##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      FORM 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    September 30, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          
    to   Commission file number 0-07477
       The Enstar Group,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Georgia

63-0590560(State or other jurisdiction
    of

(I.R.S. Employerincorporation 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)
  þ o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF INCOMECONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II OTHER INFORMATIONItem 6. ExhibitsSIGNATURESEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO    Table of Contents    THIS
    FORM 10-Q
    AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY THE
    ENSTAR GROUP, INC. OR MEMBERS OF ITS MANAGEMENT TEAM CONTAIN
    STATEMENTS WHICH MAY CONSTITUTE FORWARD-LOOKING
    STATEMENTS WITHIN THE MEANING OF THE SECURITIES ACT OF
    1933, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE
    PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
    15 U.S.C.A.
    SECTIONS 77Z-2
    AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS
    REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE
    ENSTAR GROUP, INC. AND MEMBERS OF ITS MANAGEMENT TEAM, AS WELL
    AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
    PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
    FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
    PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL
    RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
    FORWARD-LOOKING STATEMENTS. THERE ARE A NUMBER OF IMPORTANT
    FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY
    FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THESE
    FACTORS INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH IN
    ITEM 1A. RISK FACTORS TO THE ENSTAR GROUP, INC.
    ANNUAL REPORT ON
    FORM 10-K/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
  September 30,


December 31,2006


2005(Dollars in thousands) (Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
74,285


$
54,032Certificates of deposit


20,390



19,686Other current assets


30



129Total current assets


94,705



73,847Partially owned equity affiliates


99,678



107,329Other investments


5,382



3,542Other assets


514



502Total assets

$
200,279


$
185,220LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued
    liabilities

$
2,673


$
595Income taxes payable


4,246



5,467Total current liabilities


6,919



6,062Deferred income tax liabilities


10,099



10,401Accrued taxes


2,325



2,325Deferred compensation


1,002



853Other liabilities


466



456Total liabilities


20,811



20,097Commitments and contingencies
    (Note 5)Shareholders equity:Common stock ($.01 par value;
    55,000,000 shares authorized, 6,185,260 and
    5,960,260 shares issued at September 30, 2006 and
    December 31, 2005, respectively)


62



60Additional paid-in capital


198,248



189,968Accumulated other comprehensive
    income of partially owned equity affiliates, net


465



210Accumulated deficit


(13,227
)


(19,305
)Treasury stock, at cost (445,876
    and 442,351 shares at September 30, 2006 and
    December 31, 2005, respectively)


(6,080
)


(5,810
)Total shareholders equity


179,468



165,123Total liabilities and
    shareholders equity

$
200,279


$
185,220    1




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(Dollars in thousands, except per share data)(Unaudited)Interest income

$
1,237


$
608


$
3,086


$
1,651Other investment income






487



199



1,091Earnings of partially owned equity
    affiliates


3,890



1,186



10,645



2,497Other income (includes related
    party income of $100, $100, $300 and $300, respectively)


121



100



330



301General and administrative expenses


(745
)


(617
)


(4,245
)


(2,258
)Income before income taxes and
    extraordinary gain


4,503



1,764



10,015



3,282Income taxes


(2,260
)


(794
)


(4,812
)


(1,477
)Income before extraordinary gain


2,243



970



5,203



1,805Extraordinary gain, net of income
    taxes of $543










875



Net income

$
2,243


$
970


$
6,078


$
1,805Weighted average shares
    outstanding  basic


5,739,384



5,517,909



5,621,279



5,517,909Weighted average shares
    outstanding  assuming dilution


6,002,448



5,862,172



5,939,750



5,852,596Income per common share before
    extraordinary gain  basic

$
0.39


$
0.18


$
0.92


$
0.33Extraordinary gain, net of income
    taxes  basic










0.16



Net income per common
    share  basic

$
0.39


$
0.18


$
1.08


$
0.33Income per common share before
    extraordinary gain  assuming dilution

$
0.37


$
0.17


$
0.87


$
0.31Extraordinary gain, net of income
    taxes  assuming dilution










0.15



Net income per common
    share  assuming dilution

$
0.37


$
0.17


$
1.02


$
0.31    2




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
  Three Months


Nine MonthsEnded September 30,


Ended September 30,2006


2005


2006


2005(Dollars in thousands)(Unaudited)Net income

$
2,243


$
970


$
6,078


$
1,805Other comprehensive income (loss):Unrealized holding gains (losses)
    on investments, net of income tax expense (benefit) of $(103),
    $(21), $67 and $408


(165
)


(34
)


110



657Reclassification adjustment for
    losses (gains) included in net income, net of income tax
    (benefit) expense of $2, $57, $(8) and $74


(3
)


(91
)


12



(119
)Currency translation adjustment,
    net of income tax expense (benefit) of $12, $(10), $84 and $(85)


19



(17
)


133



(138
)Other comprehensive income (loss)


(149
)


(142
)


255



400Comprehensive income

$
2,094


$
828


$
6,333


$
2,205    3




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSeptember 30,2006


2005(Dollars in thousands) (Unaudited)Cash flows from operating
    activities:Net income

$
6,078


$
1,805Adjustments to reconcile net
    income to net cash used in operating activities:Earnings of partially owned equity
    affiliates


(10,645
)


(2,497
)Dividends and distributions
    received from partially owned equity affiliates


20,169



Extraordinary gain, net of income
    taxes


(875
)


Noncash compensation expense


163



Gain on sale of marketable
    securities






(1,060
)Deferred income taxes


(1,004
)


484Tax benefit from exercise of stock
    options


(5,694
)


Changes in assets and liabilities:Accounts payable and accrued
    expenses


2,078



(315
)Income taxes payable


4,473



(82
)Other, net


335



162Net cash provided by (used in)
    operating activities


15,078



(1,503
)Cash flows from investing
    activities:Investment in J.C. Flowers II
    LP


(1,896
)


Purchase of marketable securities






(9,460
)Proceeds from sale of marketable
    securities






7,060Return of capital from NIB Partners


56



Capital contributions to
    Affirmative Investment






(8,406
)Purchases of certificates of
    deposit


(86,525
)


(14,084
)Maturities of certificates of
    deposit


85,730



4,048Net cash used in investing
    activities


(2,635
)


(20,842
)Cash flows from financing
    activities:Tax benefit from exercise of stock
    options


5,694



Proceeds from exercise of stock
    options


2,116



Net cash provided by financing
    activities


7,810



Increase (decrease) in cash and
    cash equivalents


20,253



(22,345
)Cash and cash equivalents at the
    beginning of the period


54,032



81,675Cash and cash equivalents at the
    end of the period

$
74,285


$
59,330Supplemental disclosures of cash
    flow information:Income taxes paid

$
842


$
1,079Supplemental disclosures of
    noncash financing activities:Receipt of treasury stock from
    exercise of stock options

$
270


$
    4




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THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  Note 1:
    General        Form 10-K/A
  Note 2:
    Significant
    Accounting Policies  Principles of Consolidation
  Use of Estimates
  Cash Equivalents
  Partially Owned Equity Affiliates
 5




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Comprehensive Income
    September 30,


December 31,2006


2005Currency translation adjustment,
    net of income tax expense of $213 and $130

$
344


$
210Unrealized holding gains, net of
    income tax expense of $75


121



Total accumulated other
    comprehensive income

$
465


$
210   Revenue Recognition
  Stock-Based Compensation
     6




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THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Three Months


Nine MonthsEnded


EndedSeptember 30, 2005(Dollars in thousands, exceptper share data)(Unaudited)Net income, as reported

$
970


$
1,805Add: Stock-based employee
    compensation expense included in reported net income, net of
    income taxes


29



87Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards, net of income taxes


(92
)


(270
)Pro forma net income

$
907


$
1,622Income per common share:Basic  as reported

$
0.18


$
0.33Basic  pro forma

$
0.16


$
0.29Assuming dilution  as
    reported

$
0.17


$
0.31Assuming dilution  pro
    forma

$
0.15


$
0.28     No. 00-23,
   7




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Three Months


Nine MonthsEnded


EndedSeptember 30, 2006Increase (Decrease)General and administrative expenses

$
50


$
163Income before income taxes and
    extraordinary gain


(50
)


(163
)Income taxes


(26
)


(78
)Net income


(24
)


(85
)Net income per common
    share  basic


(.00
)


(.02
)Net income per common
    share  assuming dilution


(.00
)


(.01
)       Weighted-AverageWeighted-


Remaining


AggregateAverage


Contractual


IntrinsicExercise


Term (in


Value (inOptions

Shares


Price


years)


thousands)Outstanding at December 31,
    2005


725,000


$
20.47Vested during the nine month
    period ended September 30, 2006


5,000



57.81



8.52Exercised during the nine months
    ended September 30, 2006


225,000



10.60






$
14,795Outstanding at September 30,
    2006


500,000



24.91



5.24



35,314Exercisable at September 30,
    2006


420,000



22.04



4.93



30,871Vested or expected to vest at
    September 30, 2006


500,000



24.91



5.24



35,314         Unrecognized compensation

$
138,000Weighted average period of
    expected recognition (in years)


.65   Recent Accounting Pronouncements
   8




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 3:
    Partially
    Owned Equity Affiliates  B.H.
    Acquisition
    Castlewood
    Holdings Limited
   9




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THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              1 3
     10




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                 11




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THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)












Affirmative
    Investment LLC














12



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##### Table of Contents





THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)




Summarized
    Financial Information








|                  |  |                        |         |  |            |   |           | 
|----------------- |  | ---------------------- | ------- |  | ---------- | - | --------- | 
|                  |  | September 30, 2006     |        
|                  |  | B.H.                   |         |  | Castlewood |  
|                  |  | Acquisition            |         |  | Holdings   |  
|                  |  | (Dollars in thousands) |        
|                 
|Total assets      |  | $                      | 104,332 |  |            | $ | 1,466,646 | 
|Total liabilities |  |                        | 64,386  |  |            |   | 1,149,082 | 
|Minority interest |  |                        |        |  |            |   | 50,116    | 
|Total equity      |  |                        | 39,946  |  |            |   | 267,448   | 





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





|                 |  |                                       |     |  |            |   |        | 
|---------------- |  | ------------------------------------- | --- |  | ---------- | - | ------ | 
|                 |  | Three Months Ended September 30, 2006 |    
|                 |  | B.H.                                  |     |  | Castlewood |  
|                 |  | Acquisition                           |     |  | Holdings   |  
|                 |  | (Dollars in thousands)                |    
|                
|Revenue          |  |                                       |     |  |            | $ | 9,350  | 
|Operating income |  | $                                     | 516 |  |            |   | 14,417 | 
|Net income       |  |                                       | 516 |  |            |   | 10,996 | 





|                 |  |                                      |       |  |            |   |        | 
|---------------- |  | ------------------------------------ | ----- |  | ---------- | - | ------ | 
|                 |  | Nine Months Ended September 30, 2006 |      
|                 |  | B.H.                                 |       |  | Castlewood |  
|                 |  | Acquisition                          |       |  | Holdings   |  
|                 |  | (Dollars in thousands)               |      
|                
|Revenue          |  |                                      |       |  |            | $ | 20,950 | 
|Operating income |  | $                                    | 1,100 |  |            |   | 38,385 | 
|Net income       |  |                                      | 1,100 |  |            |   | 35,183 | 





|                  |  |                                       |     |  |            |   |       | 
|----------------- |  | ------------------------------------- | --- |  | ---------- | - | ----- | 
|                  |  | Three Months Ended September 30, 2005 |    
|                  |  | B.H.                                  |     |  | Castlewood |  
|                  |  | Acquisition                           |     |  | Holdings   |  
|                  |  | (Dollars in thousands)                |    
|                 
|Revenue           |  |                                       |     |  |            | $ | 5,180 | 
|Operating income  |  | $                                     | 139 |  |            |   | 4,494 | 
|Net income (loss) |  |                                       | 139 |  |            |   | 3,833 | 





13



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THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)




|                  |  |                        |    |  |            |   |        | 
|----------------- |  | ---------------------- | -- |  | ---------- | - | ------ | 
|                  |  | Nine Months Ended      |   
|                  |  | September 30, 2005     |   
|                  |  | B.H.                   |    |  | Castlewood |  
|                  |  | Acquisition            |    |  | Holdings   |  
|                  |  | (Dollars in thousands) |   
|                 
|Revenue           |  |                        |    |  |            | $ | 13,525 | 
|Operating income  |  | $                      | 68 |  |            |   | 10,814 | 
|Net income (loss) |  |                        | 68 |  |            |   | 7,914  | 









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















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



month-to-month






14



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##### Table of Contents





THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)








|        |                       
|------- | ----------------------
|Note 6: | Stock
    Compensation







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



















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









15



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THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)








|                                  |  |                        |         |  |             |   |        |            |  |   |             |  |  |       |       |  |  |   |         | 
|--------------------------------- |  | ---------------------- | ------- |  | ----------- | - | ------ | ---------- |  | - | ----------- |  |  | ----- | ----- |  |  | - | ------- | 
|                                  |  | September 30, 2006     |        
|                                  |  |                        |         |  | B.H.        |   |        | Castlewood |  |   | Affirmative |  |  |       |      
|                                  |  | Corporate              |         |  | Acquisition |   |        | Holdings   |  |   | Investment  |  |  | Total |      
|                                  |  | (Dollars in thousands) |        
|                                 
|Total reportable segment assets:  |  |                        |         |  |             |   |        |            |  |   |             |  |  |       |       |  |  |   |         | 
|Partially owned equity affiliates |  |                        |         |  |             | $ | 13,269 |            |  | $ | 77,569      |  |  | $     | 8,840 |  |  | $ | 99,678  | 
|Corporate assets                  |  | $                      | 100,601 |  |             |   |        |            |  |   |             |  |  |       |       |  |  |   | 100,601 | 
|                                  |  |                        |         |  |             |   |        |            |  |   |             |  |  |       |       |  |  |   |         | 
|Total                             |  | $                      | 100,601 |  |             | $ | 13,269 |            |  | $ | 77,569      |  |  | $     | 8,840 |  |  | $ | 200,279 | 
|                                  |  |                        |         |  |             |   |        |            |  |   |             |  |  |       |       |  |  |   |         | 





|                                  |  |                        |        |  |             |   |        |            |  |   |             |  |  |       |       |  |  |   |         | 
|--------------------------------- |  | ---------------------- | ------ |  | ----------- | - | ------ | ---------- |  | - | ----------- |  |  | ----- | ----- |  |  | - | ------- | 
|                                  |  | 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 September 30, 2006 |       
|                                                                             |  |                                       |        |   | B.H.        |   |       | Castlewood |  |   | Affirmative |   |  |       |    
|                                                                             |  | Corporate                             |        |   | Acquisition |   |       | Holdings   |  |   | Investment  |   |  | Total |    
|                                                                             |  | (Dollars in thousands)                |       
|                                                                            
|Revenue                                                                      |  |                                       |        |   |             |   |       |            |  | $ | 9,350       |   |  |       |     |  |  |   |       | 
|Net investment income                                                        |  |                                       |        |   |             | $ | 1,262 |            |  |   | 12,712      |   |  |       |     |  |  |   |       | 
|Interest income                                                              |  | $                                     | 1,237  |   |             |   |       |            |  |   |             |   |  |       |     |  |  |   |       | 
|Net (increase) reduction in loss
    and loss adjustment expense liabilities |  |                                       |        |   |             |   | (337  | )          |  |   | 3,920       |   |  |       |     |  |  |   |       | 
|General and administrative expenses                                          |  |                                       | (745   | ) |             |   | (658  | )          |  |   | (12,150     | ) |  |       |     |  |  |   |       | 
|Amortization of run-off provision                                            |  |                                       |        |   |             |   | 250   |            |  |   |             |   |  |       |     |  |  |   |       | 
|Interest expense                                                             |  |                                       |        |   |             |   |       |            |  |   | (362        | ) |  |       |     |  |  |   |       | 
|Other income                                                                 |  |                                       | 121    |   |             |   |       |            |  |   |             |   |  |       |     |  |  |   |       | 
|Foreign exchange gain (loss)                                                 |  |                                       |        |   |             |   | (1    | )          |  |   | 947         |   |  |       |     |  |  |   |       | 
|Share of net income of
    partly-owned companies                            |  |                                       |        |   |             |   |       |            |  |   | 232         |   |  |       |     |  |  |   |       | 
|                                                                             |  |                                       |        |   |             |   |       |            |  |   |             |   |  |       |     |  |  |   |       | 
|Income before income taxes                                                   |  |                                       | 613    |   |             |   | 516   |            |  |   | 14,649      |   |  |       |     |  |  |   |       | 
|Income tax expense                                                           |  |                                       | (2,260 | ) |             |   |       |            |  |   | (1,034      | ) |  |       |     |  |  |   |       | 
|Minority interest                                                            |  |                                       |        |   |             |   |       |            |  |   | (2,619      | ) |  |       |     |  |  |   |       | 
|                                                                             |  |                                       |        |   |             |   |       |            |  |   |             |   |  |       |     |  |  |   |       | 
|Net income (loss)                                                            |  | $                                     | (1,647 | ) |             | $ | 516   |            |  | $ | 10,996      |   |  |       |     |  |  |   |       | 
|                                                                             |  |                                       |        |   |             |   |       |            |  |   |             |   |  |       |     |  |  |   |       | 
|Companys economic ownership %                                               |  |                                       |        |   |             |   | 33    | %          |  |   | 32.03       | % |  |       |     |  |  |   |       | 
|                                                                             |  |                                       |        |   |             |   |       |            |  |   |             |   |  |       |     |  |  |   |       | 
|Earnings of partially owned equity
    affiliates                            |  |                                       |        |   |             | $ | 170   |            |  | $ | 3,522       |   |  | $     | 198 |  |  | $ | 3,890 | 
|                                                                             |  |                                       |        |   |             |   |       |            |  |   |             |   |  |       |     |  |  |   |       | 





16



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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Nine Months Ended September 30, 2006B.H.


Castlewood


AffirmativeCorporate


Acquisition


Holdings


Investment


Total(Dollars in thousands)Revenue









$
20,950Net investment income

$
199


$
3,091



33,438Interest income


3,086Net (increase) reduction in loss
    and loss adjustment expense liabilities






(1,010
)


10,700General and administrative expenses


(4,245
)


(1,811
)


(34,723
)Amortization of run-off provision






750Interest expense










(894
)Other income


330Foreign exchange gain






80



8,914Share of net income of
    partly-owned companies










495Income (loss) before income taxes


(630
)


1,100



38,880Income tax expense


(5,355
)






(239
)Minority interest










(7,805
)Income (loss) before extraordinary
    gain


(5,985
)


1,100



30,836Extraordinary gain, net of
    minority interest










4,347Net income (loss)

$
(5,985
)

$
1,100


$
35,183Companys economic ownership %






33
%


32.24
%11,342Companys portion of pre-tax
    extraordinary gain










(1,418
)Earnings of partially owned equity
    affiliates





$
363


$
9,924


$
358


$
10,645     17




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Three Months Ended September 30, 2005B.H.


Castlewood


AffirmativeCorporate


Acquisition


Holdings


Investment


Total(Dollars in thousands)Revenue









$
5,180Net investment income (loss)

$
487


$
680



7,866Interest income


608Net (increase) reduction in loss
    and loss adjustment expense liabilities






(290
)


1,043General and administrative expenses


(617
)


(601
)


(9,372
)Amortization of run-off provision






334Other income


100Foreign exchange gain (loss)






16



(223
)Share of net income of
    partly-owned companies










63Income (loss) before income taxes


578



139



4,557Income tax expense


(794
)






(285
)Minority interest










(439
)Net income (loss)

$
(216
)

$
139


$
3,833Companys economic ownership %






33
%


32.63
%Earnings (loss) of partially owned
    equity affiliates





$
46


$
1,250


$
(110
)

$
1,186   Nine Months Ended September 30, 2005B.H.


Castlewood


AffirmativeCorporate


Acquisition


Holdings


Investment


Total(Dollars in thousands)Revenue









$
13,525Net investment income (loss)

$
1,091


$
1,578



21,149Interest income


1,651Net (increase) reduction in loss
    and loss adjustment expense liabilities






(870
)


6,466General and administrative expenses


(2,258
)


(1,600
)


(27,908
)Amortization of run-off provision






1,000Other income


301Foreign exchange loss






(40
)


(2,418
)Share of net income of
    partly-owned companies










142Income (loss) before income taxes


785



68



10,956Income tax expense


(1,477
)






(1,612
)Minority interest










(1,430
)Net income (loss)

$
(692
)

$
68


$
7,914Companys economic ownership %






33
%


32.65
%Earnings (loss) of partially owned
    equity affiliates





$
23


$
2,584


$
(110
)

$
2,497  18




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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    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(Dollars in thousands, except per share data)(Unaudited)Income before extraordinary gain

$
2,243


$
970


$
5,203


$
1,805Extraordinary gain, net of income
    taxes










875Net income

$
2,243


$
970


$
6,078


$
1,805Income per common share before
    extraordinary gain  basic

$
0.39


$
0.18


$
0.92


$
0.33Extraordinary gain, net of income
    taxes  basic










0.16Net income per common
    share  basic

$
0.39


$
0.18


$
1.08


$
0.33Income per common share before
    extraordinary gain  assuming dilution

$
0.37


$
0.17


$
0.87


$
0.31Extraordinary gain, net of income
    taxes  assuming dilution










0.15Net income per common
    share  assuming dilution

$
0.37


$
0.17


$
1.02


$
0.31Weighted average shares
    outstanding  basic


5,739,384



5,517,909



5,621,279



5,517,909Common share equivalents


263,064



344,263



318,471



334,687Weighted average shares
    outstanding  assuming dilution


6,002,448



5,862,172



5,939,750



5,852,596     Note 10:
    Plan of
    Merger   19




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              30-day
 20




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##### Table of Contents



THE
    ENSTAR GROUP, INC. AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 11:
    Subsequent
    Event      Form S-4
 21




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              Deloitte &
    Touche LLP
    22




---



##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Overview
  Form 10-K/A
  Recent
    Accounting Pronouncements
       23




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##### Table of Contents



Critical
    Accounting Policies
  Enstar
    Income Tax Valuation Reserve
  Castlewood
    Holdings and B.H. Acquisition
    Loss and Loss Adjustment Expenses
  Reinsurance Balances Receivable
 24




---



##### Table of Contents



Goodwill
      Plan of
    Merger
           25




---



##### Table of Contents



30-day
    Liquidity
    and Capital Resources
       26




---



##### Table of Contents



Contractual
    Obligations and Commitments
  month-to-month
      Recent
    Developments
      Form S-4
 27




---



##### Table of Contents



Results
    of Operations
               28




---



##### Table of Contents



Results
    of Operations  Partially Owned Equity
    Affiliates
    Castlewood
    Holdings
              non-U.S. currencies,
 29




---



##### Table of Contents



B.H.
    Acquisition
       30




---



##### Table of Contents



(non-U.S.)
   
  Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk        held-to-maturity
  (non-U.S.)
 
  Item 4.
    Controls
    and Procedures   31




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##### Table of Contents



32




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##### Table of Contents



PART II
  OTHER
    INFORMATION
 
  Item 6.
    Exhibits  ReferenceNumber



Description of Exhibits2
.1



Agreement and Plan of Merger,
    dated as of May 23, 2006, among the Company, Castlewood
    Holdings Limited and CWMS Subsidiary Corp. (incorporated by
    reference to Exhibit 2.1 to the Current Report on
    Form 8-K
    dated May 23, 2006).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



Recapitalization Agreement, dated
    as of May 23, 2006, among the Company, Castlewood Holdings
    Limited and other parties thereto. (incorporated by reference to
    Exhibit 2.2 to the Current Report on
    Form 8-K
    dated May 23, 2006).10
.2



Support Agreement, dated as of
    May 23, 2006, among Castlewood Holdings Limited, J.
    Christopher Flowers, Nimrod T. Frazer and John J. Oros.
    (incorporated by reference to Exhibit 2.3 to the Current
    Report on
    Form 8-K
    dated May 23, 2006).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 amended, 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 amended, 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.  33




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##### Table of Contents



SIGNATURES
    The Enstar Group, Inc.
  By:
    /s/  Cheryl
    D. Davis   Chief Financial Officer, Vice President
 of Corporate Taxes, Secretary
 (Authorized Officer)
 (Principal Financial Officer)
   34