5,881,058 |   |      |   | 5,849,053 |  
|                                                                           |  |                               |           |   |      |  
|Income per common share before extraordinary gain 
    basic              |  | $                             | 0.33      |   |      | $ | 0.01      |  
|Extraordinary gain, net of income taxes  basic                            |  |                               | 0.16      |   |      |   |          |  
|                                                                           |  |                               |           |   |      |  
|Net income per common share  basic                                        |  | $                             | 0.49      |   |      | $ | 0.01      |  
|                                                                           |  |                               |           |   |      |  
|Income per common share before extraordinary gain 
    assuming dilution  |  | $                             | 0.31      |   |      | $ | 0.01      |  
|Extraordinary gain, net of income taxes  assuming
    dilution            |  |                               | 0.15      |   |      |   |          |  
|                                                                           |  |                               |           |   |      |  
|Net income per common share  assuming dilution                            |  | $                             | 0.46      |   |      | $ | 0.01      |  
|                                                                           |  |                               |           |   |      |  



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THE ENSTAR GROUP, INC. AND SUBSIDIARIES







CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


|                                                               |                                                                                           |                 |       |     |      |   |     |     |  
|-------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------- | ----- | --- | ---- | - | --- | --- | -
|                                                               |                                                                                           | Three Months    |      
|                                                               |                                                                                           | Ended March 31, |      
|                                                               |                                                                                           |                 |      
|                                                               |                                                                                           | 2006            |       |     | 2005 |  
|                                                               |                                                                                           |                 |       |     |      |  
|                                                               |                                                                                           | (Dollars in     |      
|                                                               |                                                                                           | thousands)      |      
|                                                               |                                                                                           | (Unaudited)     |      
|Net income                                                     |                                                                                           | $               | 2,703 |     |      | $ | 39  |    
|Other comprehensive loss of partially owned equity affiliates: |                                                                                           |                 |       |     |      |   |     |    
|                                                               | Unrealized holding losses on investments, net of income tax
    benefit of $15            |                 |       | (24 | )    |   |     |    |  
|                                                               | Currency translation adjustment, net of income tax expense
    (benefit) of $11 and $(15) |                 |       | 17  |      |   |     | (24 | )
|                                                               |                                                                                           |                 |       |     |      |  
|Other comprehensive loss                                       |                                                                                           |                 | (7    | )   |      |   | (24 | )  
|                                                               |                                                                                           |                 |       |     |      |  
|Comprehensive income                                           |                                                                                           | $               | 2,696 |     |      | $ | 15  |    
|                                                               |                                                                                           |                 |       |     |      |  



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THE ENSTAR GROUP, INC. AND SUBSIDIARIES







CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                         |                                                                                   |                                                                                 |                                       |         |        |      |        |    |      |      |  
|-------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ---- | ------ | -- | ---- | ---- | -
|                                                         |                                                                                   | Three Months Ended                                                              |                                      
|                                                         |                                                                                   | March 31,                                                                       |                                      
|                                                         |                                                                                   |                                                                                 |                                      
|                                                         |                                                                                   | 2006                                                                            |                                       |         | 2005   |     
|                                                         |                                                                                   |                                                                                 |                                       |         |        |     
|                                                         |                                                                                   | (Dollars in thousands)                                                          |                                      
|                                                         |                                                                                   | (Unaudited)                                                                     |                                      
|Cash flows from operating activities:                    |                                                                                   |                                                                                 |                                       |         |        |      |        |   
|                                                         | Net income                                                                        |                                                                                 | $                                     | 2,703   |        |      | $      | 39 |     
|                                                         | Adjustments to reconcile net income to net cash used in
    operating activities: |                                                                                 |                                       |         |        |      |        |    |     
|                                                         |                                                                                   | Earnings of partially owned equity affiliates                                   |                                       |         | (2,630 | )    |        |    | (265 | )   
|                                                         |                                                                                   | Dividends and distributions received from partially owned equity
    affiliates |                                       |         | 11     |      |        |    |     |     
|                                                         |                                                                                   | Extraordinary gain, net of income taxes                                         |                                       |         | (875   | )    |        |    |     |     
|                                                         |                                                                                   | Noncash compensation expense                                                    |                                       |         | 62     |      |        |    |     |     
|                                                         |                                                                                   | Deferred income taxes                                                           |                                       |         | 11     |      |        |    | (57  | )   
|                                                         | Changes in assets and liabilities:                                                |                                                                                 |                                       |         |        |      |        |    |     
|                                                         |                                                                                   | Accounts payable and accrued expenses                                           |                                       |         | 512    |      |        |    | 75   |     
|                                                         |                                                                                   | Other, net                                                                      |                                       |         | (60    | )    |        |    | 48   |     
|                                                         |                                                                                   |                                                                                 |                                       |         |        |     
|                                                         |                                                                                   |                                                                                 | Net cash used in operating activities |         |        | (266 | )      |    |      | (160 | )
|                                                         |                                                                                   |                                                                                 |                                       |         |        |     
|Cash flows from investing activities:                    |                                                                                   |                                                                                 |                                       |         |        |      |        |   
|                                                         | Purchases of certificates of deposit                                              |                                                                                 |                                       | (28,078 | )      |      |        |   |     
|                                                         | Maturities of certificates of deposit                                             |                                                                                 |                                       | 27,797  |        |      |        |   |     
|                                                         |                                                                                   |                                                                                 |                                       |         |        |     
|                                                         |                                                                                   |                                                                                 | Net cash used in investing activities |         |        | (281 | )      |    |      |     |  
|                                                         |                                                                                   |                                                                                 |                                       |         |        |     
|Decrease in cash and cash equivalents                    |                                                                                   |                                                                                 | (547                                  | )       |        |      | (160   | ) 
|Cash and cash equivalents at the beginning of the period |                                                                                   |                                                                                 | 54,032                                |         |        |      | 81,675 |   
|                                                         |                                                                                   |                                                                                 |                                       |         |        |     
|Cash and cash equivalents at the end of the period       |                                                                                   | $                                                                               | 53,485                                |         |        | $    | 81,515 |   
|                                                         |                                                                                   |                                                                                 |                                       |         |        |     
|Supplemental disclosures of cash flow information:       |                                                                                   |                                                                                 |                                       |         |        |      |        |   
|                                                         | Income taxes paid                                                                 |                                                                                 | $                                     | 550     |        |      | $      | 1  |     
|                                                         |                                                                                   |                                                                                 |                                       |         |        |     



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THE ENSTAR GROUP, INC. AND SUBSIDIARIES







NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




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







10-K




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

Principles of Consolidation


Use of Estimates


Cash Equivalents


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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Partially Owned Equity Affiliates


Comprehensive Income




|                                                                                |  |           |     |   |              |   |     | 
|------------------------------------------------------------------------------- |  | --------- | --- | - | ------------ | - | --- | 
|                                                                                |  | March 31, |     |   | December 31, |  
|                                                                                |  | 2006      |     |   | 2005         |  
|                                                                                |  |           |     |   |              |  
|Currency translation adjustment, net of income tax expense of
    $141 and $130 |  | $         | 227 |   |              | $ | 210 | 
|Unrealized holding losses, net of income tax benefit of $15                     |  |           | (24 | ) |              |   |    | 
|                                                                                |  |           |     |   |              |  
|Total accumulated other comprehensive income                                    |  | $         | 203 |   |              | $ | 210 | 
|                                                                                |  |           |     |   |              |  

Revenue Recognition


Stock-Based Compensation




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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                                                                                                                             |                                 |                  |     |      | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------------- | --- | ---- | 
|                                                                                                                                             |                                 | Three Months     |    
|                                                                                                                                             |                                 | Ended            |    
|                                                                                                                                             |                                 | March 31,        |    
|                                                                                                                                             |                                 | 2005             |    
|                                                                                                                                             |                                 |                  |    
|                                                                                                                                             |                                 | (Dollars in      |    
|                                                                                                                                             |                                 | thousands,       |    
|                                                                                                                                             |                                 | except per share |    
|                                                                                                                                             |                                 | data)            |    
|                                                                                                                                             |                                 | (Unaudited)      |    
|Net income, as reported                                                                                                                      |                                 | $                | 39  |     
|Add: Stock-based employee compensation expense included in
    reported net income, net of income taxes                                      |                                 |                  | 22  |     
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    income taxes |                                 |                  | (78 | )   
|                                                                                                                                             |                                 |                  |    
|Pro forma net loss                                                                                                                           |                                 | $                | (17 | )   
|                                                                                                                                             |                                 |                  |    
|Income per common share:                                                                                                                     |                                 |                  |     |     
|                                                                                                                                             | Basic  as reported             |                  | $   | 0.01 | 
|                                                                                                                                             |                                 |                  |    
|                                                                                                                                             | Basic  pro forma               |                  | $   | 0.00 | 
|                                                                                                                                             |                                 |                  |    
|                                                                                                                                             | Assuming dilution  as reported |                  | $   | 0.01 | 
|                                                                                                                                             |                                 |                  |    
|                                                                                                                                             | Assuming dilution  pro forma   |                  | $   | 0.00 | 
|                                                                                                                                             |                                 |                  |    

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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




00-23,




|                                                |  |            |      |  
|----------------------------------------------- |  | ---------- | ---- | -
|                                                |  | Increase   |     
|                                                |  | (Decrease) |     
|                                                |  |            |     
|General and administrative expense              |  | $          | 62   |  
|Income before income taxes                      |  |            | (62  | )
|Income tax expense (benefit)                    |  |            | (26  | )
|Net income                                      |  |            | (36  | )
|Net income per common share  basic             |  |            | (.01 | )
|Net income per common share  assuming dilution |  |            | (.01 | )





|                                             |  |        |         |           |       |           |             |        |  |           |            |  |  |   |        | 
|-------------------------------------------- |  | ------ | ------- | --------- | ----- | --------- | ----------- | ------ |  | --------- | ---------- |  |  | - | ------ | 
|                                             |  |        |         |           |       | Weighted- |             |        | 
|                                             |  |        |         |           |       | Average   |             |        | 
|                                             |  |        |         | Weighted- |       |           | Remaining   |        |  | Aggregate |           
|                                             |  |        |         | Average   |       |           | Contractual |        |  | Intrinsic |           
|                                             |  |        |         | Exercise  |       |           | Term (in    |        |  | Value (in |           
|Options                                      |  | Shares |         |           | Price |           |             | years) |  |           | thousands) | 
|                                             |  |        |         |           |       |           |             |        |  |           |            | 
|Outstanding at December 31, 2005             |  |        | 725,000 |           |       | $         | 20.47       |        |  |           |            |  |  |   |        | 
|Outstanding at March 31, 2006                |  |        | 725,000 |           |       |           | 20.47       |        |  |           | 4.20       |  |  | $ | 50,220 | 
|Exercisable at March 31, 2006                |  |        | 640,000 |           |       |           | 17.74       |        |  |           | 3.76       |  |  |   | 46,081 | 
|Vested or expected to vest at March 31, 2006 |  |        | 725,000 |           |       |           | 20.47       |        |  |           |            |  |  |   |        | 







|                                                           |  |   |         | 
|---------------------------------------------------------- |  | - | ------- | 
|Unrecognized compensation                                  |  | $ | 239,000 | 
|Weighted average period of expected recognition (in years) |  |   | .82     | 

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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



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





| |                            
| | ---------------------------
| | Castlewood Holdings Limited













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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




1 3








wholly-owned mid-market






10



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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                           
| | --------------------------
| | Affirmative Investment LLC







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



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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                  |  |                        |         |  |            |   |           |             |  |   |        | 
|----------------- |  | ---------------------- | ------- |  | ---------- | - | --------- | ----------- |  | - | ------ | 
|                  |  | March 31, 2006         |        
|                  |  |                        |        
|                  |  | B.H.                   |         |  | Castlewood |   |           | Affirmative | 
|                  |  | Acquisition            |         |  | Holdings   |   |           | Investment  | 
|                  |  |                        |         |  |            |   |           |             | 
|                  |  | (Dollars in thousands) |        
|Total assets      |  | $                      | 105,318 |  |            | $ | 1,560,445 |             |  | $ | 59,765 | 
|Total liabilities |  |                        | 66,225  |  |            |   | 1,218,839 |             |  |   |       | 
|Minority interest |  |                        |        |  |            |   | 68,002    |             |  |   |       | 
|Total equity      |  |                        | 39,093  |  |            |   | 273,604   |             |  |   | 59,765 | 

|                  |  |                        |         |  |            |   |           |             |  |   |        | 
|----------------- |  | ---------------------- | ------- |  | ---------- | - | --------- | ----------- |  | - | ------ | 
|                  |  | December 31, 2005      |        
|                  |  |                        |        
|                  |  | B.H.                   |         |  | Castlewood |   |           | Affirmative | 
|                  |  | Acquisition            |         |  | Holdings   |   |           | Investment  | 
|                  |  |                        |         |  |            |   |           |             | 
|                  |  | (Dollars in thousands) |        
|Total assets      |  | $                      | 105,578 |  |            | $ | 1,199,963 |             |  | $ | 60,199 | 
|Total liabilities |  |                        | 66,733  |  |            |   | 898,513   |             |  |   |       | 
|Minority interest |  |                        |        |  |            |   | 40,544    |             |  |   |       | 
|Total equity      |  |                        | 38,845  |  |            |   | 260,906   |             |  |   | 60,199 | 

|                           |  |                                   |      |   |            |   |        |             |  |   |      |  
|-------------------------- |  | --------------------------------- | ---- | - | ---------- | - | ------ | ----------- |  | - | ---- | -
|                           |  | Three Months Ended March 31, 2006 |     
|                           |  |                                   |     
|                           |  | B.H.                              |      |   | Castlewood |   |        | Affirmative | 
|                           |  | Acquisition                       |      |   | Holdings   |   |        | Investment  | 
|                           |  |                                   |      |   |            |   |        |             | 
|                           |  | (Dollars in thousands)            |     
|Revenue                    |  |                                   |      |   |            | $ | 6,349  |             |  |   |      |  
|Underwriting income (loss) |  | $                                 | (337 | ) |            |   | 2,457  |             |  |   |      |  
|Operating income (loss)    |  |                                   |     |   |            |   |       |             |  | $ | (356 | )
|Net income (loss)          |  |                                   | 248  |   |            |   | 12,310 |             |  |   | (356 | )

|                           |  |                                   |      |   |            |   |       | 
|-------------------------- |  | --------------------------------- | ---- | - | ---------- | - | ----- | 
|                           |  | Three Months Ended March 31, 2005 |     
|                           |  |                                   |     
|                           |  | B.H.                              |      |   | Castlewood |  
|                           |  | Acquisition                       |      |   | Holdings   |  
|                           |  |                                   |      |   |            |  
|                           |  | (Dollars in thousands)            |     
|Revenue                    |  |                                   |      |   |            | $ | 4,488 | 
|Underwriting income (loss) |  | $                                 | (290 | ) |            |   | 1,550 | 
|Net income (loss)          |  |                                   | (140 | ) |            |   | 945   | 





|        |                  
|------- | -----------------
|Note 4: | Other Investments



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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|        |                              
|------- | -----------------------------
|Note 5: | Commitments and Contingencies

month-to






|        |             
|------- | ------------
|Note 6: | Income Taxes







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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                    
|------- | -------------------
|Note 7: | Segment Information







|                                 |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |   |       |       |  |   |         |         | 
|-------------------------------- | --------------------------------- | ---------------------- | - | ------ | ----------- |  | ---------- | -------- | ------ | ----------- | ---------- | ------ | ------ | ----- | - | ----- | ----- |  | - | ------- | ------- | 
|                                 |                                   | March 31, 2006         |  
|                                 |                                   |                        |  
|                                 |                                   |                        |   | B.H.   |             |  | Castlewood |          |        | Affirmative |            |        |       
|                                 |                                   | Corporate              |   |        | Acquisition |  |            | Holdings |        |             | Investment |        |        | Total |  
|                                 |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |  
|                                 |                                   | (Dollars in thousands) |  
|Total reportable segment assets: |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |   |       |       |  |   |        
|                                 | Partially owned equity affiliates |                        |   |        |             |  | $          | 12,988   |        |             | $          | 89,923 |        |       | $ | 8,454 |       |  | $ | 111,365 |        
|                                 | Corporate assets                  |                        | $ | 77,732 |             |  |            |          |        |             |            |        |        |       |   |       |       |  |   | 77,732  |        
|                                 |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |  
|                                 |                                   | Total                  |   | $      | 77,732      |  |            | $        | 12,988 |             |            | $      | 89,923 |       |   | $     | 8,454 |  |   | $       | 189,097 | 
|                                 |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |  

|                                 |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |   |       |       |  |   |         |         | 
|-------------------------------- | --------------------------------- | ---------------------- | - | ------ | ----------- |  | ---------- | -------- | ------ | ----------- | ---------- | ------ | ------ | ----- | - | ----- | ----- |  | - | ------- | ------- | 
|                                 |                                   | December 31, 2005      |  
|                                 |                                   |                        |  
|                                 |                                   |                        |   | B.H.   |             |  | Castlewood |          |        | Affirmative |            |        |       
|                                 |                                   | Corporate              |   |        | Acquisition |  |            | Holdings |        |             | Investment |        |        | Total |  
|                                 |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |  
|                                 |                                   | (Dollars in thousands) |  
|Total reportable segment assets: |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |   |       |       |  |   |        
|                                 | Partially owned equity affiliates |                        |   |        |             |  | $          | 12,906   |        |             | $          | 85,908 |        |       | $ | 8,515 |       |  | $ | 107,329 |        
|                                 | Corporate assets                  |                        | $ | 77,891 |             |  |            |          |        |             |            |        |        |       |   |       |       |  |   | 77,891  |        
|                                 |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |  
|                                 |                                   | Total                  |   | $      | 77,891      |  |            | $        | 12,906 |             |            | $      | 85,908 |       |   | $     | 8,515 |  |   | $       | 185,220 | 
|                                 |                                   |                        |   |        |             |  |            |          |        |             |            |        |        |       |  

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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |      |   |  |   |       | 
|------------------------------------------------------ |  | --------------------------------- | ------ | ---- | ----------- | - | ---------- | -------- |  | ----------- | ---------- | - |  | ----- | ---- | - |  | - | ----- | 
|                                                       |  | Three Months Ended March 31, 2006 |       
|                                                       |  |                                   |       
|                                                       |  |                                   |        | B.H. |             |   | Castlewood |          |  | Affirmative |            |   | 
|                                                       |  | Corporate                         |        |      | Acquisition |   |            | Holdings |  |             | Investment |   |  | Total |     
|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |     
|                                                       |  | (Dollars in thousands)            |       
|Net underwriting (loss) income                         |  |                                   |        |      |             | $ | (337       | )        |  | $           | 2,457      |   |  |       |      |   |  |   |       | 
|Revenue                                                |  |                                   |        |      |             |   |            |          |  |             | 6,349      |   |  |       |      |   |  |   |       | 
|Net investment income                                  |  | $                                 | 199    |      |             |   | 880        |          |  |             | 9,660      |   |  |       |      |   |  |   |       | 
|Interest income                                        |  |                                   | 782    |      |             |   |            |          |  |             |            |   |  |       |      |   |  |   |       | 
|Share of net income (loss) of partly-owned companies   |  |                                   |        |      |             |   |            |          |  |             | 112        |   |  | $     | (356 | ) |  |   |       | 
|General and administrative expenses                    |  |                                   | (567   | )    |             |   | (561       | )        |  |             | (11,087    | ) |  |       |      |   |  |   |       | 
|Amortization of run-off provision                      |  |                                   |        |      |             |   | 250        |          |  |             |            |   |  |       |      |   |  |   |       | 
|Other income                                           |  |                                   | 103    |      |             |   |            |          |  |             |            |   |  |       |      |   |  |   |       | 
|Foreign exchange gain                                  |  |                                   |        |      |             |   | 16         |          |  |             | 470        |   |  |       |      |   |  |   |       | 
|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |     
|Income (loss) before income taxes                      |  |                                   | 517    |      |             |   | 248        |          |  |             | 7,961      |   |  |       | (356 | ) |  |   |       | 
|Income tax (expense) benefit                           |  |                                   | (1,862 | )    |             |   |            |          |  |             | 214        |   |  |       |      |   |  |   |       | 
|Minority interest                                      |  |                                   |        |      |             |   |            |          |  |             | (212       | ) |  |       |      |   |  |   |       | 
|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |     
|Income (loss) before extraordinary gain                |  |                                   | (1,345 | )    |             |   | 248        |          |  |             | 7,963      |   |  |       | (356 | ) |  |   |       | 
|Extraordinary gain                                     |  |                                   |        |      |             |   |            |          |  |             | 4,347      |   |  |       |      |   |  |   |       | 
|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |     
|Net income (loss)                                      |  | $                                 | (1,345 | )    |             | $ | 248        |          |  | $           | 12,310     |   |  | $     | (356 | ) |  |   |       | 
|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |     
|Companys economic ownership %                         |  |                                   |        |      |             |   | 33         | %        |  |             | 32.63      | % |  |       | 14   | % |  |   |       | 
|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |     
|                                                       |  |                                   |        |      |             |   |            |          |  |             | 4,016      |   |  |       |      |   |  |   |       | 
|Companys portion of pre-tax extraordinary gain        |  |                                   |        |      |             |   |            |          |  |             | (1,418     | ) |  |       |      |   |  |   |       | 
|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |     
|Earnings (losses) of partially owned equity affiliates |  |                                   |        |      |             | $ | 82         |          |  | $           | 2,598      |   |  | $     | (50  | ) |  | $ | 2,630 | 
|                                                       |  |                                   |        |      |             |   |            |          |  |             |            |   |  |       |     



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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                     |  |                                   |      |                        |             |   |            |          |  |   |        |   |  |   |     | 
|---------------------------------------------------- |  | --------------------------------- | ---- | ---------------------- | ----------- | - | ---------- | -------- |  | - | ------ | - |  | - | --- | 
|                                                     |  | Three Months Ended March 31, 2005 |     
|                                                     |  |                                   |     
|                                                     |  |                                   |      | B.H.                   |             |   | Castlewood |          |  |  
|                                                     |  | Corporate                         |      |                        | Acquisition |   |            | Holdings |  |   | Total  |  
|                                                     |  |                                   |      |                        |             |   |            |          |  |   |        |  
|                                                     |  |                                   |      | (Dollars in thousands) |             |   |           
|Net underwriting income (loss)                       |  |                                   |      |                        |             | $ | (290       | )        |  | $ | 1,550  |   |  |   |     | 
|Revenue                                              |  |                                   |      |                        |             |   |            |          |  |   | 4,488  |   |  |   |     | 
|Net investment income                                |  |                                   |      |                        |             |   | 343        |          |  |   | 5,028  |   |  |   |     | 
|Interest income                                      |  | $                                 | 482  |                        |             |   |            |          |  |   |        |   |  |   |     | 
|Share of net income of partly-owned companies        |  |                                   |      |                        |             |   |            |          |  |   | 48     |   |  |   |     | 
|General and administrative expenses                  |  |                                   | (780 | )                      |             |   | (518       | )        |  |   | (7,557 | ) |  |   |     | 
|Amortization of run-off provision                    |  |                                   |      |                        |             |   | 333        |          |  |   |        |   |  |   |     | 
|Other income                                         |  |                                   | 100  |                        |             |   |            |          |  |   |        |   |  |   |     | 
|Foreign exchange loss                                |  |                                   |      |                        |             |   | (8         | )        |  |   | (1,057 | ) |  |   |     | 
|                                                     |  |                                   |      |                        |             |   |            |          |  |   |        |  
|Income (loss) before income taxes                    |  |                                   | (198 | )                      |             |   | (140       | )        |  |   | 2,500  |   |  |   |     | 
|Minority interest                                    |  |                                   |     |                        |             |   |            |          |  |   | (379   | ) |  |   |     | 
|Income taxes                                         |  |                                   | (28  | )                      |             |   |            |          |  |   | (1,176 | ) |  |   |     | 
|                                                     |  |                                   |      |                        |             |   |            |          |  |   |        |  
|Net income (loss)                                    |  | $                                 | (226 | )                      |             | $ | (140       | )        |  | $ | 945    |   |  |   |     | 
|                                                     |  |                                   |      |                        |             |   |            |          |  |   |        |  
|Companys economic ownership %                       |  |                                   |      |                        |             |   | 33         | %        |  |   | 32.89  | % |  |   |     | 
|                                                     |  |                                   |      |                        |             |   |            |          |  |   |        |  
|Earnings (loss) of partially owned equity affiliates |  |                                   |      |                        |             | $ | (46        | )        |  | $ | 311    |   |  | $ | 265 | 
|                                                     |  |                                   |      |                        |             |   |            |          |  |   |        |  

1 3


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THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |                 
|------- | ----------------
|Note 8: | Income per Share



|                                                                          |  |                               |           |  |      |   |           | 
|------------------------------------------------------------------------- |  | ----------------------------- | --------- |  | ---- | - | --------- | 
|                                                                          |  | Three Months Ended            |          
|                                                                          |  | March 31,                     |          
|                                                                          |  |                               |          
|                                                                          |  | 2006                          |           |  | 2005 |  
|                                                                          |  |                               |           |  |      |  
|                                                                          |  | (Dollars in thousands, except |          
|                                                                          |  | per share data)               |          
|                                                                          |  | (Unaudited)                   |          
|Income before extraordinary gain                                          |  | $                             | 1,828     |  |      | $ | 39        | 
|Extraordinary gain, net of income taxes                                   |  |                               | 875       |  |      |   |          | 
|                                                                          |  |                               |           |  |      |  
|Net income                                                                |  | $                             | 2,703     |  |      | $ | 39        | 
|                                                                          |  |                               |           |  |      |  
|Income per common share before extraordinary gain 
    basic             |  | $                             | 0.33      |  |      | $ | 0.01      | 
|Extraordinary gain, net of income taxes  basic                           |  |                               | 0.16      |  |      |   |          | 
|                                                                          |  |                               |           |  |      |  
|Net income per common share  basic                                       |  | $                             | 0.49      |  |      | $ | 0.01      | 
|                                                                          |  |                               |           |  |      |  
|Income per common share before extraordinary gain 
    assuming dilution |  | $                             | 0.31      |  |      | $ | 0.01      | 
|Extraordinary gain, net of income taxes  assuming
    dilution           |  |                               | 0.15      |  |      |   |          | 
|                                                                          |  |                               |           |  |      |  
|Net income per common share  assuming dilution                           |  | $                             | 0.46      |  |      | $ | 0.01      | 
|                                                                          |  |                               |           |  |      |  
|Weighted average shares outstanding  basic                               |  |                               | 5,517,909 |  |      |   | 5,517,909 | 
|Common share equivalents                                                  |  |                               | 363,149   |  |      |   | 331,144   | 
|                                                                          |  |                               |           |  |      |  
|Weighted average shares outstanding  assuming dilution                   |  |                               | 5,881,058 |  |      |   | 5,849,053 | 
|                                                                          |  |                               |           |  |      |  





|        |                  
|------- | -----------------
|Note 9: | Subsequent Events





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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















|                           | 
|-------------------------- | 
|/s/  Deloitte & Touche LLP | 




18



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Overview


10-K




Recent Accounting Pronouncements




Critical Accounting Policies




| |       
| | ------
| | Enstar



Income Tax Valuation Reserve


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##### Table of Contents





| |                                         
| | ----------------------------------------
| | Castlewood Holdings and B.H. Acquisition



Loss and Loss Adjustment Expenses


Reinsurance Balances Receivable


Goodwill






20



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##### Table of Contents



Recent Developments






Liquidity and Capital Resources












Contractual Obligations and Commitments


month-to






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##### Table of Contents



Results of Operations
















22



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##### Table of Contents



Results of Operations  Partially Owned Equity
Affiliates






| |                    
| | -------------------
| | Castlewood Holdings











(non-U.S.)








23



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##### Table of Contents













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











(non-U.S.)







|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures About Market
    Risk



24



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##### Table of Contents









(non-U.S.)









|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures





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##### Table of Contents






PART II


OTHER INFORMATION







|        |         
|------- | --------
|Item 6. | Exhibits

|          |    |    |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                
|--------- | -- | -- |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Reference |    |    |  |                        
|Number    |    |    |  | Description of Exhibits
|          |    |    |  |                        
|          | 3  | .1 |  |                        |  | Articles of Incorporation of the Company, as amended on
    June 10, 1998 (incorporated by reference to
    Exhibit 3.1 to the Quarterly Report on Form 10-Q,
    dated August 4, 1998).                                                                                                                                                                                       
|          | 3  | .2 |  |                        |  | Bylaws of the Company, as amended on May 20, 1999
    (incorporated by reference to Exhibit 3.2 to the Quarterly
    Report on Form 10-Q, dated August 6, 1999).                                                                                                                                                                                                               
|          | 4  | .1 |  |                        |  | Rights Agreement between the Company and American Stock
    Transfer & Trust Company, as Rights Agent, dated as of
    January 20, 1997 (incorporated by reference to
    Exhibit 4.1 to Amendment No. 2 to the Registration
    Statement on Form 10, dated March 27, 1997).                                                                                                  
|          | 4  | .2 |  |                        |  | Amendment Agreement, dated as of October 20, 1998, to the
    Rights Agreement, dated as of January 20, 1997, between the
    Company and American Stock Transfer & Trust Company
    (incorporated by reference to Exhibit 10.2 to the Current
    Report on Form 8-K dated October 20, 1998).                                                                                
|          | 10 | .1 |  |                        |  | Amended and Restated Deferred Compensation and Stock Plan for
    Non-Employee Directors (incorporated by reference to Exhibit
    10.1 to the Current Report on Form 8-K dated
    December 29, 2005).                                                                                                                                                                        
|          | 10 | .2 |  |                        |  | Agreement for the Sale and Purchase of Aioi Insurance Company of
    Europe Limited, dated December 30, 2005, by and among Aioi
    Insurance Company Limited, Hillcot Holdings Ltd., Castlewood
    (EU) Ltd., Kenmare Holdings Ltd., and Shinsei Bank, Limited
    (incorporated by reference to Exhibit 10.2 to the Current
    Report on Form 8-K dated December 29, 2005).
|          | 31 | .1 |  |                        |  | Certification of Chief Executive Officer pursuant to
    Rule 13a  14(a) or Rule 15d 
    14(a) of the Securities Exchange Act of 1934 as adopted under
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   
|          | 31 | .2 |  |                        |  | Certification of Chief Financial Officer pursuant to
    Rule 13a  14(a) or Rule 15d 
    14(a) of the Securities Exchange Act of 1934 as adopted under
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   
|          | 32 | .1 |  |                        |  | Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                     
|          | 32 | .2 |  |                        |  | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                     

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SIGNATURES






| |                       
| | ----------------------
| | 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)          



27