##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

FORM 10-Q/A

(Amendment No. 1)


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(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



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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


(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 to be filed 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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one):

o þ o


Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act).     Yes o       No þ

The number of shares of Registrants Common Stock,
$.01 par value per share, outstanding at September 19,
2006 was 5,739,384.



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##### Table of Contents



EXPLANATORY NOTE

The Enstar Group, Inc. (the Company or
Enstar) is filing this Amendment No. 1 on
Form 10-Q/A (this Form 10-Q/A) to the
Companys Quarterly Report on Form 10-Q for the period
ended March 31, 2006, initially filed with the Securities
and Exchange Commission (the SEC) on May 10,
2006 (the Original 10-Q Filing), to give effect
to the restatement of its financial statement disclosures as
discussed in Note 2 to the unaudited condensed consolidated
financial statements and related notes included in Item 1
of Part I  Financial Statements.
This restatement had no impact on the net income, net income per
share or shareholders equity of the Company or its
partially owned affiliates.

The Company has also updated Item 2 of Part I,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, to give effect to the
restatement, and Item 4 of Part I, Controls and
Procedures. In addition, the Company has amended
Item 6 of Part II to reflect the filing of currently
dated certifications from the Companys Chief Executive
Officer and Chief Financial Officer, as required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The
certifications of the Companys Chief Executive Officer and
Chief Financial Officer are attached to this Form 10-Q/A as
Exhibits 31.1, 31.2, 32.1, and 32.2. Other than the changes
for the effects of the restatement, no other information in this
Form 10-Q/A has been updated to reflect any subsequent
information or events since the date of the Original
10-Q Filing. For the convenience of the reader, this
Form 10-Q/A sets forth the Original 10-Q Filing in its
entirety, as amended.



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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 CEO               
|EX-31.2 SECTION 302 CERTIFICATION OF CFO               
|EX-32.1 SECTION 906 CERTIFICATION OF CEO               
|EX-32.2 SECTION 906 CERTIFICAITON OF CFO               



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##### Table of Contents



THIS FORM 10-Q/A 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/A 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.

i



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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 6)   |                                                                                                                                      |                                            |         |              |         |  |         |        
|                                        
|                                        
|                                        
|                                        
|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 | 
|                                         |                                                                                                                                      |                                            |         |              |         |  |         |        

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

1



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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      |  
|                                                                           |  |                               |           |      |  |   |           |  

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

2



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##### Table of Contents



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  |    
|                                                                   |                                                                                           |                 |       |      |   |   |     |    

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

3



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##### Table of Contents



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  |     
|                                                             |                                                                                   |                                                                                 |                                       |         |        |      |        |   

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

4



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES






NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




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

Enstar is a publicly traded company engaged in the operation of
several equity affiliates in the financial services industry.
Enstar also continues its active search for one or more
additional operating businesses which meet its acquisition
criteria.

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

The Company consolidates JCF CFN LLC and related entities
(collectively, the JCF CFN Entities). The JCF CFN
Entities were formed to serve as members of Green Tree
Investment Holdings LLC (formerly known as CFN Investment
Holdings LLC) and related entities (collectively, Green
Tree), which, in turn, were formed to effect the
acquisition of a portfolio of home equity and manufactured
housing loan securities and the associated servicing businesses
from Conseco Finance Corp. (Conseco Finance). In
July 2004, the JCF CFN Entities completed the sale of their
entire interest in Green Tree and have been inactive since then.

The condensed consolidated financial statements of the Company
are unaudited and, in the opinion of management, include all
adjustments consisting solely of normal recurring adjustments
necessary to fairly state the Companys financial
condition, results of operations and cash flows for the interim
period. The results of operations for the three months ended
March 31, 2006 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, 2005 included in the Companys
Form 10-K/A as filed with the Securities and Exchange
Commission on September 19, 2006 under the Securities
Exchange Act of 1934, as amended.



|        |                                    
|------- | -----------------------------------
|Note 2: | Restatement of Financial Statements

Subsequent to the issuance of the Companys condensed
consolidated financial statements for the three month periods
ended March 31, 2006 and 2005, the condensed consolidated
financial statements of the Companys partially owned
equity affiliates, Castlewood Holdings and B.H. Acquisition,
were restated to reflect certain reclassifications. As a result
of these restatements, the Company has restated certain
disclosures in the notes to the condensed consolidated financial
statements relating to financial information of Castlewood
Holdings and B.H. Acquisition. These restatements had no impact
on the net income, net income per share or shareholders
equity of Enstar or its partially owned equity affiliates.

The reclassifications made by Castlewood Holdings and B.H.
Acquisition were between certain line items of income and
expenses on their respective condensed consolidated statements
of earnings. Underwriting income, previously included in income
for both entities, was renamed Net reduction in loss and
loss adjustment expense liabilities and reclassified as an
expense item. In addition, Castlewood Holdings net foreign
exchange loss (gain) was also reclassified from income to
expense. These reclassifications are reflected in the
Companys condensed consolidated financial statements in
Note 4, Partially Owned Equity Affiliates and
Note 8, Segment Information.

5



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|        |                                
|------- | -------------------------------
|Note 3: | Significant Accounting Policies

(a) Principles of Consolidation  The
condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Enstar
Financial Services, Inc. and Enstar Group Operations, Inc., both
of which are currently inactive. In addition, the Company
consolidates the JCF CFN Entities, recording a minority interest
in its financial statements for Castlewood Holdings 40%
interest. All significant intercompany balances and transactions
have been eliminated in consolidation.

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

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

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

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

The components of accumulated other comprehensive income are as
follows:

|                                                                                |  |           |     |              |  |   |     | 
|------------------------------------------------------------------------------- |  | --------- | --- | ------------ |  | - | --- | 
|                                                                                |  | 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 | 
|                                                                                |  |           |     |              |  |   |     | 

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

6



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

share of earnings from partially owned equity affiliates is
recorded as such earnings are recognized by the partially owned
equity affiliate.

(g) Stock-Based Compensation  The Company
utilizes various stock-based compensation plans for the benefit
of non-employee directors and certain officers. In 1997, the
Company adopted the Deferred Compensation and Stock Plan for
Non-Employee Directors and a long-term incentive program made up
of three stock option/incentive plans. Additionally, in 2001,
the Company adopted the 2001 Outside Directors Stock
Option Plan.

The options granted under the plans are exercisable during the
period commencing from the date they vest until expiring
according to the terms of the grant. Options generally expire no
later than ten years from the grant date. Options under the
various plans had original vesting schedules that ranged from
one to four years. Any shares issued from the exercise of
options would be from newly issued shares. There are a total of
817,500 shares authorized under the Companys various
stock option plans, 52,500 of which are available to be granted
at March 31, 2006. Prior to 2006, no compensation expense
was recognized in net earnings for grants under stock
option/incentive plans that had an exercise price equal to the
market value of the Companys underlying common stock on
the date of grant. In connection with options granted in
November 2001, the market value of the Companys common
stock on the date of grant exceeded the exercise price,
resulting in a charge to earnings for that year. In addition,
compensation expense was recognized over the vesting life of
these options through June 2004.

As of January 1, 2006, the Company adopted
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R). This Statement
requires companies to recognize an expense in their financial
statements for stock options based on the fair value
method. The fair value method requires that a fair value
be assigned to a stock option on its grant date and that this
value be amortized over the grantees service period. Prior
to January 1, 2006, the Company accounted for stock options
in accordance with SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123) as
amended by SFAS 148, Accounting for Stock-Based
Compensation  Transition. These Statements
permitted companies to choose between two methods of recording
the expense for stock options in their financial statements;
either the fair value method, or the intrinsic value
method, in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related
interpretations. Under the intrinsic value method, compensation
expense for the Companys option grants was only recognized
if the exercise price of the employee stock option was less than
the market price of the underlying stock on the date of grant.
If a company elected to use the intrinsic value method, pro
forma disclosures of earnings and earnings per share were
required as if the fair value method of accounting had been
applied. The Company previously elected to account for its stock
options under the intrinsic value method and therefore computed
and disclosed the required pro forma disclosures.

SFAS 123R provides for two alternative methods of adoption:
the modified retrospective method and the
modified prospective method. While the modified
retrospective method permits restatement of prior periods for
comparability, the Company has elected to apply the modified
prospective method. The modified prospective method calls for
unvested options as of January 1, 2006 and options granted
after January 1, 2006 to be expensed in accordance with
SFAS 123R after that date. Compensation expense under the
fair value method for prior periods is not reflected in the
financial statements of those periods but was disclosed on a pro
forma basis. The table below presents the Companys pro
forma earnings information as if stock options issued prior to
January 1, 2006, were expensed in prior periods.

7



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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,       
|                                                                                                                                             |                                 | 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 | 
|                                                                                                                                             |                                 |                  |     |     

The fair values for options granted under the Companys
stock option plans were calculated at the date of grant using
the Black-Scholes option pricing model. The estimated weighted
average fair value at the date of grant for options vesting
during the three months ended March 31, 2006 and 2005 was
$9.50.

The adoption of SFAS 123R has not altered the
Companys methodology of computing option expense from that
used to prepare the pro forma disclosures in previous years.
Furthermore, at the present time, the Company does not plan to
change its policies of stock option compensation with respect to
the number of grants, terms, or alternative instruments as a
result of the adoption of SFAS 123R. Stock-based employee
compensation is based on the application of Emerging Issues Task
Force No. 00-23, Issues Related to the Accounting for
Stock Compensation under APB 25 and FASB Interpretation
No. 44, to the straight-line vesting of such awards
over the full vesting period. At this time, the Company
anticipates that 2006 after-tax stock option expense will be
approximately $124,000 or $.02 per diluted share.

The effect of the adoption of SFAS 123R on selected line
items is as follows for the three months ended March 31,
2006:

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

No stock option expense was capitalized during the three months
ended March 31, 2006.

8



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A summary of option activity for the three-month period ended
March 31, 2006 is presented below:

|                                             |  |        |         |           |  |             |       |            |  |  |      |  |  |   |        | 
|-------------------------------------------- |  | ------ | ------- | --------- |  | ----------- | ----- | ---------- |  |  | ---- |  |  | - | ------ | 
|                                             |  |        |         |           |  | 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 |            |  |  |      |  |  |   |        | 

The total fair value of shares vesting during the three months
ended March 31, 2006 was $380,000.

There were no options granted, exercised, forfeited or expired
during the three months ended March 31, 2006.

Information about the Companys unrecognized stock-based
compensation at March 31, 2006 is as follows:

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



|        |                                  
|------- | ---------------------------------
|Note 4: | Partially Owned Equity Affiliates



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

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



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

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

As a result of this transaction, the Companys 33% direct
economic interest in B.H. Acquisition increased by an additional
indirect economic interest through Castlewood Holdings. At
March 31, 2006, the Companys beneficial ownership in
B.H. Acquisition was 47.68%. The Companys combined voting
interest in B.H. Acquisition is limited to 50%.

9



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In conjunction with the closing of the Castlewood Holdings
Transaction, a wholly owned subsidiary of Castlewood Holdings
completed the acquisition of two reinsurance companies in
run-off, 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). The total purchase price
of River Thames and Overseas Reinsurance was approximately
$15.2 million.

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

Also in 2002, Castlewood Holdings capitalized Fitzwilliam
(SAC) Insurance Limited (Fitzwilliam), a wholly
owned subsidiary. Fitzwilliam, based in Bermuda, offers
specialized reinsurance protections to related companies,
clients of Castlewood Holdings and other third-party companies.

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

In August 2004, Castlewood Holdings implemented an employee
stock-based compensation plan. The plan allows for the award of
Castlewood Holdings Class D non-voting shares to
certain senior employees up to a maximum of 7.5% of the total
issued share capital of Castlewood Holdings. As a result of
awards made in 2005 and 2004, the Companys economic
interest in Castlewood Holdings of 33 1/3% has been diluted by
0.70% to 32.63% as of March 31, 2006. As awarded shares
vest and as additional shares are awarded in the future, the
Companys economic interest could decrease to a minimum of
30.83%. The Companys voting interest will remain at 50%.

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

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

10



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

In December 2005, Castlewood Holdings, through two of its
wholly-owned subsidiaries, invested approximately
$24.5 million in New NIB Partners LP (NIB
Partners), a newly formed Province of Alberta limited
partnership, in exchange for an approximately
1.4% interest. NIB Partners was formed for the purpose of
purchasing, together with certain affiliated entities, 100% of
the outstanding share capital of NIBC N.V. (formerly, NIB
Capital N.V.) and its affiliates (NIBC). NIBC is a
merchant bank focusing on the mid-market segment in northwest
Europe with a global distribution network.

New NIB Partners and certain related entities are indirectly
controlled by New NIB Limited, an Irish corporation.
Mr. Flowers is a director of New NIB Limited and is on the
supervisory board of NIBC. Certain affiliates of
J.C. Flowers I LP also participated in the acquisition
of NIBC.

In March 2006, Castlewood Holdings and Shinsei completed the
acquisition of Aioi Insurance Company of Europe Limited
(Aioi Europe), a London-based subsidiary of Aioi
Insurance Company, Limited, for £62 million
(approximately $108 million), with £50 million in
cash upon the closing of the transaction and
£12 million in the form of a promissory note, payable
twelve months from the date of the closing. Aioi Europe
underwrote general insurance and reinsurance business in Europe
for its own account until 2002 when it generally ceased
underwriting, and placed into run-off, its general insurance and
reinsurance business. The acquisition was effected through
Hillcot. The acquisition has been accounted for using the
purchase method of accounting. Castlewood Holdings recorded an
extraordinary gain of approximately $4.3 million (net of
minority interest of $4.3 million) relating to the excess
of the fair value of the assets acquired over their cost. Upon
completion of the transaction, Aioi Europes name was
changed to Brampton Insurance Company Limited.

Also in March 2006, Castlewood Holdings approved a commitment of
up to $75.0 million in J.C. Flowers II LP (the
J.C. Flowers Fund), a private investment fund to be
formed by J.C. Flowers & Co. LLC. The transaction is
expected to close in the second quarter of 2006. Castlewood
Holdings intends to use cash on hand to fund its commitment.

J.C. Flowers & Co. LLC is controlled by
Mr. Flowers. No fees will be payable by Castlewood Holdings
to J.C. Flowers II LP, J.C. Flowers & Co. LLC, or
Mr. Flowers in connection with Castlewood Holdings
investment in the J.C. Flowers Fund.



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

In June 2005, the Company committed to contribute up to
$10 million for a 14%, non-voting interest in Affirmative
Investment LLC (Affirmative Investment), a newly
formed Delaware limited liability company. J.C. Flowers I LP
committed the capital necessary for the remaining 86% interest
in Affirmative Investment. Both J.C. Flowers I LP and
Affirmative Associates LLC, the managing member of Affirmative
Investment, are controlled by Mr. Flowers, a member of the
Companys board of directors and the Companys largest
shareholder. In July 2005, the Company funded its initial
capital contribution of approximately $2.6 million. Since
that time, the Company has funded additional capital
contributions of approximately $5.7 million. At
March 31, 2006, the Companys total investment in
Affirmative Investment was approximately $8.5 million,
including equity in earnings from July 1, 2005 to
March 31, 2006. The Companys ownership in Affirmative
Investment is accounted for using the equity method of
accounting.

Also in June 2005, Affirmative Investment acquired
1,183,000 shares of common stock of Affirmative Insurance
Holdings, Inc. (Affirmative Insurance), through open
market purchases. In August, Affirmative Investment acquired 50%
of the membership interests of New Affirmative LLC
(NAL), a newly formed Delaware limited liability
company, for approximately $40.7 million in cash and the
1,183,000 shares of Affirmative Insurance. The remaining
50% of the membership interests of NAL were acquired by Delaware

11



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Street Capital Master Fund, LP or its affiliates
(DSC) for approximately $37.5 million in cash
and 1,459,699 shares of Affirmative Insurance common stock.
In turn, NAL, pursuant to a Stock Purchase Agreement with Vesta
Insurance Group, Inc. (VIG) and Vesta Fire Insurance
Corporation, a subsidiary of VIG (together with VIG,
Vesta), acquired from Vesta an aggregate of
5,218,228 shares of Affirmative Insurance common stock for
a purchase price of $15.00 per share. Upon the closing of
the transaction with Vesta and the transfer of the shares of
Affirmative Insurance from Affirmative Investment and DSC,
NALs ownership percentage in Affirmative Insurance was
approximately 52.9%. Affirmative Investments ownership in
NAL is accounted for using the equity method of accounting.
Affirmative Investment accounts for its investment in NAL three
months in arrears.



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

In accordance with APB No. 18, The Equity Method of
Accounting for Investments in Common Stock, the Company
prepared summarized financial information for B.H. Acquisition
and Castlewood Holdings as of March 31, 2006 and
December 31, 2005 and for the three months ended
March 31, 2006 and 2005, respectively. Summarized financial
information for Affirmative Investment is presented as of
March 31, 2006 and December 31, 2005 and for the three
months ended March 31, 2006 (Affirmative Investment was
formed in June 2005). The summarized financial information
presented below for B.H. Acquisition and Castlewood Holdings is
derived from their respective audited financial statements for
December 31, 2005 and their unaudited quarterly financial
statements. The summarized financial information presented below
for Affirmative Investment is derived from its unaudited
quarterly financial statements for December 31, 2005 and
for the three months ended March 31, 2006.

|                  |  |                        |         |            |  |             |           |  |  |   |        | 
|----------------- |  | ---------------------- | ------- | ---------- |  | ----------- | --------- |  |  | - | ------ | 
|                  |  |                       
|                  |  | 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 
|                        |  |                                   |     |            |  |            
|                        |  | (Restated)                        |     | (Restated) |  |            
|                        |  |                                  
|                        |  | (Dollars in thousands)           
|                       
|                       
|                       
|                       
|Revenue                 |  |                                   |     |            |  | $           | 6,349  |  |  |   |      |  
|                       
|                       
|                       
|                       
|Operating income (loss) |  | $                                 | 248 |            |  |             | 7,849  |  |  | $ | (356 | )
|                       
|                       
|                       
|                       
|Net income (loss)       |  |                                   | 248 |            |  |             | 12,310 |  |  |   | (356 | )

12



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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, 2005
|                        |  |                                  
|                        |  | B.H.                              |      | Castlewood
|                        |  | Acquisition                       |      | Holdings  
|                        |  |                                   |      |           
|                        |  | (Restated)                        |      | (Restated)
|                        |  |                                  
|                        |  | (Dollars in thousands)           
|                       
|                       
|                       
|                       
|Revenue                 |  |                                   |      |            |  | $ | 4,488 | 
|                       
|                       
|                       
|                       
|Operating income (loss) |  | $                                 | (140 | )          |  |   | 2,452 | 
|                       
|                       
|                       
|                       
|Net income (loss)       |  |                                   | (140 | )          |  |   | 945   | 

The Companys consolidated accumulated deficit includes
undistributed earnings of its partially owned equity affiliates
of approximately $56.7 million and approximately
$52.6 million at March 31, 2006 and December 31,
2005, respectively.



|        |                  
|------- | -----------------
|Note 5: | Other Investments

In December 2005, the Company invested approximately
$3.5 million in NIB Partners, a newly formed Province of
Alberta limited partnership, in exchange for an approximately
..2% limited partnership interest. NIB Partners was formed for
the purpose of purchasing, together with certain affiliated
entities, 100% of the outstanding share capital of NIBC N.V.
(formerly, NIB Capital N.V.) and its affiliates
(NIBC). NIBC is a merchant bank focusing on the
mid-market segment in northwest Europe with a global
distribution network. In April 2006, the Company received a
distribution of $254,000 from its investment in NIB Partners
consisting of $199,000 in dividend income and a return of
capital of $55,000. These amounts were accrued as receivables at
March 31, 2006.

New NIB Partners and certain related entities are indirectly
controlled by New NIB Limited, an Irish corporation.
Mr. Flowers is a director of New NIB Limited and is on the
supervisory board of NIBC. Certain affiliates of J.C. Flowers I
LP also participated in the acquisition of NIBC. The
Companys investment in NIB Partners is accounted for at
cost.



|        |                              
|------- | -----------------------------
|Note 6: | Commitments and Contingencies

In December 2004, the Company signed a one year lease beginning
January 1, 2005 on an office building at 401 Madison
Avenue, Montgomery, Alabama which serves as the corporate
headquarters. The lease also provides renewal options for three
periods of one year each. In December 2005, the Company signed a
one year renewal option beginning January 1, 2006.
Additionally, pursuant to an oral agreement, the Company leases
space in a warehouse at 703 Howe Street, Montgomery, Alabama on
a month-to-month basis. The Company leases the office building
and warehouse space from unaffiliated third parties for $3,000
and $350 per month, respectively. The Company believes the
rental amounts are competitive with market rates and that the
cancellation or termination of either of these leases would not
have a material adverse effect on the Companys results of
operations. In September 2005, the Company entered into an
agreement with J.C. Flowers & Co. LLC continuing
through October 2014 for the use of certain office space and
administrative services from J.C. Flowers & Co. LLC for
monthly payments of $4,146. Either party may, at its option with
or without cause, terminate this agreement upon thirty
(30) days prior written notice to the other party. J.C.
Flowers & Co. LLC is managed by Mr. Flowers, a
member of the Companys board of directors and the
Companys largest shareholder. The Company does not own any
real property. Including payments made to J.C.
Flowers & Co. LLC, the Company incurred rent expense in
the amount of $16,488 and $20,658 for the three months ended
March 31, 2006 and 2005, respectively.

In February 2006, the Company announced that it approved a
commitment of up to $25.0 million in
J.C. Flowers II LP (the J.C. Flowers
Fund), a private investment fund to be formed by J.C.
Flowers & Co. LLC. The transaction is expected to close
in the second quarter. The Company intends to use cash on hand to

13



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fund its commitment. No fees will be payable by the Company to
J.C Flowers II LP, J.C. Flowers & Co. LLC, or
Mr. Flowers in connection with the Companys
investment in the J.C. Flowers Fund.



|        |             
|------- | ------------
|Note 7: | Income Taxes

Income tax expense was approximately $1.3 million for the
three months ended March 31, 2006 compared to $28,000 for
the same period in 2005. The Companys effective tax rates
for 2006 and 2005 differ from the statutory rate primarily due
to changes in the valuation allowance related to deferred tax
assets, tax contingencies and state income taxes.

The Company provides U.S. taxes for the anticipated
repatriation of certain earnings of foreign subsidiaries. A
valuation allowance is recorded when it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of the deferred tax assets
depends on the ability to generate sufficient taxable income in
the future in the appropriate jurisdictions. The Company has
provided a valuation allowance for operating losses of partially
owned foreign subsidiaries at March 31, 2006 and
December 31, 2005.

The Company has established reserves for tax-related
uncertainties based on its best estimates of whether, and the
extent to which, additional taxes and interest will be due.
These reserves are adjusted in light of changing facts and
circumstances. Accruals of $2.1 million and
$2.3 million for tax contingencies are reflected in accrued
taxes in the consolidated balance sheets at March 31, 2006
and December 31, 2005, respectively.



|        |                    
|------- | -------------------
|Note 8: | Segment Information

The Company separately evaluates the performance of B.H.
Acquisition and Castlewood Holdings based on the different
services provided by each of the entities, and such evaluation
is based on 100% of the entities results of operations.
Because the Company separately evaluates the financial results
of each of its partially owned equity affiliates on a gross
basis, the amounts presented herein represent the gross results
of each entity. The amounts in excess of the Companys
ownership percentage are eliminated as part of the
reconciliation from the gross amounts presented to the measure
of profit or loss included in the consolidated financial
statements. The Company also reviews separate financial results
for Affirmative Investment and Enstars corporate activity.

B.H. Acquisition, through its wholly owned subsidiaries,
Brittany and CEAI, is principally engaged in the active
management of books of reinsurance business from international
markets. Castlewood Holdings acquires and manages insurance and
reinsurance companies, including companies in run-off, and
provides management, consulting and other services to the
insurance and reinsurance industry. Affirmative Investment was
formed to facilitate the participation of its members in the
purchase, sale and ownership of membership interests of NAL and
common stock of Affirmative Insurance.

A reconciliation of the consolidated financial information by
segment to the Companys consolidated financial statements
as of March 31, 2006 and December 31, 2005 and for the
three months ended March 31, 2006 and 2005, respectively,
is as follows:

|                                 |                                   |                        |   |             |        |            |   |             |        |       |   |        |        |  |   |       |       |  |   |         |         | 
|-------------------------------- | --------------------------------- | ---------------------- | - | ----------- | ------ | ---------- | - | ----------- | ------ | ----- | - | ------ | ------ |  | - | ----- | ----- |  | - | ------- | ------- | 
|                                 |                                   |                       
|                                 |                                   | 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 | 
|                                 |                                   |                        |   |             |        |            |   |             |        |       |   |        |        |  |   |       |       |  |   |        

14



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                 |                                   |                        |   |             |        |            |   |             |        |       |   |        |        |  |   |       |       |  |   |         |         | 
|-------------------------------- | --------------------------------- | ---------------------- | - | ----------- | ------ | ---------- | - | ----------- | ------ | ----- | - | ------ | ------ |  | - | ----- | ----- |  | - | ------- | ------- | 
|                                 |                                   |                       
|                                 |                                   | 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 | 
|                                 |                                   |                        |   |             |        |            |   |             |        |       |   |        |        |  |   |       |       |  |   |        

|                                                                             |  |                                   |        |             |  |            |      |             |  |       |         |   |  |   |      |   |  |   |       | 
|---------------------------------------------------------------------------- |  | --------------------------------- | ------ | ----------- |  | ---------- | ---- | ----------- |  | ----- | ------- | - |  | - | ---- | - |  | - | ----- | 
|                                                                             |  |                                  
|                                                                             |  | Three Months Ended March 31, 2006
|                                                                             |  |                                  
|                                                                             |  |                                   |        | B.H.        |  | Castlewood |      | Affirmative |  |      
|                                                                             |  | Corporate                         |        | Acquisition |  | Holdings   |      | Investment  |  | Total
|                                                                             |  |                                   |        |             |  |            |      |             |  |      
|                                                                             |  |                                   |        | (Restated)  |  | (Restated) |      |             |  |      
|                                                                             |  |                                  
|                                                                             |  | (Dollars in thousands)           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Revenue                                                                      |  |                                   |        |             |  |            |      |             |  | $     | 6,349   |   |  |   |      |   |  |   |       | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net investment income                                                        |  | $                                 | 199    |             |  | $          | 880  |             |  |       | 9,660   |   |  |   |      |   |  |   |       | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Interest income                                                              |  |                                   | 782    |             |  |            |      |             |  |       |         |   |  |   |      |   |  |   |       | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net (increase) reduction in loss and loss
    adjustment expense liabilities |  |                                   |        |             |  |            | (337 | )           |  |       | 2,457   |   |  |   |      |   |  |   |       | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|General and administrative expenses                                          |  |                                   | (567   | )           |  |            | (561 | )           |  |       | (11,087 | ) |  |   |      |   |  |   |       | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Amortization of run-off provision                                            |  |                                   |        |             |  |            | 250  |             |  |       |         |   |  |   |      |   |  |   |       | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other income                                                                 |  |                                   | 103    |             |  |            |      |             |  |       |         |   |  |   |      |   |  |   |       | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Foreign exchange gain                                                        |  |                                   |        |             |  |            | 16   |             |  |       | 470     |   |  |   |      |   |  |   |       | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Share of net income (loss) of partly-owned
    companies                     |  |                                   |        |             |  |            |      |             |  |       | 112     |   |  | $ | (356 | ) |  |   |       | 
|                                                                             |  |                                   |        |             |  |            |      |             |  |       |         |   |  |   |      |   |  |   |       | 
|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 | 
|                                                                             |  |                                   |        |             |  |            |      |             |  |       |         |   |  |   |      |   |  |   |       | 

The income tax amount of approximately $1.9 million
included in the corporate segment includes $543,000 which is
netted against the Companys proportionate share of an
extraordinary gain in the Companys consolidated statement
of income. The Companys economic ownership percentage in
Castlewood Holdings decreased from 32.89% to 32.63% during the
second quarter of 2005 (Note 4).

15



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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, 2005
|                                                                             |  |                                  
|                                                                             |  |                                   |      | B.H.        |  | Castlewood |      |      
|                                                                             |  | Corporate                         |      | Acquisition |  | Holdings   |      | Total
|                                                                             |  |                                   |      |             |  |            |      |      
|                                                                             |  |                                   |      | (Restated)  |  | (Restated) |      |      
|                                                                             |  |                                  
|                                                                             |  | (Dollars in thousands)           
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Revenue                                                                      |  |                                   |      |             |  |            |      |       |  | $ | 4,488  |   |  |   |     | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net investment income                                                        |  |                                   |      |             |  | $          | 343  |       |  |   | 5,028  |   |  |   |     | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Interest income                                                              |  | $                                 | 482  |             |  |            |      |       |  |   |        |   |  |   |     | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net (increase) reduction in loss and loss
    adjustment expense liabilities |  |                                   |      |             |  |            | (290 | )     |  |   | 1,550  |   |  |   |     | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|General and administrative expenses                                          |  |                                   | (780 | )           |  |            | (518 | )     |  |   | (7,557 | ) |  |   |     | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Amortization of run-off provision                                            |  |                                   |      |             |  |            | 333  |       |  |   |        |   |  |   |     | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other income                                                                 |  |                                   | 100  |             |  |            |      |       |  |   |        |   |  |   |     | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Foreign exchange loss                                                        |  |                                   |      |             |  |            | (8   | )     |  |   | (1,057 | ) |  |   |     | 
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Share of net income of partly-owned companies                                |  |                                   |      |             |  |            |      |       |  |   | 48     |   |  |   |     | 
|                                                                             |  |                                   |      |             |  |            |      |       |  |   |        |   |  |   |     | 
|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 | 
|                                                                             |  |                                   |      |             |  |            |      |       |  |   |        |   |  |   |     | 

The Companys economic ownership percentage in Castlewood
Holdings decreased from 33 1/3% to 32.89% during the third
quarter of 2004 (Note 4).

16



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##### Table of Contents



THE ENSTAR GROUP, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|        |                 
|------- | ----------------
|Note 9: | Income per Share

The table below illustrates the reconciliation between net
income per common share  basic and net income per
common share  assuming dilution for the three months
ended March 31, 2006 and 2005. 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           
|                                                                          |  | 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 | 
|                                                                          |  |                               |           |      |  |   |           | 

There were no antidilutive common stock equivalents for the
three months ended March 31, 2006 and 2005.



|         |                  
|-------- | -----------------
|Note 10: | Subsequent Events

In April 2006, the Company received a dividend of approximately
$20.1 million from Castlewood Holdings, a partially owned
equity affiliate of the Company.

Also in April 2006, the Company received a distribution of
$254,000 from its investment in NIB Partners. This distribution
consisted of $199,000 in dividend income and a return of capital
of $55,000. These amounts were accrued as receivables at
March 31, 2006.

17



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of





We have reviewed the accompanying condensed consolidated balance
sheet of The Enstar Group, Inc. and Subsidiaries
(Enstar) as of March 31, 2006, and the related
condensed consolidated statements of income, comprehensive
income and cash flows for the three-month periods ended
March 31, 2006 and 2005. These interim financial statements
are the responsibility of Enstars management.

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

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

We have previously audited, in accordance with standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Enstar as of December 31,
2005, and the related consolidated statements of income,
comprehensive income, stockholders equity, and cash flows
for the year then ended (not presented herein); and in our
report dated March 16, 2006, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2005 is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.

As discussed in Note 2, the accompanying notes to the
condensed consolidated financial statements have been restated.



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

Birmingham, Alabama 
 May 10, 2006



18



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##### 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 acquires and manages insurance
and reinsurance companies in run-off. The management of these
businesses includes claims administration, adjustment and
settlement together with the collection of reinsurance
recoveries. Castlewood Holdings, a Bermuda-based company, also
provides management, consulting and other services to the
insurance and reinsurance industry for both fixed and
success-based fee arrangements. In general, reinsurance is an
arrangement in which the reinsurer agrees to indemnify an
insurance or reinsurance company against all or a portion of the
risks underwritten by such insurance or reinsurance company
under one or more insurance or reinsurance contracts. For a
discussion of certain risks and uncertainties relating to the
Companys participation in the reinsurance industry see
Item 1A. Risk Factors to The Enstar Group, Inc.
Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2005, which is hereby incorporated by
reference.

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

Restatement of Financial Statements

The Company has amended certain disclosures in its
Form 10-Q/A as a result of restated information from its
partially owned equity affiliates, Castlewood Holdings and
B.H. Acquisition. The following managements
discussion and analysis of financial condition and results of
operations give effect to the restatement. This restatement had
no impact on the net income, net income per share or
shareholders equity of Enstar or its partially owned
equity affiliates. For a more detailed description of the
restatement, see Note 2, Restatement of Financial
Statements to the accompanying condensed consolidated
financial statements.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS 123R).
SFAS 123R requires that the compensation cost resulting
from all share-based payment transactions (e.g. stock options
and restricted stock) be recognized in the financial statements.
SFAS 123R requires all entities to apply a fair-value-based
measurement method in accounting for share-based payment
transactions with employees and non-employees except for equity
instruments held by employee share ownership plans. This
statement replaces SFAS 123, Accounting for
Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). The Company
adopted SFAS 123R as of January 1, 2006 using the
modified-prospective method. Under this transition method,
compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS 123R for
all share-based payments granted after the effective date and
(b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of
SFAS 123R that remain unvested on the effective date.

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

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##### Table of Contents





Income Tax Valuation Reserve  The Company
recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. The effect of temporary
differences on the financial statements includes certain
operating losses of partially owned foreign subsidiaries and tax
credit carryforwards. The Company has established a valuation
allowance for the uncertainty of the realization of these and
any other net deferred tax assets. However, utilization of the
remaining deferred tax assets at March 31, 2006, 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 values requiring the most inherently
subjective and complex estimates. In addition, the assessment of
the possible impairment of goodwill involves certain estimates
and assumptions. As such, the accounting policies for these
amounts are of critical importance to their consolidated
financial statements.

Loss and Loss Adjustment Expenses  Because a
significant amount of time can lapse between the assumption of
risk, the occurrence of a loss event, the reporting of the event
to an insurance or reinsurance company and the ultimate payment
of the claim on the loss event, Castlewood Holdings and
B.H. Acquisitions liability for unpaid losses and
loss expenses is based largely upon estimates.
Castlewood Holdings and B.H. Acquisitions
management must use considerable judgment in the process of
developing these estimates. The liability for unpaid losses and
loss expenses for property and casualty business includes
amounts determined from loss reports on individual cases and
amounts for losses incurred but not reported. Such reserves are
reviewed and estimated by management based upon reports received
from ceding companies, supplemented by Castlewood Holdings
and B.H. Acquisitions own estimates of reserves for which
ceding company reports have not been received, and independent
actuarial estimates of ultimate unpaid losses. Castlewood
Holdings and B.H. Acquisitions reserves are largely
comprised of casualty exposures including asbestos and
environmental exposures and therefore these claims are subject
to a higher degree of estimation volatility as a result of
changes in the legal environment, jury awards, medical cost
trends and general inflation. Castlewood Holdings and B.H.
Acquisition regularly review and update these estimates using
the most current information available and employing various
actuarial methods. The ultimate liability for a loss is likely
to differ from the original estimate due to the factors
discussed above. Adjustments resulting from changes in our
estimates are recorded in the period such adjustments are
determined. The establishment of reserves, or the adjustment of
reserves for reported losses, could result in significant upward
or downward changes to our financial condition or results of our
operations in the period such amounts are reported.

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

Goodwill  SFAS 142, Goodwill and
Other Intangible Assets, requires that goodwill be
assessed for impairment on at least an annual basis. In
determining goodwill, Castlewood Holdings must determine the
fair values of the assets of an acquired company. The
determination of fair value necessarily involves many
assumptions. Fair values of reinsurance assets and liabilities
acquired are derived from probability weighted ranges of the
associated projected cash flows, based on actuarially prepared
information and management run-off strategy. Fair value
adjustments are based on the estimated timing of loss and loss
adjustment expense payments and an assumed interest rate, and
are amortized over the estimated payout period, as adjusted for

20



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##### Table of Contents





Castlewood Holdings assessed its recorded goodwill in 2005 in
accordance with SFAS 142 and determined that there had been
no impairment in its carrying value.

During the three months ended March 31, 2006, Castlewood
Holdings took negative goodwill into earnings upon the
acquisition of Aioi Insurance Company of Europe Limited
(Aioi Europe), and presented it as an extraordinary
gain, in accordance with SFAS 141, Business
Combinations.

Recent Developments

In April 2006, the Company received a dividend of approximately
$20.1 million from Castlewood Holdings, a partially owned
equity affiliate of the Company.

Also in April 2006, the Company received a distribution of
$254,000 from its investment in NIB Partners.

Liquidity and Capital Resources

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

Net cash used in operating activities was $266,000 and $160,000
for the three months ended March 31, 2006 and 2005,
respectively. The Company received a distribution of $11,000
from Affirmative Investment in January 2006.

Net cash used in investing activities was $281,000 for the three
months ended March 31, 2006. This amount represents the
purchases of new certificates of deposit in excess of
certificates of deposit maturing during the quarter. There were
no investing activities for the three months ended
March 31, 2005.

There were no financing activities for the three months ended
March 31, 2006 and 2005.

The Companys assets, aggregating approximately
$189.1 million at March 31, 2006, include
approximately $53.5 million in cash and cash equivalents
and approximately $19.9 million in short-term certificates
of deposit. The Company believes its current liquidity is
adequate to fund any foreseeable cash requirements.

Contractual Obligations and Commitments

In December 2004, the Company signed a one year lease beginning
January 1, 2005 on an office building at 401 Madison
Avenue, Montgomery, Alabama which serves as the corporate
headquarters. The lease also provides renewal options for three
periods of one year each. In December 2005, the Company signed a
one year renewal option beginning January 1, 2006.
Additionally, pursuant to an oral agreement, the Company leases
space in a warehouse at 703 Howe Street, Montgomery, Alabama on
a month-to-month basis. The Company leases the office building
and warehouse space from unaffiliated third parties for $3,000
and $350 per month, respectively. The Company believes the
rental amounts are competitive with market rates and that the
cancellation or termination of either of these leases would not
have a material adverse effect on the Companys results of
operations. In September 2005, the Company entered into an
agreement with J.C. Flowers & Co. LLC continuing
through October 2014 for the use of certain office space and
administrative services from J.C. Flowers & Co. LLC for
monthly payments of $4,146. Either party may, at its option with
or without cause, terminate this agreement upon thirty
(30) days prior written notice to the other party. J.C.
Flowers & Co. LLC is managed by Mr. Flowers, a
member of the Companys board of directors and the
Companys largest shareholder. The Company does not own any
real property.

21



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##### Table of Contents



In February 2006, the Company approved a commitment of up to
$25.0 million in the J.C. Flowers Fund, a private
investment fund to be formed by J.C. Flowers & Co. LLC.
The transaction is expected to close in the second quarter. The
Company intends to use cash on hand to fund its commitment. In
March 2006, one of the Companys partially owned equity
affiliates, Castlewood Holdings, approved a commitment of up to
$75.0 million in the J.C. Flowers Fund. Castlewood Holdings
intends to use cash on hand to fund its commitment.

No fees will be payable by the Company or Castlewood Holdings to
J.C. Flowers II LP, J.C. Flowers & Co. LLC, or Mr.
Flowers in connection with the Companys investment in the
J.C. Flowers Fund.

Results of Operations

The Company reported net income of approximately
$2.7 million for the three months ended March 31,
2006, compared to net income of $39,000 for the same period in
the prior year. The increase in net income for the three months
ended March 31, 2006 compared to the same period in the
prior year is primarily a result of an increase in earnings from
partially owned equity affiliates and an increase in interest
income.

Interest income was $782,000 for the three months ended
March 31, 2006 compared to $482,000 for the three months
ended March 31, 2005. Interest income was earned from cash,
cash equivalents and certificates of deposit. Interest income
increased primarily as a result of an increase in interest rates
earned on the Companys cash, cash equivalents and
certificates of deposit. On average, interest rates earned by
the Company have increased approximately 2.0 percent in the
first quarter of 2006 compared to the same period in 2005.

Other investment income of $199,000 for the three months ended
March 31, 2006 resulted from dividends accrued from the
Companys investment in New NIB Partners LP.

Earnings of partially owned equity affiliates were approximately
$2.6 million for the three months ended March 31, 2006
compared to $265,000 for the same period in 2005. The Company
recorded equity in earnings of $82,000 from B.H. Acquisition for
the three months ended March 31, 2006 compared to equity in
losses of $46,000 for the same period in 2005. The Company
recorded equity in earnings of approximately $2.6 million
from Castlewood Holdings for the three months ended
March 31, 2006 compared to $311,000 for the three months
ended March 31, 2005. The Company recorded equity in losses
of $50,000 from Affirmative Investment for the three months
ended March 31, 2006 (the Company made its initial capital
contribution to Affirmative Investment in July 2005). In
addition, the Company reported income of $875,000, net of income
taxes, as its proportionate share of the excess of the net
assets acquired over the cost in the acquisition of Aioi Europe.
For further discussion of the reasons underlying the changes in
earnings (losses) from B.H. Acquisition and Castlewood Holdings,
see  Results of Operations 
Partially Owned Equity Affiliates.

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

General and administrative expenses were $567,000 for the three
months ended March 31, 2006 compared to $780,000 for the
same period in 2005. Of these amounts, $386,000 and $297,000
related to employee expenses in 2006 and 2005, respectively.
Included in the 2006 amount is $62,000 in non-cash compensation
relating to the implementation of SFAS 123R which became
effective on January 1, 2006. General and administrative
expenses also include legal and professional fees as well as
travel expenses incurred in connection with the Companys
search for one or more additional operating companies.
Additionally, the Company incurs legal and professional fees in
connection with reporting requirements associated with being a
publicly traded company, and in connection with handling various
other accounting and tax matters. Legal and professional fees
and travel expenses were $524,000 in the first quarter of 2006
and $340,000 for the same period in 2005. General and
administrative expenses for the first quarter of 2006 also
include the reversal of a contingency reserve in the amount of
$500,000.

Income tax expense was approximately $1.3 million for the
three months ended March 31, 2006 compared to $28,000 for
the same period in 2005. The Companys effective tax rates
for 2006 and 2005 differ

22



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##### Table of Contents





Results of Operations  Partially Owned Equity
Affiliates

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



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

Castlewood Holdings reported consolidated net earnings of
$12.3 million for the three months ended March 31,
2006 compared to net earnings of $945,000 for the same period in
2005. The increase in net earnings for the quarter was primarily
due to $4.3 million of negative goodwill realized on the
acquisition of Aioi Europe, an increase in net investment income
of $4.7 million due to the increased yield in 2006 and a
reduction in income taxes of $1.4 million due to
utilization of group loss carryforwards against prior
years taxes paid.

Castlewood Holdings earned consulting fees of $6.3 million
for the three months ended March 31, 2006 compared to
$4.5 million for the same period in 2005. Castlewood
Holdings generates its consulting fees based on a combination of
fixed and success based fee arrangements. Consulting income will
vary dependent on the success and timing of completion of
success based fee arrangements. Included in this amount was
$313,000 in consulting fees charged to B.H. Acquisition, a
related party.

Net investment income for the three months ended March 31,
2006 was $9.7 million compared to net investment income of
$5.0 million for the same period in 2005. Net investment
income consisted primarily of interest income earned from cash,
cash equivalents and debt securities. The increase in interest
income is due primarily to the rise in the interest rates.

Net reduction in loss and loss adjustment expense liabilities
was $2.5 million and $1.6 million for the three months
ended March 31, 2006 and March 31, 2005, respectively.

Salaries and benefits were $7.9 million for the three
months ended March 31, 2006 compared to $4.9 million
for the same period in 2005. Castlewood Holdings is a service
based company and, as such, employee salaries and benefits is
its largest cost. Castlewood Holdings has in place a
discretionary bonus plan. Included as part of the salary cost is
an accrual relating to this plan. The increased cost is
attributable to both the growth in staff of Castlewood Holdings
over the past year and the increase in the accrual relating to
the discretionary bonus plan.

General and administrative expenses were $3.1 million for
the three months ended March 31, 2006 compared to
$2.7 million for the same period in 2005. General and
administrative expenses include rent and rent related costs,
professional fees (legal, investment, audit and actuarial) and
travel expenses. Castlewood Holdings operates in the UK, US and
Bermuda, and staff travel frequently in connection with
Castlewood Holdings search for acquisition opportunities and in
the general management of the business.

Castlewood Holdings recorded a foreign exchange gain of $470,000
for the three months ended March 31, 2006 and a foreign
exchange loss of $1.1 million for the same period in 2005.
Through its subsidiaries, Castlewood Holdings conducts business
in a variety of foreign (non-U.S.) currencies, the principal
exposures being Euros and British pounds. At each balance sheet
date, recorded balances that are denominated in a currency other
than the functional currency of Castlewood Holdings are adjusted
to reflect the current exchange rate. Revenue and expense items
are translated into U.S. dollars at average rates of
exchange for the periods. The resulting exchange gains or losses
are included in net earnings.

Castlewood Holdings net income from partly-owned companies
was $112,000 and $48,000 for the three months ended
March 31, 2006 and March 31, 2005, respectively. The
amount for the current year represents Castlewood Holdings
proportionate share of equity in the earnings of B.H.
Acquisition. The prior year relates

23



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##### Table of Contents





Castlewood Holdings had an income tax benefit of $214,000 for
the three months ended March 31, 2006, due to utilization
of group loss carryforwards against prior years taxes paid.
Castlewood Holdings recorded expense of $1.2 million for
the same period in 2005. Under current Bermuda law, Castlewood
Holdings and its Bermuda subsidiaries are not required to pay
taxes in Bermuda on either income or capital gains. Castlewood
Holdings and its Bermuda subsidiaries have received an
undertaking from the Bermuda government that, in the event of
income or capital gains taxes being imposed, Castlewood Holdings
and its Bermuda subsidiaries will be exempted from such taxes
until the year 2016. United Kingdom and Unites States
subsidiaries record income taxes based on their graduated
statutory rates, net of any tax benefits arising from tax loss
carryforwards.

Castlewood Holdings recorded a minority interest of $212,000 and
$380,000 for the three months ended March 31, 2006 and
2005, respectively. The minority interest for the quarter ended
March 31, 2006 represents the minority interest share of
the net earnings of Hillcot Re and Aioi.

Negative goodwill was $4.3 million (net of minority
interest of $4.3 million) for the quarter ended
March 31, 2006. On March 30, 2006 the Company acquired
Aioi Europes fair valued net assets of $117.9 million
for total consideration of $109.2 million
(£62 million). The excess has, in accordance with SFAS
141, been recognized as an extraordinary gain in the quarter.

The fair values of the reinsurance assets and liabilities
acquired are derived from probability weighted ranges of the
associated projected cash flows, based on actuarially prepared
information and management run-off strategy. If the assumptions
made in initially valuing the assets change significantly in the
future, Castlewood Holdings may be required to record impairment
charges which could have a material impact on the financial
statements.



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

B.H. Acquisition reported a net income of $248,000 for the three
months ended March 31, 2006 compared to a net loss of
$140,000 for the same period in the prior year.

Net investment income was $880,000 and $343,000 for the three
months ended March 31, 2006 and March 31, 2005,
respectively. Interest income was earned from cash, cash
equivalents and mutual funds. The increase in the quarter was
due to an increase in interest rates.

B.H. Acquisition had a net increase in loss and loss adjustment
expense liabilities of $337,000 and $290,000 for the three
months ended March 31, 2006 and 2005, respectively.

General and administrative expenses were $561,000 and $518,000
for the three months ended March 31, 2006 and
March 31, 2005, respectively. General and administrative
expenses include legal, audit, management and actuarial expenses.

The Company recorded a foreign exchange gain of $16,000 and a
foreign exchange loss of $8,000 for the three months ended
March 31, 2006 and March 31, 2005, respectively.
Through its subsidiaries B.H. Acquisition conducts business in a
variety of foreign (non-U.S.) currencies, the principal
exposures being Euros and British pounds. At each balance sheet
date, recorded balances that are denominated in a currency other
than the functional currency of B.H. Acquisition are adjusted to
reflect the current exchange rate. Revenue and expense items are
translated into U.S. dollars at average rates of exchange
for the years. The resulting exchange gains or losses are
included in net income.

Amortization of the run-off provision was $250,000 and $333,000
for the three months ended March 31, 2006 and 2005,
respectively. The Company established a provision at the date of
acquisition equal to the anticipated expenses to be incurred
over the expected life of the run-off. This provision is
amortized on a straight-line basis over this period. In 2005 an
additional provision of $667,000 was established and the
expected life of the run-off was extended one year.

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

The Company is exposed to market risk from changes in interest
rates. At March 31, 2006, the Company had cash and cash
equivalents of approximately $53.5 million in interest
bearing accounts (interest at floating rates) and approximately
$19.9 million of short-term certificates of deposit
(interest at fixed rates). Accordingly, each one percent change
in market interest rates would change interest income by
approximately $734,000 per year. However, any future
transactions affecting the Companys cash and cash
equivalents and certificates of deposit will change this
estimate. Additionally, although interest rate changes would
affect the fair value of the Companys certificates of
deposits, the weighted average original term of certificates
held by the Company at March 31, 2006 is approximately five
months. The short-term nature of these certificates limits the
Companys risk of changes in the fair value of these
certificates.

The Company is also exposed to three types of market risk
through its holdings in partially owned equity affiliates and
their subsidiaries: interest rate risk, foreign currency risk
and credit risk.

The portfolios of fixed income securities of Castlewood Holdings
and B.H. Acquisition are exposed to interest rate risk.
Fluctuation in interest rates have a direct impact on the market
valuation of these securities. In general, the fair market value
of a portfolio of fixed income securities increases or decreases
inversely with changes in market interest rates. Castlewood
Holdings and B.H Acquisition attempt to manage this interest
rate risk by monitoring the duration and structure of their
investment portfolios relative to the duration and structure of
their liability portfolios.

Foreign currency risk is the risk that the Company will incur
economic losses due to adverse changes in foreign currency
exchange rates. Castlewood Holdings and B.H. Acquisition 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. These
entities attempt to manage their exposure to foreign currency
exchange risk by broadly matching assets against liabilities.
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.

Castlewood Holdings and B.H. Acquisition are also exposed to
credit risk on losses recoverable from reinsurers. These
companies credit risk exposure was assumed at the time
they acquired various subsidiaries. They manage this risk by
conducting a detailed review of each potential
acquisitions reinsurance portfolio during the due
diligence process.






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

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

As described in Note 2 to the condensed consolidated
financial statements hereto, subsequent to the period covered by
this report, management of the Company was informed that the
condensed consolidated financial statements of the
Companys partially owned equity affiliates, Castlewood
Holdings and B.H. Acquisition, would be restated. After
consulting with the Audit Committee we determined to restate our
condensed consolidated financial statements for the three month
periods ended March 31, 2006 and 2005 and to file a
Form 10-Q/ A amending our Quarterly Report on
Form 10-Q for the period ended March 31, 2006. The
restatement relates only to the information provided in
Note 4, Partially Owned Equity Affiliates and
Note 8, Segment Information and do not impact
any of our primary financial statements. We considered the
impact of these matters on our evaluation of disclosure controls
and procedures.

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As required by Securities and Exchange Commission
(SEC) rules, the Company has evaluated the
effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by
this amended report. Based on this evaluation, the
Companys management, including its principal executive
officer and principal financial officer, concluded that, as of
the end of the period covered by this Form 10-Q/ A, the
design and operation of the Companys disclosure controls
and procedures are effective. In reaching this conclusion
management considered the facts and circumstances that resulted
in the restatement of the financial statements as described in
Note 2 to the condensed consolidated financial statements.
Specifically, management considered the fact that the
restatement did not occur as a result of a breakdown of the
Companys internal controls but was the result of
restatements of the condensed consolidated financial statements
of the Companys partially owned equity affiliates.
Management does not consider controls over the recording of
transactions by its partially owned equity affiliates to be a
part of the Companys internal control structure.
Additionally, the Company considered the fact that the
restatement had no impact on the net income, net income per
share or shareholders equity of Enstar or its partially
owned equity affiliates.

There were no changes to the Companys internal controls
over financial reporting during the period covered by this
amended report that materially affected, or are reasonably
likely to materially affect, the Companys internal
controls over financial reporting subsequent to the date of
their evaluation.

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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

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: September 19, 2006

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